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Arbitration Panel Upholds US Tax On Canadian Lumber

by Mike Godfrey, Tax-News.com, Washington

02 October 2009


The London Court of International Arbitration (LCIA) upheld the United States' decision to impose a 10% import tax on softwood to address violations by Canada of the US-Canada Softwood Lumber Agreement (SLA), stating, in a September 28 judgement, that the duty is appropriate and justified.

The case centred around Canada’s failure in April to implement a remedy prescribed by the LCIA tribunal after Canadian lumber producers were found to have exceeded their export quota levels to the US under the SLA. As a result, the United States exercised its rights under the agreement to impose countermeasures, and is collecting an additional 10% import tax on lumber imports from Ontario, Quebec, Manitoba, and Saskatchewan until CAD68.26m is collected – the amount prescribed by the LCIA tribunal.

In the earlier ruling in March 2008, the LCIA tribunal found that Canada breached the SLA by failing to calculate quotas properly during the first six months of 2007. On February 26, 2009, the LCIA tribunal issued its decision on a remedy for that breach, and determined that Canada was required to cure the breach by March 28, 2009. Canada offered to settle the dispute by reimbursing the United States, accepting the court emphasized that the burden should fall on exporters and not the government.

Canada however did not impose the compensatory measures determined by the tribunal. Instead, on March 27, 2009, Canada offered to tender a payment of USD36.66m to the US government. The United States considered that such an offer did not cure the breach identified by the tribunal, and thus rejected Canada's offer. On April 2, 2009, Canada requested that the LCIA tribunal determine whether Canada had cured the breach with its payment offer.

In the decision, released on September 28, the LCIA tribunal rejected Canada's argument that it cured its breach when it offered to pay USD36.66m to the US government. The tribunal also rejected the notion that any government-to-government payment could cure a breach of the SLA, because such a payment would have no impact on exports of softwood lumber products from Canada to the United States. Canada also requested that the tribunal clarify whether, if Canada imposed export charges, it could allocate such charges by exporter or by Region based on prior shipments. The tribunal rejected this request and found that any export charges must be imposed on all shipments from all Option B Regions.

As a consequence of the LCIA tribunal's decision is that the United States may continue to impose 10% ad valorem customs duties on imports of softwood lumber products from four Canadian provinces (Ontario, Quebec, Manitoba, and Saskatchewan). These duties are scheduled to remain in place until such time as the United States has collected USD54.8m (equivalent to CAD68.26m at the time of the court’s February judgement). The duty does not affect lumber from British Columbia, which produces about half of Canada's softwood exports to the United States.

"The tribunal's decision confirms the view of the United States that the Softwood Lumber Agreement is enforceable,” US Trade Representative Ronald Kirk said in a statement following the ruling. He added: “Canada failed to cure its breach, and the tribunal has upheld the ability of the United States to take action in response.”

“This decision is an important one for America's businesses and workers, and final resolution of this arbitration is an important enforcement action on behalf of the United States.”

Steve Swanson, chairman of the Coalition for Fair Lumber Imports and president of the family-run Swanson Group in Oregon commented:

"The Coalition is pleased that the LCIA panel soundly rejected Canada's argument that it had cured its breach of the SLA by offering a one-time Canadian government payment to the US government. This would only have resulted in further subsidization of the Canadian lumber industry.”

"Unfortunately, Canadian provincial governments appear once again to have given in to demands for more unfair subsidies," continued Swanson. "The most troubling current subsidy is British Columbia's SLA-inconsistent reductions of the prices that its lumber producers pay for government timber used to produce lumber."

"Prompt and effective enforcement of the SLA to address Canada's violations of the agreement is critical to the recovery of the American forestry industry. Until this happens, US. jobs will continue to be lost to Canadian trade agreement violations," concluded Swanson.


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