NAFTACOMPLYING WITH NEW NAFTAREGULATIONS AND REQUIREMENTS |
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.
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.
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.
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:Preference Criteria A
(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(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(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
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.Preference Criteria B
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. |
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.
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.
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%.(1) Transaction Value Method
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. |
RVC = regional value content, expressed as a percentage;
RVC=TV-VNM x 100 TV
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.
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%.(2) Net Cost Method
RVC = regional value content, expressed as a percentage;
RVC=NC-VNM x 100 NC
NC = net cost of the good;
VNM = value of non-originating materials used by the producer in the production of the good.
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 C
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.Preference Criteria D
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, orii) 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. |
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.
NOTE: | The use of the Intermediate Materials and Accumulation provisions involve complex cost calculations and should not be used without careful deliberation and research. |
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.
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. |
(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.
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.
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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