Canada’s Administration of New Tariff Rate Quotas for Refined Sugar and Sugar-Containing Products to the United States: Background
New Tariff Rate Quotas (TRQs) under the Canada-United States-Mexico Agreement (CUSMA):
Allocation methodologies may vary from quota to quota. The following are some examples:
- First-come-first-served: As the name implies, there is no allocation policy. Eligible companies may export products and receive the preferential rate of duty until the quota is filled. Export permits are issued on a shipment-by-shipment basis until the specified quantity for the quota is reached. Once that threshold is reached (i.e., once the quota is filled), additional exports will be subject to the Most-Favoured Nation (MFN) rate of duty.
- Previous year’s utilization: Eligible applicants receive an allocation equal to their total utilization during the previous year. Further allocations are available on a first-come-first-served basis as long as quota remains available. New entrants normally obtain quota on a first-come-first-served basis for their first year.
- Equal Share: All eligible applicants receive an equal allocation.
- Market Share: All eligible applicants receive an allocation proportional to their respective market share.
- Hybrid: The allocation method combines two or more of the above approaches.
The eligibility for each quota varies and is used to determine who is eligible to obtain an allocation under a quota or a permit to 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 be a “resident of Canada.” “Resident of Canada” is defined as meaning, 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.
Often, there are additional eligibility criteria, depending on the type of product, the amount of production undertaken in Canada, whether it is destined for retail sale or for manufacturing purposes, or depending on the number of applicants who are interested in exporting that product. Eligible applicants could include exporters, processors, or distributors.
Quotas 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 may be 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 substantially 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, which contributes to maximum utilization of the quota. It also allows an allocation holder that is unable to substantially 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 may face a return penalty if they apply for an allocation in subsequent years. The details of the return policy, including what is meant by a “significant portion”, vary by quota. Generally, the applicant’s allocation will be adjusted downward in proportion to the amounts returned in the previous year. The purpose of the return penalty is twofold: to direct allocations to applicants that can fully utilize them and to encourage maximum utilization of the quota by industry.
The purpose of the under-utilization policy is to encourage maximum utilization of the quota by directing allocations to applicants that will utilize them. Applicants that apply for allocations they are unable to utilize, and that also 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 utilize. The threshold below which an allocation is considered under-utilized varies by quota. In some quotas, allocation holders that have utilized 85% or more of their respective allocations are considered to have fully utilized their allocations and will not be subject to an under-utilization penalty in the following year. In other quotas, the threshold may be as high as 95%.
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