The North American Free Trade Agreement

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NAFTANorth American Free Trade

Agreement

Canada

Mexico

United States2

NAFTA – What is it?• Importing and Exporting of Goods• Investment• Intellectual Property Rights• Banking• Communications• Etc…..

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Importing and Exporting

• Objective in 1994 was to phase out duty over a period of fifteen years

• All three countries have not meet that objective

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Side Note to NAFTA

Classification – The Building Block of NAFTA eligibility

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Classification• Your product components must be

classified properly.

• Your manufactured products must be classified properly.

• If you are trying to qualify a product in Mexico or Canada, then you need to have their HTS versions.

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How To Classify• Read over the GRIs (General Rules of

Interpretation).

• Find a single heading that describes your product then read the Section and Chapter Notes.

• If you find more than one heading, select the most specific then read the Section and Chapter Notes.

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How to Classify - Continued• If your headings refer to the chief component

materials in your product, there is no “most specific” so determine the essential character and classify accordingly while reading the Section and Chapter Notes.

• If there is no essential character, use the number appearing last in the HTSUS and read the Section and Chapter Notes.

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Helpful Classification ToolsIf you are still stuck, use the following

tools:– Explanatory Notes– CROSS program on http://rulings.cbp.gov/– Call a Customs Import Specialist

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Common Errors in Classifying• Not reading the Section and Chapter

Notes.• Jumping to “essential character” without

going through the previous rules• Comparing items at different levels

(indentions)• Classifying backwards – finding the

subheading or statistical breakout you like and then trying to make it fit.

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Common Errors in Classifying• Reading only part of a Heading or Note. The

first five words of a long Chapter Note may sound like your product, but finish reading it – your item may be excluded at the very end of the sentence.

• Picking an “other” provision instead of obtaining complete information about the product. “Other” does not mean “I don’t know”.

• Relying on the index for the HTSUS number• Comparing subheadings in different

headings11

Product Eligibility for NAFTA• Preference Criterion A – Wholly Originating• Preference Criterion B – Tariff Change and Regional

Value Content• Preference Criterion C – Goods made from

originating materials• Preference Criterion D – Assembly of

unassembled/disassembled goods• Preference Criterion E – Certain computer

goods/materials• Preference Criterion F – Agriculture Products

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Preference Criterion “A”“A” – wholly obtained or produced in the

territory of one or more of the NAFTA countries.

“Wholly obtained or produced” means:

• Mineral goods extracted

• Live animals, born or raised

• Vegetable goods harvested

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Preference Criterion “A”• Goods obtained from hunting, trapping or fishing

• Fish, shellfish, or marine life taken from the sea by vessels registered and flying a flag of an FTA party

• Waste and scrap derived from production or use in territory of one or more parties

Purchasing a good from a NAFTA country does not necessarily render it “wholly obtained or produced”.

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Preference Criterion “B”“B” – produced entirely in the territory of one or

more of the NAFTA countries and satisfies the specific rule of origin.

• Tariff Shift – A change in tariff classification as a result of production or processing in an FTA country.

• Regional Value Content (RVC) – Percentage of originating material using either transaction value or net cost of the good.

• De Minimus – The value of all non-originating materials used in the production of the good that do not undergo the required change in tariff classification does not exceed 7%.

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“B” –“Tariff Change” or “Tariff Shift”

• NON-originating materials make a change from their own HTSUS into the number for the finished good.

• More complex the product, more work there is; more products made, more work there is; more raw materials used, more work there is

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“B” –“Tariff Change” or “Tariff Shift”

There are two different ways to approach non-originating materials.– Classify all the materials, then request Certificates

of Origin for only the ones that do not make the required tariff change; or

– Demand Certificates from all your vendors, and then deal individually with the ones that affect the eligibility of the final product.

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“B” – “Regional Value Content”

• Must be especially familiar with the Appendix to Part 181 of 19 CFR.

• Must have accounting background since accounting terms are used.

• Must be familiar with “Generally Accepted Accounting Principles” (GAAP).

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“B” – “Regional Value Content”

• RVC is the percentage of the value of the good that represents its North American content.

• The amount required– 50% - if the Net Cost Method is used; or– 60% - if the Transaction Value Method is

used

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“B” – “Regional Value Content” – “Net Cost Method”

Use of Net Cost is applicable in the following situations:– If there is no transaction value – This could occur if

there is not a sale involved.– If the transaction value is unacceptable – This will

happen if there are restrictions on the disposition or use of the good, there is some condition for which a value cannot be determined, proceeds of resale are paid to the producer, or the producer and buyer are related and the relationship affects the price.

– If 85% or more of the producer’s total sales are to parties related to the producer.

– If the exporter/producer chooses to “accumulate”. – If the good is an intermediate material and is subject to

an RVC requirement.20

“B” – “Regional Value Content” – “Net Cost Method”

RVC = NC – VNM X 100NC

• NC is the net cost of the good, calculated in accordance of subsection 11.

• VNM is the value of non-originating materials used by the producer in the production of the good, determined, except as otherwise provided in sections 9 and 10, in accordance with section 7.

• VNM does not include value of non-originating materials used in originating materials.

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“B” – “Regional Value Content” –“Net Cost Method”

• If you calculate the RVC using Transaction Value Method and are told by Customs administration that is not acceptable, you may switch to Net Cost.

• If you are using the Net Cost Method and that is found not acceptable by Customs, you cannot switch to Transaction Value Method.

Net Cost Transaction Value

Net Cost Transaction Value

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“B” – “Regional Value Content” – “Transaction

Value Method”Price actually paid or payable for the

merchandise

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“B” – “Regional Value Content” – “Transaction Value Method”RVC = TV – VNM x 100

TV

• RVC is the regional value content of the good, expressed as a percentage.

• TV is the transaction value of the good, determined in accordance with Schedule II with respect to the transaction in which the producer of the good sold the good, adjusted to an F.O.B. basis.

• VNM is the value of non-originating materials used by the producer in the production of the good, determined in accordance with section 7.

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“B” – “De minimus”

• All non-originating, non-tariff shifting materials are worth 7% or less of the TOTAL value of the finished good.

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Preference Criterion “C”“C” – Produced exclusively from originating

materials.

• “Originating” includes non-originating materials which transform into originating goods prior to incorporation into the final good.

• Generally applies to manufactured products versus raw materials which are generally covered under Preference Criterion “A”.

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Preference Criterion “D”“D” – Goods are produced in one or more NAFTA

countries, but do not meet the applicable Rule of Origin because one or more non-originating materials do not undergo the tariff shift requirement.

• This criterion is limited to two circumstances:– The good was imported in an unassembled or disassembled

form according to GRI 2(a).– “Parts of” and the finished goods are classified under the

same heading or subheading and is not further subdivided.

• Goods meeting their circumstances above may be considered originating if they meet the RVC requirement.

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Preference Criterion “E”

“E” – Automatic data processing goods and their parts (specified in Annex 308.1) may be considered originating upon importation into the territory of a NAFTA country from the territory of another NAFTA country when the most-favored-nation tariff of the good conforms to the rate established in Annex 308.1 and is common to all NAFTA countries.

• This criterion is applicable only to the ADP goods and parts specified in Annex 308.1.

• Must be imported directly from the territory of another NAFTA party to qualify.

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Preference Criterion “E”

• ADP goods and parts specified in Annex 308.1 are duty free upon importation from another NAFTA country, regardless of origin.

• As of January 2004, NAFTA Certificates are no longer required under Annex 308.1.– This is due to the MFN rate of 0%.– NAFTA COO may still be required to

eliminate MPF and DTA fees charged by the US and Mexico.

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Preference Criterion “F”

“F” – Agricultural goods (not covered under Preference Criterion “A”).

• Agreement was negotiated separately for agricultural goods shipped between:– US and Canada – incorporates the original rules from the

US-Canada FTA of 1988.– US and Mexico – refer to Annex 703.2, Section A.– Canada and Mexico – refer to Annex 703.2, Section B.

• Does not apply to goods that “wholly originate” in Canada or the United States and are imported into either Canada or the United States.

• Applies to “tariff rate quotas”, not absolute (quantitative) quotas.

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Determining the Preference Criterion• What is the condition or form of the imported raw

material, component, or good?– Unassembled, disassembled, raw material, or finished

good?• What is the origin of the raw materials or

components?• What is the classification?• What is the Rule of Origin?

– Refer to GN 12 or the NAFTA Text• Is RVC required?• What process or manufacturing has the good

undergone after importation and/or just prior to incorporation into the finished good?

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NAFTA Certificate of Origin

• Block 1: Exporter Name and Address and Tax ID Number

Full legal name, address (including country), and legal tax identification number of the exporter.

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Certificate of Origin - Form• Block 2: Blanket Period

If the Certificate covers multiple shipments of identical goods for a specified period of up to 1 year (blanket period), it must include the date upon which the Certificate becomes applicable to the good covered by the blanket Certificate (“FROM” date) and the date upon which the blanket period expires (“TO” date).

The importation of a good for which preferential tariff treatment is claimed based on this Certificate must occur between these dates.

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Certificate of Origin - Form• Block 3: Producer Name and Address and Tax

ID Number

Legal name, address (including country), and legal tax identification number of the producer. If more than one producer's good is included on the Alt 434, a list of the additional producers, including the legal name, address (including country), and legal tax identification number must be attached. If the importer requests this information to be confidential, he/she may state “Available to CBP upon request”. Indicate whether the producer and the exporter are the same, or if the producer is unknown.

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Certificate of Origin - Form

• Block 4: Importer Name and Address and Tax ID Number

Legal name, address (including country), and legal tax identification number of the importer. If the importer is not known, state “UNKNOWN”; if multiple importers, state “VARIOUS.”

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Certificate of Origin – Form• Block 5: Description of Goods

Full description of each good. The description should be sufficient to relate it to the invoice description and to the Harmonized System (H.S.) description of the good. If the Certificate covers a single shipment of a good, include the invoice number as shown on the commercial invoice. If not known, indicate another unique reference number, such as the shipping order number.

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Certificate of Origin - Form

• Block 6: HTSUS Tariff Classification Number

Using the H.S. tariff classification of the country into whose territory the good is imported, list the H.S. tariff classification to six digits. If the good is subject to a specific rule of origin in Annex 401 that requires eight digits, it should be identified accordingly.

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Certificate of Origin - Form• Block 7: Preference Criterion

Preference criterion (A through F).

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Certificate of Origin - Form• Block 8: Producer

Exporter must indicate whether he/she is the producer of the good. If the exporter is not the producer of the good, he/she must indicate whether the claim is based on knowledge of whether the good qualifies as an originating good; reliance on the producer's written representation (other than a Certificate of Origin) that the good qualifies as an originating good; or a completed and signed Certificate for the good, voluntarily provided to the exporter by the producer.

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Certificate of Origin - Form• Block 9: Net Cost

Where the good is subject to a regional value content (RVC) requirement, indicate “NC” if the RVC is calculated according to the net cost method; otherwise, indicate “NO”. If the RVC is calculated according to the net cost method over a period of time, further identify the beginning and ending date of that period. (Reference: Articles 402.1 and 402.5)

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Certificate of Origin - Form• Block 10: Country of Origin

Identify the name of the country (“CA” or “MX”) to which the preferential rate of customs duty applies.

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Certificate of Origin - Form• Block 11: Certification

The person that signs their name to the NAFTA certification needs to be someone within the company who knows the “ins” and “outs” of the NAFTA program.

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Common Errors on the Certificate of Origin Form

• Wrong names in the Exporter/Producer/Importer blocks. Think about what you are certifying and whether it is crossing a border or not.

• Blanket period shows more than one year. The blanket period can be a maximum of one year.

• Tax ID numbers are not shown. All three countries’ Customs offices require this information.

• Description not sufficient to match it to entry documents.

• Wrong tariff number. Remember, this affects the eligibility of the product.

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Common Errors on the Certificate of Origin Form

• Preference Criterion obviously wrong. For example, showing “A” for items that obviously are not wholly originating in the NAFTA Territory.

• Amount of money shown in Column 9, Net Cost.• No country of origin shown or a country that is

outside the NAFTA group.• Columns left blank.• Number of pages not indicated.• Certificate not signed or not signed by the

appropriate person.44