Making sense of Customs under the HCA (Part I)
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There is, rightly so, much debate about the rights of Licensees in Freeport these days. A Freeport Licensee Association is in the process of being created. I am a Licensee, and I have for decades publicly and privately supported such an initiative. I continue to do so today. It is very important that the debate on Licensee rights be conducted on principle and constructively. I am grateful to the Rotary Club for providing me with this opportunity to speak, and I will endeavour to use this occasion to further contribute to the education of licensees and the Freeport public about their rights under the Hawksbill Creek Agreement. I intend to develop a series of public presentations over the next 12 months which focus on different aspects of the Hawksbill Creek Agreement and licensee rights. I hope I get another invitation to speak with you.
Today I intend to speak on Customs. As we near the end of this year I want to remind licensees of the challenges which we faced at the end of last year regarding sale and purchase of duty exempt, or as commonly called "bonded" over the counter goods. You may all recall that Customs attempted to dramatically change many years of customary business practice to the great financial disadvantage of Licensees and disruption of business.
There was great agitation, much public debate, political lobbying and threats of litigation. Thankfully, reason prevailed. It was due to rational and reasoned discussions between Mr. Messrs Rolle and Adderley of the Customs on the one part, and Messrs. Julian Francis, Carey Leonard, Doswel Caokly, Chris Lowe, others and I, on the part of licensees.
Ultimately Customs did not press on with their plans which would have been catastrophic for business in Freeport. Reason and not might prevailed. But Customs did indicate that they wished to revisit this matter by the end of this year.
Accordingly, before it becomes a crisis again, and in an effort to promote constructive public debate and dialogue between Customs and Licensees on this issue, I thought it would be helpful to contribute my views and encourage a healthy debate on this very important matter for Freeport.
Licensees of the Grand Bahama Port Authority ("GBPA") are able to take advantage of the various duty exemptions conferred upon such licensees by the provisions of the Hawksbill Creek Agreement 1955, as amended ("the HCA"). The comments in this paper concern the manner in which those provisions are enforced by HM Customs in Freeport.
The issues
Firstly, at present goods are imported by wholesalers such as Dolly Madison, Kelly's, Albuild, Bellevue and the Home Centre into the Port Area duty free under the HCA. Licensees then present an annual letter to the wholesaler indicating that they will be purchasing goods for use in their trade or business during the course of that year. When other licensees purchase goods from that wholesaler, the goods are sold duty free.
Late last year, 2005, Customs proposed to change this practice so that, in future, whenever a licensee proposed to purchase goods for his trade or business from a wholesaler he would first have to produce a pro forma invoice for those goods to Customs, which would then approve the purchase and send a stamped version of the invoice to the licensee, who could then proceed to purchase the goods. This proposal was met with great opposition by licensees as likely to be unworkable, given the vast administrative workload it would place on Customs and the consequential time-lag in processing applications, many of which would be urgent. It was also likely that this would have had a severely detrimental effect on the business of licensed wholesalers and retailers. After negotiations between Customs and The GBPA Customs decided temporarily shelve its proposal to change the practice. However, the threat of its re-introduction at the end of this year remains.
The first issue is whether this proposed change of practice by Customs is lawful and whether it could successfully be challenged by Licensees.
The second issue is what are the rights of Licensee importers of wholesale and retail building materials and other hardware goods in Freeport. Theses Licensees sell their stock in their stores and hold stock on shelves. Ordinarily, customers pick the relevant product they wish to purchase from the shelf and pay for it. However, in the case of customers entitled to purchase the product duty free, a different practice is adopted and the product has to be retrieved from warehouse storage. This is because Customs requires the Licensees to pay duty on all goods displayed for sale in their stores; it is only goods in the warehouse that can be sold duty free.
This practice (nowhere provided for in the Customs management Act or the HCA) enforced by Customs is onerous for Licensees and for their customers. It means that the same product needs to be stored in two different places, and also means that licensees who are entitled to purchase products duty free have to wait to be supplied with it, rather than simply being able to pick the product of the shelf and pay for it. Licensees consider that their business would be greatly improved if they could simply sell all their products off the shelf, without having to pay duty on all products they place on the shelf for sale.
The second issue is whether Customs' present practice of requiring Licensees to pay duty on all goods displayed for sale on the shelves in their stores is lawful or whether they could successfully be challenged and, if so, what the is the best form such a challenge might take.
Can Customs lawfully change the present practice regarding the sale of over the counter bonded Customs as proposed?
In order properly to understand this issue it is necessary first briefly to consider the various exemptions that are conferred upon licensees of the GBPA by the HCA as regards customs duty. These exemptions are set out in clauses 2(1) to (3) of the HCA. In brief summary, they allow the importation of any goods duty free for the purpose of a licensee's business or undertaking.
There is however an important exception to this general position, which is that the exemption is excluded as regards "consumable stores". These are defined in clause 2 (5) of the HCA. The particular element of the definition of most relevance for present purposes is that consumable stores include goods made available after importation for personal use. In broad summary, then, provided a good is not made available after importation for personal use then (with a few exceptions irrelevant for present purposes) it can be imported duty exempt under the provisions of the HCA.
As regards the goods sold by Licensees, it will be seen that these goods fall into two categories:
Goods sold to licensees for business use. These goods fall within one or more of three categories of goods which are exempt from customs duty pursuant to the provisions of clauses 2(1) to 2(3) of the HCA. These clauses provide (in material part) as follows:
"2(1) That all material, supplies, and things of every kind and description . other than consumable stores as hereinafter defined, which in the opinion of the Port Authority are necessary for the dredging, constructions, and erection, air-conditioning, equipping, fitting out, furnishing, landscaping, extension, completion, repair, maintenance, replacement and operation of:-
all factories, warehouses, industrial, commercial, business, and other undertakings, office buildings, housing, and all other buildings and accommodations of every kind within the Port Area.
All roads, bridges, parks, places of beautification and recreation laid out within the Port Area;
All utility undertakings within the Port Area; and
Any other undertaking or thing within the Port Area constructed, erected, or operated by the Port Authority or by any person or company licensed in writing by the Port Authority .
. may during the continuance of this agreement be imported into the [Bahamas] purchased and taken out of bond therein by the Port Authority or by a Licensee free of all Customs Duties .
2(2) That all material, supplies, and things . other than consumable stores as hereinafter defined, may during the continuance of this agreement be imported into the [Bahamas] purchased or taken out of bond therein by the Port Authority or by a Licensee for the purposes of any manufacturing, industrial or other business, undertaking, or enterprise within the Port Area . free of all Customs Duties (the "Manufacturing Supplies").
2(3) That all materials, supplies and things of every kind and description other than consumable stores as hereinafter defined, which in the opinion of the Port Authority are necessary for the operation and proper functioning of the administrative, educational, medical, and all other services carried on by the Port Authority within the Port Area may during the continuance of this agreement be imported .. free of all Customs Duties (the "Administrative Supplies")."
It is likely that the bulk of the duty-exempt goods sold to licensees by the Importer Licensees fall within clause 2(2), since this clause extends to cover all goods used for the purposes of any business or undertaking, other than consumable stores (as defined).
The second category of goods sold by importer Licensees are those sold for personal use and which are consumable stores within the meaning of the HCA (as defined in clause 2(5)). These goods, being consumable stores, are not therefore duty exempt.
In addition to specifying the nature of the exemptions conferred, the HCA also sets out the mechanism for importing goods duty exempt. This is contained at clause 1(4). The provisions are fairly complex and are worth setting out in full:
"The conditions to be observed by the Port Authority or by a Licensee (hereinafter in this subclause referred to as "the Importer") importing, purchasing, or taking out of bond within the Colony any of the Supplies, the Manufacturing Supplies, and the Administrative Supplies shall be as follows:
(a) That a proper agent or officer of the Importer shall make a declaration before the Comptroller of Customs or before the Chief Revenue Officer of the Port where the Supplies, the Manufacturing Supplies, and the Administrative Supplies or any of them enter the Colony or are purchased or taken out of bond therein or before any other person appointed for this purpose by the Government (hereinafter called "the Comptroller") that the same are intended to be used solely for the Port Project, for the Port Area Development, for the Manufacturing Purposes, and for the Administrative Purposes (all and any of which said Port Project, Port Area Development, Manufacturing Purposes, and Administrative Purposes are sometimes in this subclause included in the term "the said Purposes") or any of them, as the case may be;
(b) That the Importer shall enter into a bond in the form set out in the Schedule hereto in double the amount of any Customs Duties which would ordinarily attach on the importation or taking out of bond thereof that the Supplies, the Manufacturing Supplies, and the Administrative Supplies, or any of them as the case may be, shall not be used or applied otherwise than for the said Purposes or any of them;
(c) That if any of the said Supplies, the Manufacturing Supplies, and the Administrative Supplies in respect of which such bond shall have been given shall be used or applied in breach of the conditions of the bond such articles shall be liable to be forfeited and may be seized and proceeded against in the same manner as goods liable to forfeiture under the Customs Regulations Act of the Colony or any Act passed in amendment thereto or in substitution therefor and in addition thereto the penalty of the bond may be recovered as liquidated damages;
(d) If at any time the Importer or any person in whom the property in the Supplies, the Manufacturing Supplies, and the Administrative Supplies, or any of them as the case may be, shall be vested shall desire to use any of the said articles otherwise than for the said Purposes or any of them it shall be lawful for the Comptroller on payment of the several amounts of customs duties payable on such articles (or on so much thereof as the Comptroller shall consider reasonable) by a memorandum endorsed on the bond to cancel the same so far as it relates to such articles;
(e) Upon production by the Importer to the Comptroller of a declaration made under oath by a director or officer of the Importer before a Justice of the Peace or Notary Public that the Supplies, the Manufacturing Supplies, and the Administrative Supplies or any of them have actually been so used for the said Purposes, or any of them, or have been exported from the Colony either in their original state or in a different state resulting from the manufacture, processing, or assembly thereof in any way it shall be lawful for the Comptroller (if satisfied that such declaration is true and correct) to cancel any bond or bonds entered into by the Importer under the provisions of this subclause of this clause and in the case of any of the Supplies, the Manufacturing Supplies, and the Administrative Supplies purchased in the Colony to refund to the Importer thereof (if the Comptroller shall see fit) any Customs Duties which may have been paid on the importation thereof; and
(f) Any person authorised by the Governor-in-Council shall have free access at all reasonable times to the Port Area and to any works being constructed in connection with the Port Project and/or the Port Area Development and to any manufacturing, industrial, or other business, undertaking, or enterprise being operated and carried on within the Port Area and may enter and stay and remain therein and have free access to every part thereof during reasonable business hours for the purpose of ascertaining whether the several articles admitted duty-free under this Agreement have been or are in the course of being duly used and applied to and for the said Purposes, or any of them, and as specified in the bond or bonds given in respect thereof."
It is clear that this provision (which was not substantively amended in the subsequent revisions to the HCA) envisaged a system whereby licensees would (a) make a declaration before the Comptroller or customs officer that the items they were importing were for use for one of the exempted purposes as defined in clauses 2(1) to 2(3) of the HCA, (b) that they would enter into a bond in effect to secure this promise, that (c) they would then make a declaration under oath that the goods so purchased had been used for an exempted purpose, to be presented to Customs, and (d) the bond would then be discharged.
The difficulty with this system is that it assumes that the question of whether a particular good is entitled to duty exemption or not can be answered at the point of importation. In the case of a substantial number of goods, this question can indeed be answered at the time when the good is being imported. However, the question cannot readily be answered in the case of goods imported for onward sale in the Port Area. In that case, duty may or may be payable depending upon the purpose for which the goods are eventually sold: if the purpose is one of the exempted uses set out in clauses 2 (1) to (3) then duty is not payable; if however the goods are sold for personal use, then duty becomes payable since the good then falls within the definition of "consumable stores" set out in clause 2(5). The difficulty is that the Licensee importer does not necessarily know whether the good is going to be sold for exempt or non-exempt purposes at the time of importation. Nor does Customs know this, and it would be inconsistent with the terms of the HCA for Customs to seek to predict how the goods are ultimately going to be used from the nature of the goods themselves.
There is however some assistance to be derived from one of the provisions in clause 1(4), at subsection 1(4)(d). This provides in effect that if the importer or owner of property imported duty free subsequently wishes to use the property for a non-exempted purpose, then upon an application by that person the Comptroller of Customs may give permission for him to pay the duty on the relevant goods and have the bond cancelled.
A structure is, therefore, in place which would enable goods to be imported duty free (subject to bond) and then if those goods were subsequently to be used for non-exempted purposes the duty could at that stage be paid and the bond in respect of the good cancelled without penalty. It is to be noted that Customs is not actually specifically required by subsection 1(4)(d) of the HCA to operate that system, but they are lawfully allowed to do so.
This is not however the system that is envisaged by the Customs Guide produced jointly by the Ministry of Finance and the Port Authority. The only relevant passage in the Guide is contained at para. 47, which reads as follows:
"47. Normally Licensees should obtain goods which are to be used for Prescribed Purposes [ie duty exempt goods] by directly importing them into the Port Area, but the Agreement recognises that occasions may arise when a Licensee may have to purchase within the Bahamas new and unused goods upon which duty has already been paid in order that he may use them for Prescribed Purposes. In such cases the Deputy Comptroller of Customs may, if satisfactory evidence in support of the claim is adduced, authorise a refund to the Licensee of the customs duties so paid."
This passage seems to envisage a reverse of the procedure contemplated by subsection 1(4)(d) of the HCA. Rather than allowing for goods to be imported duty free and then duty being paid on those goods if they are subsequently used for non-exempt purposes, the paragraph in the Customs Guide seems to envisage that goods are imported duty paid and then, when subsequently purchased for an exempt purpose, the duty is repaid by Customs.
The present practice adopted by Customs is more in line with the system contemplated in clause 1(4) of the HCA, rather than that outlined in the Customs Guide. The current practice is as follows. Goods are imported by Licensee wholesalers into the Port Area duty free under the HCA. Licensees then present an annual letter to the wholesaler indicating that they will be purchasing goods for use in their trade or business during the course of that year. When the licensee purchases goods from that wholesaler, the goods are sold duty free.
The Comptroller is proposing to change this practice so that, in future, whenever a licensee proposes to purchase goods for his trade or business from a wholesaler he will have first to produce an invoice for those goods to Customs, which will then approve the purchase and send a stamped version of the invoice to the licensee, who can then proceed to purchase the goods. This proposal is likely to be unworkable, given the vast administrative workload it would place on Customs and the consequential time-lag in processing applications, many of which would be urgent. It is also likely to cause considerable inconvenience, administrative expense and loss of business to importer Licensees.
End of Part I
-- Frederick Smith