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Tariff rate quotas explained: A guide to answering consultation questions
What is a tariff rate quota (TRQ)?
A TRQ is a mechanism that allows a set amount of specific products to be imported at a low or zero rate of duty. In Canada, this is commonly referred to as the “within access commitment.” TRQs are established under trade agreements and are available to the parties to such agreements.
TRQs 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 latter does not set any limits on the amount of product that may be imported, but applies a different—generally higher—rate of duty for that specific product. Imports face this higher rate of duty once the “within access commitment” amount has been reached or if any requirements associated with the “within access commitment” are not satisfied.
For example, Canada replaced its existing cheese import quota with a TRQ in 1995 under the World Trade Organization (WTO). The “within access commitment” for Canada’s WTO cheese TRQ is 20,411,866 kg, which may be imported at a rate of duty that ranges, depending on the country from where the product is imported, from 0% duty up to 3.32 cents per kilogram. The rate of duty for “over access commitment” is 245.5% and not less than $3.53 to $5.78 per kilogram, and is applied regardless of the country from where the product is imported.
Who can import a 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.
Import permits are issued only to residents of Canada. Canadian residents who apply for an import permit may also need to demonstrate that they meet further requirements, such as eligibility criteria and activity tests, which vary by TRQ.
How is a Canadian resident defined?
Under the Export and Import Permits Act, a Canadian resident is defined as follows: “resident of Canada means, in the case of a natural person, a person who ordinarily resides in Canada and, in the case of a corporation, a corporation having its head office in Canada or operating a branch office in Canada.”
What is an allocation?
An allocation is a defined portion of the “within access commitment” or TRQ that is granted to an eligible TRQ applicant.
How does an allocation work?
An allocation functions like an account. The allocation holder—meaning an applicant that has been granted a portion of a TRQ—may request a permit to import a certain amount of the TRQ good. This amount is then drawn down against their remaining allocation. Once the allocation is depleted the allocation holder may either apply to import against the “other category” or continue to import but at the over-quota rate of duty.
For example, an allocation holder has been granted an allocation of 100,000 kg under a cheese TRQ. The allocation holder may utilize the entire amount by importing 100,000 kg of cheese under one import permit, or may draw down on the allocation by using multiple permits during the allocation year.
How long is an allocation valid?
TRQs are administered on a 12-month, calendar-year basis (January 1 to December 31), or on the basis of a sector’s marketing year—for example, the dairy-sector year runs from August 1 to July 31.
Allocations are valid only for the TRQ year in which they have been granted. Applicants must reapply each year and must demonstrate each year that they qualify for an allocation. Applications are assessed on the basis of the applicable eligibility criteria and activity tests.
In addition, applicants that were granted an allocation in the previous year may be assessed on the basis of their utilization of that allocation. Canada has a number of mechanisms in place to encourage maximum utilization of TRQs. These mechanisms include return policies, penalties for chronic returns and under-utilization of allocations.
What are some of the methods by which CPTPP TRQs could be distributed among eligible applicants within Canada?
- First come, first served: As the expression implies, there is no advance allocation of the TRQ volume among eligible applicants. Rather, eligible applicants may import product at the lower within-access rate of duty up to the access level without a company-specific allocation. Once that amount is reached (i.e. once the TRQ is filled), all imports will be subject to the higher over-access rate of duty.
- Auction: Eligible applicants bid for the volume of the TRQ they would like to import. The TRQ is then allocated according to a process established in an accompanying Notice to Importers.
- Equal share: All eligible applicants receive an equal allocation of the available TRQ volume or the quantity requested, whichever is lower.
- Market share: Eligible applicants receive an allocation of the TRQ proportional to their respective market shares in relation to the total of all applicants’ market shares.
- Hybrid: The allocation method combines two or more of the above 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. In some cases, there is only one eligibility criterion, which is that the applicant must be a resident of Canada.
However, there are often additional eligibility criteria, depending on the product—whether it is destined for retail sale or for manufacturing purposes—or on the number of applicants who are interested in importing that product. Furthermore, depending on the TRQ, applicants may have to demonstrate that they are distributors, processors or food-service providers.
Eligibility criteria can be further defined by activity tests.
What is the role of “activity tests” in the distribution of TRQ allocations?
Activity tests serve two functions.
First, they add further elements or criteria when determining the eligibility of an applicant. It may not be sufficient, for example, for applicants to demonstrate that they purchase, sell and/or use a product. They may also need to demonstrate that they have purchased, sold or used a product a certain minimum quantity of 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 to ensure that each TRQ is allocated to applicants that are meaningfully active in the industry.
Second, activity tests 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 often a maximum quantity that any one eligible applicant may be authorized to import under a TRQ, there is normally no minimum quantity. An applicant may, for example, 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 do you mean by “scarce supply”?
The term “scarce supply” generally refers to a good that is not produced in Canada or that is deemed not to be available in Canada in a sufficient supply to satisfy expected Canadian demand.
Under the CPTPP, Canada reserves the right to allocate up to 10% of each TRQ for the importation of goods that are in scarce supply in the Canadian market.
What does “return policy” mean? Why is there sometimes a “chronic return” penalty?
As noted above, TRQs are administered on an annual basis, and allocations are valid only for the year in 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 that are unable to utilize 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 applicants that are able to utilize the allocation within that year, which helps to ensure that the TRQ is fully utilized each year. A return policy also allows an allocation holder that is unable to utilize the allocation in any one year to avoid facing an under-utilization penalty the following year.
Allocation holders that 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 return 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 penalty is twofold: to direct allocations to applicants that can utilize them and to encourage maximum utilization of the TRQ.
What is an “under-utilization” penalty? Why is it necessary, and how does it operate?
The purpose of the under-utilization policy is to encourage maximum utilization of the TRQ by directing allocations to applicants that will utilize them. Applicants that apply for allocations that they are unable to utilize, and that do not make use of the return policy, will have their following year allocations adjusted downward in proportion to the amount they did not utilize. The threshold below which an allocation is considered under-utilized varies by TRQ, but is generally either 90% or 95% of the granted allocation.
CPTPP Chapter 2, Section D - Tariff Rate Quota Administration: Agreed-upon principles for the administration of TRQs by CPTPP parties
CPTPP Appendix A to Tariff Schedule of Canada (Tariff Rate Quotas), Section A - General Provisions: Details on negotiated scheduled rights and commitments specific to the administration of Canadian TRQs established under the CPTPP
TRQs are implemented and administered by Global Affairs Canada under the Export and Import Permits Act
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)
Trade Controls Policy Division (TIC)
Global Affairs Canada
111 Sussex Drive
Ottawa, ON K1A 0G2
List of questions included in the consultation online questionnaire
Required TRQ elements
- Which TRQ(s) are you specifically addressing in this questionnaire?
- For each TRQ of interest, please indicate the preferred method of allocation (first come, first served; market share; equal share; auction; or hybrid). Please explain why the chosen method is preferred.
- What criteria should be used to determine an applicant’s eligibility for an allocation under each TRQ of interest?
- For each TRQ of interest, what type of activity requirements should be used to determine whether or not applicants are active in the dairy, poultry and/or egg sector (e.g. sales, investments, etc.)? Why?
- For each TRQ of interest, should there be a required threshold of activity? If so, what should the required threshold or the level of activity be? For example, number of sales, value of sales, value of investment, volumes produced or processed, etc.?
- For each TRQ of interest, how far in advance of the end of the TRQ year should return of unused allocation be due? Why?
- For each TRQ of interest, is there a product that could/should be considered to be in scarce supply in the Canadian market and for which there would be a desire to import?
- For each TRQ of interest, what is the optimal commercially viable shipping quantity of the good per shipment? Is there a minimum commercially viable shipment quantity, under which importing is no longer economically viable?
Optional TRQ elements
- For each TRQ of interest, should there be a cap on the amount of quota that any one allocation holder (and related parties) may receive? If yes, how much should that cap be?
- For each TRQ of interest, should a portion of allocation be reserved for certain demographic, business and industry categories? Why or why not?
- For each TRQ of interest, should allocations be transferable among allocation holders? Why or why not?
- For each TRQ of interest, should allocation holders be penalized for not utilizing a certain amount of their allocation within a quota year or for not returning unused allocation on time?)? If so, up to what percentage of an allocation should be imported before it is considered fully utilized and under which the allocation holder is penalized?
- For each TRQ for which “TRQ auction” was chosen as an answer in Question 2, please provide answers to the following:
- Does your organization have previous experience with auctions for any of your business activities?
- Would a paper-based or online-based auction platform be preferred?
- What would be the best way to pay for winning bids, in what timeframe and in how many installments, and why is this payment method preferred?
- What would be your preferred instrument to provide a financial guarantee before the auction takes place? For example, cash, credit rating, bank guarantee, etc.
- For each TRQ of interest, are there other allocation and administrative considerations that should be taken into account that have not been addressed by these questions? If so, what are they and why do you think they should be considered?
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