Tariff rate quotas explained - Main questions
What is a tariff rate quota (TRQ)?
A TRQ is an import mechanism whereby a set amount of specific product may be imported at a low or zero rate of duty. In Canada, this is commonly referred to as the “within access commitment.” An important feature of TRQs is that they do not function as an absolute limit on the amount of product that may be imported. The "within access commitment" is therefore complemented by an “over access commitment.” The over access commitment does not set any limits on the amount of product that may be imported, but applies a different (generally higher) rate of duty. Imports face this higher rate of duty once the "within access commitment" amount has been reached or when requirements associated with the "within access commitment" are not satisfied.
For example, under the World Trade Organization (WTO) in 1995, Canada replaced its existing cheese import quota with a TRQ. The "within access commitment" for Canada’s WTO TRQ on cheese is 20,411,866 kilograms, which may be imported at a rate of duty that ranges from zero percent duty up to 3.32 cents per kilogram, depending on the country from which the product is imported. The rate of duty for "over access commitment" imports ranges from $3.53 to $5.78 per kilogram, regardless of the country from which the product is imported.
Who can import a controlled product by way of a TRQ?
A product that is subject to a TRQ can be imported only by someone who has a valid import permit issued under the authority of the Export and Import Permits Act. Those who apply for an import permit may also need to demonstrate how they meet the requirements, such as eligibility criteria and activity tests, which vary depending on the TRQ.
What is an allocation?
An allocation is an amount of the TRQ that is granted to an eligible applicant.
How does an allocation work?
An allocation functions like an account. The allocation holder (an applicant who has been granted an allocation under a TRQ) may request import permits against that allocation. For example, an allocation holder who has been granted an allocation of 100,000 kilograms under a cheese TRQ may request permits to import up to 100,000 kilograms of cheese. The allocation holder may use the entire amount by importing 100,000 kilograms under one import permit or may draw down on the allocation by using a number of permits during the allocation year.
For how long is an allocation valid?
TRQs are administered on an annual basis. Some TRQs are administered on a calendar basis (January 1 to December 31), while other TRQs are administered on a different 12-month basis. Allocations are valid only for the year for which they have been granted. Applicants must re-apply each year and must demonstrate each year that they qualify for an allocation.
What are some of the current methods by which TRQs are distributed among eligible applicants within Canada?
- First come, first served: As the name implies, there is no allocation process. Eligible applicants may import product at the lower within access rate of duty up to the access level. Once that amount is reached (i.e., once the TRQ is filled), imports will be subject to the higher over access rate of duty.
- Equal share: All eligible applicants receive an equal allocation.
- Market share: All eligible applicants receive an allocation proportional to their respective market shares in relation to the total market calculated under the TRQ.
- Previous year’s utilization: Eligible applicants receive an allocation equal to their total utilization of the TRQ during the previous year. Further allocations are available on a first come, first served basis, so long as quota remains available.
- Auctioning: Auction participants bid to obtain the right to import a certain quantity of goods that are subject to an import quota.
- Historical: The quota is fully allocated to companies who were active before the initial TRQs began, in proportion to their historical activity.
- Hybrid: This allocation method combines two or more of the approaches noted above.
What are eligibility criteria?
Eligibility criteria are used to determine who is eligible to obtain an allocation under a TRQ or a permit to import or export products that are controlled under the Export and Import Permits Act. For example, in the case of poultry products, applicants may be required to demonstrate that they are distributors, processors or food service providers.
Eligibility criteria are further defined by activity tests.
What are activity tests?
Activity tests serve two functions. First, they add further definition to eligibility criteria. For example, it may not be sufficient for applicants to demonstrate that they purchase or sell a supply-managed product; they may also have to demonstrate that they have purchased or sold a certain minimum quantity of the product in a given 12-month reference period. Applicants who do not meet this threshold would not be considered eligible for an allocation. This is a useful means of limiting the number of applicants who apply for a given TRQ and ensuring that the TRQ is allocated to applicants that are active in the industry.
The second function of an activity test is to determine the size of each eligible applicant’s allocation in cases where a TRQ is allocated, wholly or in part, on the basis of market share.
Can eligible applicants apply to import small amounts of product, or is there a minimum quantity for which applicants must apply?
While there is sometimes a maximum quantity that any one eligible applicant may be authorized to import under a TRQ, there is generally no minimum quantity. For example, an applicant may apply for a small allocation with a view to importing a specialty product that is not available in Canada and for which there may be limited demand.
What is a new entrant?
A new entrant is generally defined as an eligible applicant who is not an allocation holder under the relevant TRQ. Some of Canada’s international agreements set out their own specific definitions of new entrant. For example, under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), after the full phase-in period, a new entrant is an eligible applicant who is not an allocation holder under Canada’s WTO cheese TRQ or did not receive an allocation of the TRQs under CETA in the preceding year.
What is a TRQ return policy, and why is there a chronic return penalty?
As noted above, TRQs are administered on an annual basis and allocations are valid only for the year for which they are granted. In addition, applicants who seek to obtain an allocation in the following year are assessed on the basis of their performance in the current year.
A return policy is a provision that allows allocation holders who are unable to use their allocations to return all or part of that allocation by a specific date. The amount that is returned can then be made available to other eligible participants who are able to use the allocation. This contributes to maximum utilization of the TRQ. It also allows an allocation holder who is unable to use the allocation in any one year to avoid facing an underutilization penalty the following year.
Allocation holders who return a significant portion of their allocation in two or more consecutive years may face a chronic return penalty if they apply for an allocation in subsequent years. The details of the chronic returns policy, including what is meant by a “significant portion,” vary by TRQ. Generally, the applicant’s allocation will be adjusted downward in proportion to the amounts returned in previous years. The purpose of the chronic return policy is threefold: to discourage speculative applications; to direct allocations to applicants that can use them; and to encourage maximum utilization of the TRQ.
Why is there a penalty for underutilization, and how does it work?
The purpose of the underutilization policy is to encourage maximum utilization of the TRQ by directing allocations to applicants that will use them. Applicants who apply for allocations that they are unable to use, and who do not make use of the return policy, will have their allocations in the following year adjusted downward in proportion to the amount they did not use. The threshold below which an allocation is considered underutilized varies by TRQ. In some TRQs, allocation holders who have used 85% of their respective allocations are considered to have fully utilized their allocations and will not be subject to an underutilization penalty in the following year. In other TRQs, the threshold may be as high as 95%.
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