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NAFTA

COMPLYING WITH NEW NAFTA

REGULATIONS AND REQUIREMENTS

by Middleton & Shrull

INTRODUCTION

The North American Free Agreement (NAFTA) bonds Canada, Mexico, and the United States in a special cooperative trade agreement which was created to expand and secure a market for the goods and services produced in the three countries. The NAFTA creates a free trade area, not a common market. Each country will maintain its own Customs administration and all goods must still comply with the laws and regulations &each country. The NAFTA was effective on January 1, 1994.

 The NAFTA eliminates tariffs on most goods originating in one or more of the three countries over a maximum transition period of fifteen years. The schedules to eliminate tariffs already established in the Canada-United States Free Trade Agreement will continue. As a result all Canada-United States trade for eligible merchandise will be duty free by January 1, 1999.

Concerning Mexico-United States and Canada-Mexico trade, the NAFTA will eliminate duties only on originating goods as defined in Article 401 of the NAFTA. The duty elimination will occur on a staged reduction basis where some goods become free immediately, while for others the duty is phased out over a five, ten, or fifteen year period. (Article 302)Although the NAFTA has greatly liberalized trade between the three countries, this liberalization only concerns merchandise "originating" in these countries. Generally, those goods which do not meet the NAFTA rules of origin will receive Most Favored Nation tariff rates.

 STAGED DUTY REDUCTIONS

Under the NAFTA, most duty rates will be reduced in stages over a 15 year period. These stages are identified by Categories labeled A through D and take effect as follows:

Merchandise Processing Fee

As of January 1, 1994 originating goods imported from Canada that qualify under the NAFTA to be marked as "Goods of Canada" are no longer subject to any Merchandise Processing Fees. Non-originating Canadian goods remain subject to the appropriate Merchandise Processing Fee.

There is no immediate change in the Merchandise Processing Fee assessed on originating Mexican goods. However, effective June 30, 1999, the Merchandise Processing Fee will be eliminated for originating Mexican goods which qualify to be marked as "Goods of Mexico" under NAFTA,

Other fees, e.g. Harbor Maintenance Fee, are unaffected and will be collected whether or not the goods originate in Canada or Mexico.

RULES OF ORIGIN

The rules of origin are the most critical factor in determining whether a product is eligible for preferential duty treatment under the NAFTA. The same rules apply to goods exported and imported from Canada, Mexico, and the United States. Since the NAFTA cannot be used as a conduit for third country products, any item which contains third country components must undergo a substantial processing which is physically and commercially significant, in Canada, Mexico, and/or the United States to be eligible for NAFTA treatment.

To be eligible for the reduced duty rates offered by the NAFTA, goods must qualify as "originating" in Canada, Mexico, and/or the United States. In order to be considered "originating" the goods must meet one of the specific definitions provided in Article 401 of the Agreement.

The following rules are identified as they appear under the Preferential Criteria identified in section 7 of the North American Free Trade Agreement Certificate of Origin.

Preference Criteria A

Goods wholly obtained or produced in Canada, Mexico, and/or the United States. This criteria is defined very narrowly and applies only to the following items:

(a) mineral goods extracted in Canada, Mexico, and/or the United States;

(b) goods harvested in Canada, Mexico, and/or the United States;

(c) live animals born and raised in Canada, Mexico, and/or the United States'

(d) goods obtained from hunting, trapping or fishing in Canada, Mexico, and/or the United States;

(e) fish, shellfish, etc. taken by. a vessel registered or recorded in Canada, Mexico. and/or the United States;

(f) goods produced on board factory ships from the goods referred to in subparagraph (e) provided such factory ships are registered or recorded with the country and fly its flag;

(g) goods taken by Canada, Mexico, and/or the United States or a person of these countries from the seabed or beneath the seabed outside territorial waters, provided that Canada, Mexico, and/or the United States has the right to exploit such seabed;

(h) goods taken from outer space, provided they are obtained by Canada, Mexico, and/or the United States or by a person of these countries and not processed in a non-NAFTA country;

(i) waste and scrap derived from:

(l) production in Canada, Mexico, and/or the United States, or

(2) used goods collected in Canada, Mexico, and/or the United States, provided such goods are fit only for the recovery of raw materials, and

(j) goods produced in Canada, Mexico, and/or the United States exclusively from goods referred to in subparagraphs (a) through (i), or from their derivatives, at any stage of production

Preference Criteria B

The NAFTA indicates that the goods may "originate" in Canada, Mexico, and/or the United' States, even if they contain non-originating materials, if the materials satisfy the rules of origin specified in Annex 401 of the Agreement. The Annex 401 rules of origin are based on a change in tariff classification, a regional value-content requirement, or both.
NOTE: Annex 401 is organized by Harmonized Tariff Schedule (HTS) number. In order to determine the specific rule of origin which applies to a particular good, it is necessary to properly classify the exported good and each of the foreign components or materials incorporated therein.

 Tariff Classification Change

When a rule of origin is based on a change in tariff classification, each of the non-originating materials used in the production of the exported goods must undergo the applicable change as a result of production occurring entirely in Canada, Mexico, and/or the United States.

These classification changes reflect the specific changes or transformations each commodity must undergo in order to be considered originating. These rules specify the exact nature of the classification change required; e.g. chapter to chapter, heading to heading or subheading to subheading.

Regional Value Content Change

Some Annex 401 specific rules of origin require that a good have a minimum regional value content, i.e., a certain percentage of the value of the goods must be from Canada, Mexico, and/or the United States.

Article 402 provides two formulas for calculating regional value content; "transaction value" method or the "net cost" method. In most, but not all, instances the producer may choose to use either the Transaction Value Method or the Net Cost Method for calculating regional value content.

The Net Cost Method must be used in instances where:

(a) there is no transaction value for the good;

(b) the transaction value of the good is unacceptable under Article 1 of the Customs Valuation Code:

(c) the good is sold by the producer to a related person and the volume of sales of the good exceeds 85% of the producer's total sales of such goods within the preceding six months;

(d) certain specific tariff provisions dealing with motor vehicles, footwear, and word processing machines;

(e) if producer or exporter chooses to accumulate the regional value content as defined in Article 404; or

(f) the good is designated as an "intermediate material" nd is subject to a regional value content requirement.

(1) Transaction Value Method

Calculates the value of the non-originating materials as a percentage of the GATT transaction value of the goods, frequently referred to as the "price paid or payable". This method permits the producer to include all of its costs and profit as territorial. The required percentage of regional value content under this method is 60%.
NOTE: The transaction value used for calculating the regional value content is the transaction value from the producer, who may or may not be the exporter. In instances where the exporter is not the producer, the exporter must obtain the necessary calculations from the producer.
The formula for calculating the regional value content using the transaction value method is:
 
 
RVC=TV-VNM x 100
TV
RVC = regional value content, expressed as a percentage;

TV = transaction value of the goods adjusted to an F.O.B. basis;

VNM = value of non-originating materials used by the producer in the production of the good.

 (2) Net Cost Method

This method calculates the regional value content as a percentage of the net cost to produce the good. Net cost represents the costs incurred by the producer minus expenses for sales promotion (including marketing and after sales service), royalties, shipping and packaging costs and non-allowable interest costs. The percentage content required for the net cost method is 50%.
 
 
RVC=NC-VNM x 100
NC
RVC = regional value content, expressed as a percentage;

NC = net cost of the good;

VNM = value of non-originating materials used by the producer in the production of the good.

 Preference Criteria C

Goods are considered to "originate" under this criteria if they are produced entirely in Canada, Mexico, and/or the United States exclusively from materials that are considered to be originating because they meet the specific rules of origin itemized in Annex 401.

 Preference Criteria D

In a few very specific situations, a good which has not under-gone the required tariff change can still qualify for preferential treatment under the NAFTA if a regional value content requirement is met.

Under Criteria D no change in tariff classification occurs because either:

i) the goods are produced using materials imported into Canada, Mexico, and/or the United States which are classified as parts under the HTS and the parts are classified in the same subheading or undivided heading as the finished goods, or

ii) the goods are imported into Canada, Mexico, and/or the United States unassembled or disassembled, but are classified as assembled goods pursuant to General Rule 2(a) of the HTS.

NOTE: Criteria D is very limited and only applies to the two specific circumstances identified above.This criteria can never be used for wearing apparel provided for in Chapters 61 and 62, and textile articles classified in Chapter 63. Furthermore, the assembled goods must be produced entirely in the territory in one or more of the NAFTA countries.

Intermediate Materials

For purposes of calculating regional value content of final goods, Article 412(10) allows a producer to designate as an intermediate Material any self-produced originating material used in the production of the final goods. As long as the Intermediate Material qualifies as an originating material, the entire value may be treated as originating in determining the regional value content of the finished goods.

If the Annex 401 rule of origin for the material requires a minimum regional value content, the net cost method must be used. In addition, no material subject to a regional value content requirement may be designated as aN Intermediate Material, if it contains sub materials also subject to a regional value content requirement that were also designated as Intermediate Materials.

Accumulation

Accumulation permits a producer or exporter to include as part of the goods' regional value content any regional value added by suppliers of non-originating materials used to produce the final goods. Potentially, accumulation allows the producer to reduce the value of the non-originating materials used in the production of the good by taking into account the value of the NAFTA input incorporated into those materials.
NOTE: The use of the Intermediate Materials and Accumulation provisions involve complex cost calculations and should not be used without careful deliberation and research.

OTHER PROVISIONS RELATING TO ORIGIN

Accessories, Spare Parts, and Tools

Accessories, spare parts, and tools that are delivered with the goods and that form part of the goods' standard accessories, spare parts, and tools, are considered originating if the goods originate, and are disregarded in determining whether all the non-originating materials undergo any annex 401 tariff change. This provision only applies if the accessories, spare parts, and tools are invoiced with the goods and the quantities and value are customary and appropriate. If the goods are subject to a regional value content the value of the accessories, spare parts, and tools must be taken into consideration in making the necessary calculation.

Packaging for Retail Sale

Packaging materials and containers in which goods are packaged for retail sale, if classified with the goods, are disregarded in determining whether all the non-originating materials used in the production of the goods undergo the applicable change in tariff classification set out in Annex 401. If the goods are subject to a regional value content the value of the retail packaging materials and containers must be taken into consideration in making the necessary calculation.

Packing for Shipment

Packing materials and containers in which goods are packed for shipment are disregarded in determining whether the non-originating materials used in the production of the goods undergo an applicable change in tariff classification set out in Annex 401. They are also disregarded in determining whether the goods satisfy a regional value-content requirement.

Transshipment

Goods which qualify as originating will lose that status if they subsequently undergo any operation outside any of the NAFTA countries, other than unloading, reloading, or any other operation necessary to preserve them in good condition or transport the goods to another NAFTA country.

Non-Qualifying Operations

Article 412 provides that goods shall not be considered to originate if they are merely diluted with water or another substance that does not materially alter the characteristic of the goods.
NOTE:  Mere dilution, even if it results in a change in tariff classification, is not sufficient to confer origin.

Article 412 also provides that goods will not be considered to originate if a preponderance of the evidence establishes that any production or pricing practice has been used to circumvent the intent of the origin rules.

 NOTE: The textile, automotive, and agricultural sectors have specific origin determination requirements which may differ from the general rules discussed above.

NOTE:  The textile, automotive, and agricultural sectors have specific origin determination requirements which may differ from the general rules discussed above.

CERTIFICATE OF ORIGIN

The importer must base his claim on the NAFTA Certification of Origin, issued by the exporter, indicating that the goods meet the specific rule of origin required to make the goods eligible for preferential treatment under NAFTA. All three countries use the same Certificate of Origin. However, the Customs authorities in any country can demand a translation of a Certificate issued in a different language. The Certificate of Origin must be completed and signed by the exporter of the goods. Where the exporter is not the producer, the exporter may complete the Certificate on the basis of:

(a) knowledge that the good originates;

(b) reasonable reliance on the producer's written representation that the good originates; or

(c) a completed and signed Certificate of Origin for the good voluntarily provided to the exporter by the producer.

The Certificate of Origin must be executed by the exporter prior to filing the claim and must be in the possession of the importer at the time he makes the entry summary. The written Certificate must be provided to Customs by the importer upon request. Exporters or producers shall provide copies of the Certificates of Origin which they have prepared to their own Customs officials upon request. In instances where the importer has not yet received the Certificate at the time of filing the entry, summary., he is precluded from making a claim for NAFTA treatment and must enter the goods under the appropriate Column 1 or 2 rate. A subsequent claim for NAFTA treatment, however, may be made once the importer receives a valid Certificate of Origin. An importer in any of the three countries has up to 1 year from the date of importation to make a claim for NAFTA treatment.

The Certificate of Origin may be issued for each individual shipment, for a specific product, or for an entire product line. A Certificate may be executed on an entry, by entry, basis or it may be utilized as a blanket declaration for a period of up to 1 year.

Exporters and producers which provide a Certificate of Origin must maintain records pertaining to the exportation for five years from the date of issue. In addition, they must notify all parties to whom the Certificate was provided of any change which could affect the accuracy or validity of the Certificate.

ORIGIN VERIFICATIONS

The NAFTA authorizes the importing country's customs officials to conduct verifications of the exporter or producer to determine whether goods qualify as originating as certified by the Certificate of Origin. Although most verifications are performed by issuing written questionnaires and conducting verification visits, discrepancies and problems detected through these review procedures may result in audits and investigations.

Keep in mind that the "verification visits" are performed by the Customs authorities of the importing country. Written consent must be obtained by the exporter or producer being visited prior to conducting the visit. The exporter or producer whose goods are the subject of the verification visit has the right to designate two observers to be present during the visit. A determination concerning the eligibility of the good for preferential duty treatment is subsequently made and the exporter or producer has the right to a review and the opportunity to appeal the determination in the importing country.

PENALTIES

Canada, Mexico, and the United States each maintain measures imposing criminal, civil, and administrative penalties for violations of their laws and customs procedures, including those relating to the NAFTA. Exporters, producers, and importers are all subject to these various penalty actions.

Corrections to Declaration of Origin

Canada, Mexico, and the United States require importers to advise their respective Customs authorities promptly upon becoming aware of the fact that a claim for preferential duty treatment is incorrect. Failure to do so can result in severe sanctions being imposed.

In Canada - Upon determining that the declaration for preferential duty treatment under NAFTA is incorrect, the importer or owner of goods for which preferential tariff treatment under the NAFTA was claimed must:

(a) make a correction to the declaration of origin,

(b) pay all appropriate duties which may be owed within 90 days of having reason to believe that the original declaration is incorrect, and

(c) file a completed Canada Customs Form B-2.

In the United States - Importers are required to "promptly" make corrected declarations and pay any duties owed, if they determine that a Certificate on which a declaration was based contains incorrect information. Such corrections should be made under Prior Disclosure provision provided for in section 162 of the Customs Regulation (19 CFR 162).

NOTE: The NAFTA requires that both importers and exporters maintain all their relevant records for 5 years. All of these records are subject to whatever audit and statutory requirements apply to import and export records.

A U.S importer faces the following potential penalties if he cannot provide upon request a Certificate of Origin:

1) denial of NAFTA benefits, and

2) up to $10,000 fine against each claim.

A U.S. importer who produces a false Certificate of Origin faces:

1) denial of NAFTA benefits, and

2) penalty action under 19 USC 1592, covering negligence, gross negligence or fraud, if the importer knew or should have known that the certificate was false. In instances of collusion, potential criminal sanctions exist as well.

A us exporter who prepares a Certificate of Origin and does not maintain and can not provide the necessary documentation faces the following potential penalties:

1) denial of the NAFTA benefits by Canadian or Mexican authorities, and

2) up to $10,000 fine against each claim.

A u.s. exporter faces the following potential penalties for submitting a false Certificate of Origin:

1) denial of the NAFTA benefits by Canadian or Mexican authorities, and

2) penalty action under 19 USC 1592 covering fraud, gross negligence, or negligence.

Finally, any U.S. importer or exporter who fails to maintain all of the necessary records for 5 years from the date of entry/exportation, or fails to provide these records upon request to U.S. Customs may be levied with a civil penalty of the lower of $10,000 or 40% of the entered value in instances of negligence or $100,000 or 75% of the entered value in instances of willful behavior. These penalties apply to each violation.
 
 
 

NOTE: These materials are designed only as a brief outline of some of the issues involved in the NAFTA. They are not intended as advice for any specific circumstance and should not be interpreted as such. A party wishing to take advantage of the benefits offered by the NAFTA is advised to research all of the issues carefully prior to taking any action and to seek professional advice if necessary.

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