NAFTANorth American Free Trade Agreement

Administration and Compliance – How to properly apply it and manage your risks.

• This event will be recorded and both the recording and the presentation slide deck will be made available after the webinar.

• You will all be in the “Listen Only” mode for the webinar.

• If you have a question please use the “Ask a Question” function on your GoTo Webinars panel.– All questions will be addressed at the end of the presentation unless

there is a common, reoccurring question.

• If you are experiencing technical difficulties, please use the “Chat” function on your GoTo Webinars panel; OR email Justin directly at justin@ghy.com

House Keeping

• This course will provide an understanding of the NAFTA agreement and how to apply the rules of origin. In addition we will look at the potential risks and the compliance requirements.

About the Class

• Darcy Calder is both a Certified Trade Compliance Specialist and a Certified Customs Specialist with over 20 years of experience in cross border trade facilitation and relationship management. In addition Darcy also is a CITT-Certified Logistics Professional (CCLP).

• In Darcy’s career he has held roles that have given him a broad perspective of understanding across multiple industry sectors, including automotive manufacturing, agricultural, food/produce, retail, etc.

About the Speaker

• Overview & Historical context• Rules of origin and administration• Importer/Exporter Obligations• Risks of non-compliance

Agenda

• Roots are founded in 1989 FTA (US/CA)• Came into force on January 1st, 1994• Reduce trade barriers and tariffs• Expand trade, free flow of goods

NAFTA Overview

• In 2012 three way trade between Canada, US and Mexico = $1.2 Trillion Dollars (more than tripled from 1993: $288 billion)

• The combined GDP has also increased from $7.7 trillion in 1993 to $19.2 trillion in 2012

Why is NAFTA Important?

Rules of Origin and Administration

• Preference Criterion• Tariff• Description • Signature

Common Errors

• Indicates how the goods qualified for NAFTA• 6 Preference Criterion – A through F

− “A” Wholly obtained or produced in the NAFTA region− “B” Goods meeting the Annex 401 Rule of Origin− “C” Goods produced in the NAFTA region wholly from originating

materials− “D” unassembled goods, goods classified with their parts which

do not meet Annex 401 rules, but meet Regional Value Content Requirements.

Preference Criterion

• Goods wholly obtained or produced entirely in Canada, Mexico or the United States.

• Contains no non-North American parts or materials anywhere in the production process.

Preference Criterion A

Wheat grown in Canada

Coal mined in Montana (USA)

(A) Wholly Obtained or Produced

• Corresponds to article 401(b) of the Agreement, which covers goods that a producer makes using non-originating materials. The non-originating materials must meet the conditions set out in the specific rule of origin that applies, which can be found in Annex 401 of the Agreement.

• These rules can requires:− Tariff Shift− Tariff Shift and/or Regional Value Content (RVC)− RVC only

Criterion “B”

• Tariff shift is the process by which all NON-NAFTA materials undergo a change in tariff classification as a result of significant transformation in the NAFTA area.

• The material that is being used not only loses its original commercial identity but also its original tariff classification when it becomes or is incorporated into a new product.

Tariff Shift

• Tariff classification of a safe – 8303.00.00.00

Tariff Shift

• Rule of origin for 83.03• “83.02-83.04 A Change to

headings 83.02 through 83.04 from any other heading, including another heading within that group.”

• Non- originating material:• Gauges• Iron & steel fittings• Plastic lining• Steel for the cabinet

Tariff Shift

• Gauges – Ch. 90• Iron & Steel Fittings –

Ch. 73

• Plastic Lining – Ch. 39• Steel for the cabinet –

Ch. 72

Tariff Shift

• Regional Value Content is the calculated percentage of the value of the product that represents its North American content

• May be calculated using one of two methods, depending on the rule:

− Transaction Value Method− Net Cost Method

Regional Value Content (RVC)

Net Cost Method (NC):

RCV = NC -VNM X 100

NC

= 50% or more

Transaction Value Method (TV):

RVC = TV - VNM X 100

TV

= 60% or more

VNM = Value of non-originating material

Regional Value Content (RVC)

• It is easier to use the TV method if goods are sold at a very high margin.

• Cannot use TV method if >85% related party sales, auto industry, etc.

RVC – NC or TV

Mortar Mixers 8474.31 – A change to subheading 8474.10 thru 8474.80 from subheading 8474.90 providing there is ‘regional value content’ of not less than:

a) 60 percent where transaction value method used, or

b) 50 percent where the net cost method used

8474.318474.31 – US Origin

Mortar Mixer Pts (except some naming items) are classified as 8474.90.

If parts are NAFTA eligible, EVEN THOUGH DUTY FREE, should have NAFTA.

Canadian Manufacturing of Motor MixersDuty Free – MFN & UST

Example• The Mixer cost $500 to build and is sold for $1000 and

incorporates $300 in non-qualifying materials

RVC = 40%

NON-NAFTA

$500 - $300$500

Net Cost =

RVC – NC or TV?

RVC = 70%

NAFTA QUALIFYING

$1000 - $300$1000

Transaction Value =

RVC – NC or TV?Example• The Mixer cost $500 to build and is sold for $1000 and

incorporates $300 in non-qualifying materials

Preference Criterion C

• The goods are produced entirely in the territory of one or more of the parties exclusively from originating materials

United States

Mexico

Chapter 26 Brazil

Canada

IRON ORE IRON ORE

(C) Originating Goods

Preference Criterion D

• When a tariff shift cannot occur, the good can still be certified using the RVC calculation

• There are only two conditions under which this can occur:− Products imported in an unassembled or disassembled

form are classified under the same tariff provision as the assembled good

− When parts for a good are classified under the same heading or subheading as the good itself

• No change in tariff classification• Must meet regional value content

pump

footrest

chair

HS 9402.10Dentist’s chair and

parts thereof

Assembled in Canada and sold to Mexico and the United States

(D) Goods and Their Parts

A: Wholly obtained or produced

B: Tariff shift

Tariff shift and/or RVC

RVC only

C: Made exclusively from originating materials

D: Assemblies and RVC

Parts in same provision as good and RVC

In Simple Terms

• Any foreign material that is incorporated into a good and does not undergo a tariff classification change can be disregarded when determining the country of origin of the good provided the total value of the non qualifying material is not greater than 7%

DeMinimis Rule

Non-originating strap 9113.90 $1.00made in Taiwan

Originating Watch movement 9108.91

Originating case 9112.10

Finished watch 9102.11 $20.00

• A change to heading 91.02 from any other chapter

DeMinimis

Build your audit trail to withstand customs audit1. Bill of material2. Tariff classification backup3. Rule of origin4. RVC or tariff shift analysis5. NAFTA certificates for raw materials6. Rulings7. Memo explaining work done, assumptions etc.

The Final Step

• Same form in English, French, or Spanish

• Blanket period covers identical goods for up to 12 months

• Completed by exporter

• Required for commercial goods valued at $2500 US or CAD

Certificate of Origin

STATEMENT OF ORIGIN FOR COMMERCIAL IMPORTATIONS OF LESS THAN $2500“I certify that the goods referenced in this invoice/sales contract originate under the rules of origin specified for these goods in the North American Free Trade Agreement (NAFTA) ,and that further production or any other operation outside the territories of the Parties has not occurred subsequent to production in the territories.”

NAME: I.M.Exporter

TITLE: ControllerCOMPANY: WORLD EXPORTERDATE: April 1,1995TELEPHONE: (613)123-4567 FAX: (613) 123-

4568I am the exporter of the goods____or producer of the goods______.

X

Sample Wording of Statement of Origin

1 2

3 4

65 7 8 9 10

11 I certify that...

CERTIFICATE OF ORIGINNorth American Free Trade Agreement

Revenue RevenuCanada Canada

Canada

Protected (when completed)

Instructions attached

} i- Header

} ii- Body

} iii- Trailer

From ToExporters name and address

Producers name and address Importers mane and address

Blanket Period

Description of goods

Revenue RevenuCanada Canada Protected (when completed)

CERTIFICATE OF ORIGINNorth American Free Trade Agreement

(Instructions attached)Please print or type

1 2

3 4

Exporters name and address Blanket period

Producers name and address Importers name and address

EXPORTER

PRODUCER IMPORTER

BLANKET PERIODFrom To

Tax Identification Number

Tax Identification Number Tax Identification Number

i01 01 9 4 31 12 94

5 6 7 8 9 10Description of Good(s)HS TariffClassNumber

Preferencecriteria Producer

Netcost

Country oforigin

DESCRIPTION

HS# ABCDEorF

ii

5 6 7 8 9 10Description of Good(s)HS TariffClassNumber

Preferencecriteria Producer

Netcost

Country oforigin

Yes orNo(1)(2)or(3)

ii

1-Your Knowledge 2 -Reliance on producer 3 -Certificate of origin

5 6 7 8 9 10Description of Good(s)HS TariffClassNumber

Preferencecriteria Producer

Netcost

Country oforigin

iiNCorNo

CaUSMXorJNT(Canadaonly)

iii

11 I certify that:

DECLARATION

Canada

Authorized Signature Company

Name Title

Date Telephone Fax

EXPORTER/PRODUCER

I.M.EXPORTER CONTROLLERDATE

B232E Printed in Canada

Risk and Compliance

• Claiming NAFTA – must be in possession of a valid certificate of origin.

• Refund of duties can be filed no later that one year after the date of import– Copy of the Certificate of Origin

Importer Obligations

• Solid audit trail• Respond to request from Customs authorities• Notify of any changes to all parties to whom a Certificate

has been provided.

Exporter Obligations

• Maintain books and records for:– 5 years in U.S.A.– 6 years plus current in Canada– 5 years in Mexico

Record Keeping

• Send an origin verification questionnaire• Conduct an origin verification audit• Conduct a full compliance audit

Compliance

• Loss of NAFTA benefits could result in risk and financial exposure

• Penalties• Customs audits• Interruption in your Supply Chain• Loss of competitive edge

Compliance

• Each country has their own penalties and enforcement structure for NAFTA.

• Canada – Administrative Monetary Penalty System (AMPS)

• U.S. – penalties for negligence, gross negligence and fraud

Compliance

• Strong supplier relationships• Requirement to respond to requests from Customs• Exporter will reimburse any costs from

improper/negligent Certificates.

Protection

• Understand the rules of origin for your products• Complete and accurate completion of Certificate of

Origin• Strong audit trail• Comply with all requests from Customs• Strong supplier relationships

Summary

Thank You!

Contact Information:Darcy Calder, CCLP, CTCS, CCS

Manager, Canadian Operations

darcy@ghy.com

204-947-6700 ext. 239