NAFTA Verification and Audit Manual

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NAFTA Verification/Audit Manual

The NAFTA Verification/Audit Manual is developed to support the verification of goods for which NAFTA preferential tariff treatment has been claimed comply with the rules of origin. This trilateral guide details the recommended technical verification framework to be observed by each Party when conducting NAFTA verifications. This trilaterally agreed upon manual also provides significant automobile information.

- Introduction and Executive Summary

doc - 27 KB.

- Chapter 1: Purpose of the Manual and Legislative Framework

doc - 32 KB.

- Chapter 2: Co-operation Among the Parties

doc - 30 KB.

- Chapter 3: Auditing Standards

doc - 75 KB.

- Chapter 4: Objectives of NAFTA Audits (Verifications)

doc - 28 KB.

- Chapter 5: Scope of the NAFTA Audits (Verifications)

doc - 196 KB.

- Chapter 6: Methodology for Rules of Origin Audits (Verifications)

doc - 90 KB.

- Chapter 7: NAFTA Working Groups

doc - 24 KB.

- U.S. Appendix

doc - 1,136 KB.

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NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) AUDIT (VERIFICATION) MANUAL

UNITED STATES CUSTOMS SERVICE

REGULATORY AUDIT DIVISION NORTH AMERICAN FREE TRADE AGREEMENT

AUDIT (VERIFICATION) MANUAL TABLE OF CONTENTS Introduction

Executive Summary

INTRODUCTION

With the entry in force of the North American Free Trade Agreement (NAFTA), the Parties have experienced a significant increase in the trade of goods and services between them. The three Customs Administrations have agreed that the Rules of Origin as set out in Chapter Four of the NAFTA and the NAFTA Rules of Origin Regulations (the Regulations), define the framework to be observed by exporters/producers in order to have their goods qualify as "originating goods", and be eligible for a NAFTA preferential tariff treatment when imported into the territory of any of the other Parties to the Agreement.

As a result, it has become important for the Customs Administration of each Party to verify that the goods for which NAFTA preferential tariff treatment has been claimed comply with the Rules of Origin.

In this respect, the three Customs Administrations have considered that the establishment of verification guidelines is important and useful. The Customs Administrations of all Parties have consulted during the development of this manual and these guidelines include general, examination and reporting standards for NAFTA origin verifications.

This manual is intended to be used by: Origin Audits Unit of Revenue Canada (Canada); Direction of International Audit of the Ministry of Finance and Public Credit (Mexico); and, the offices of Regulatory Audit and Field Operations, U.S. Customs Service (United States). However, portions of this manual may also be used by other areas within each Customs Administration as deemed appropriate.

The main purpose of this document is to establish the recommended technical verification framework to be observed when conducting NAFTA verifications. The application of the provisions included therein should take into consideration the circumstances involved in each verification and be adapted accordingly. It is understood that this document will be updated on a continual basis.

This of the NAFTA Verification Manual provides revisions to the November 1995 version to reflect changes in the Regulations which became effective on October 1, 1995.

EXECUTIVE SUMMARY

This manual considers all types of verifications, but focuses on the on-site audit process for exporter verifications where the regional value content requirement, tariff change requirement, or both, must be met. It should be noted that this manual provides verification procedures that are recommended by all Parties.

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There are seven chapters contained in this manual. Included is an annex at the end of most chapters. The Annex contains information for the particular chapter that may differ among the Parties. The chapters within this U.S. version of the NAFTA Verification Manual includes information unique to the U.S. Information differing in Mexico and/or Canada, is included at the end of the chapter in the Annex. The highlights for each chapter are as follows:

Chapter 1, Purpose of the Manual and Legislative Framework, points out the need for this audit (verification) manual, and refers to the legal framework by which NAFTA verifications are conducted.

Chapter 2, Co-operation Among the Parties, discusses the exchange of information and communication between Customs Administrations subject to NAFTA.

Chapter 3, Auditing Standards, demonstrates how the Generally Accepted Auditing Standards have been incorporated into each Party's audit (verification) process.

Chapter 4, Objectives of NAFTA Audits (Verifications), outlines the objectives of NAFTA exporter on-site verifications as well as the verification program objectives for this type of verification.

Chapter 5, Scope of the NAFTA Audits (Verifications), describes the parameters of coverage for NAFTA exporter verifications including the verification period, coverage, importer identification, and assessment/liquidation period. This Chapter also includes recommended verification procedures that are identical and uniform for all Customs Administrations.

Chapter 6, Methodology for Rules of Origin Audits (Verifications), explains the verification process for NAFTA exporter verifications.

Chapter 7, NAFTA Working Groups, refers to the contact areas within the Customs Administration of each Party with respect to verification issues and their relationships with the NAFTA Working Groups.

LIST OF APPENDICES

A Certificate of Origin CF-434

B General Questionnaire CF-446 C Election to Average Form for Vehicles CF-447 D Sample Letter Proposing NAFTA Verification Visit E Sample Notification of NAFTA Verification of Goods to Known Importers of Record F Review of Policies, Procedures, and Internal Controls Checklist G Final Written Determinations- Positive and Negative H Sample Notification of Verification Results to Known Importers (1) Goods met NAFTA rule of origin requirements (2) Goods did not meet NAFTA rule of origin requirements I Supplier Confirmation Letters (1) for non-automotive parts suppliers (2) for automotive parts suppliers J Supplier Verification Notification K Regulatory Audit Final Audit Reports L Goods Wholly Obtained or Produced Entirely in the Territory of One or more of the Parties M Goods Produced entirely in the Territory of One or More of the Parties Exclusively from Originating Materials N Preference Criteria D

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O Light Duty Automotive Goods - Averaged P Light Duty Automotive Goods - Non-Averaged Q Heavy Duty Automotive Goods - Averaged R Heavy Duty Automotive Goods - Non-Averaged

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CHAPTER 1 PURPOSE OF THE MANUAL AND LEGISLATIVE FRAMEWORK

1.1 Purpose of the Manual

This verification manual presents the audit process and the recommended verification procedures with which an auditor or officer must be familiar in order to conduct a verification and perform other related tasks for the North American Free Trade Agreement (NAFTA). This manual is intended to provide the user with a clear understanding of the verification function. Reference to, or usage of, the manual in daily activities will result in verifications and other related tasks being done in an efficient and uniform manner, that is consistent with established policies and procedures.

The Customs Administration of each Party has consulted in the writing of this manual, and a similar manual has been developed for their own Customs Administration. It is expected that by having a similar verification manual for all Customs Administrations there will be a uniform and consistent application of verification procedures when conducting rule of origin verifications under the NAFTA.

1.2 Scope

This manual covers subjects which are related to the process and the recommended procedures pertinent to conducting verifications under the provisions of the NAFTA. The manual does not deal specifically with interpretations and rulings on origin, as these subjects are covered by other directives issued by each Customs Administration. This manual explains the use of various reports, forms, and working papers that are required for the audit activity. (Examples are included in the appendices).

1.3 Amendments

Changes in legislation, regulations and administrative policies may necessitate changes or updates to the contents of this manual. All changes will be discussed among the Parties.

1.4 Legislative Framework

Article 506 of the NAFTA sets out the authority for each Party to the Agreement to conduct verifications of the books and records of the exporter or producer located in the territory of another NAFTA Party. The implementing legislation and enabling regulations support the text of the NAFTA.

For the domestic legislative framework of the other Parties, refer to the respective Annex 1, Section 1.4 at the end of this Chapter.

The provisions of the NAFTA were adopted by the United States with the enactment of the North American Free Trade Agreement Implementation Act, Public Law 103-182, 107 Stat. 2057. The principal role of the U.S. Customs Service is to administer the provisions of the NAFTA and the Act which relate to the importation of goods into the United States from Canada and Mexico. Those Customs related NAFTA provisions which require implementation through regulation include certain tariff and non-tariff provisions within Chapter Three (National Treatment and Market Access for Goods) and the provisions of Chapter Four (Rules of Origin) and Chapter Five (Customs Procedures).

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The majority of the NAFTA implementing regulations are contained in Part 181 of the Customs Regulations. However, in those cases in which NAFTA implementation is more appropriate in the context of an existing regulatory provision, the NAFTA regulatory text has been incorporated in an existing Part within the Customs Regulations. The NAFTA Rules of Origin Regulations are set forth as an Appendix to Part 181. The text was trilaterally negotiated and is presented as such, except for editorial modifications necessary and appropriate for the U.S. regulatory context.

The following specific Parts of the Customs Regulations were revised to reflect changes resulting from the NAFTA:

Part 10- Articles Conditionally Free, Subject to a Reduced Rate, etc. Part 12- Special Classes of Merchandise Part 24- Customs Financial and Accounting Procedure Part 123- Customs Relations with Canada and Mexico Part 134- Country of Origin Marking Part 162- Record keeping, Inspection, Search, and Seizure Part 174- Protests Part 177- Administrative Rulings Part 178- Approval of Information Collection Requirements

Part 191- Drawback ANNEX 1 CANADA

1.4 Legislative Framework

In Canada, Department Memorandum D11-4-20, "Origin Verification Procedures" outlines the Department's program for verification procedures pursuant to section 42 of the Customs Act, and Article 506 of the NAFTA, and the Uniform Regulations of the NAFTA.

The Uniform Regulations for Chapters Three and Five of the NAFTA have been agreed to by the governments of Canada, Mexico and the United States, and for Canada are contained in Departmental Memorandum D11-4-18, "Uniform Regulations, Chapters Three and Five of NAFTA". These Uniform Regulations elaborate in detail how NAFTA Parties will interpret, apply and administer the obligations regarding customs procedures under Chapter Five, and national treatment and market access under Chapter Three, and are to be read in conjunction with these Chapters.

The NAFTA Rules of Origin Regulations (regarding the rules of origin under Chapter Four of the NAFTA) effective from January 1, 1994 to September 30, 1995 are found in Customs Notice N-840. The NAFTA Rules of Origin Regulations effective from October 1, 1995 onward are found in Departmental Memorandum D11-5-1, "NAFTA Rules of Origin Regulations".

ANNEX 1 CANADA

1.4.1 Customs Act

The Customs Act provides the domestic legal framework for administering and enforcing laws relating to Revenue Canada, Customs and Excise including the Customs Tariff.

The Customs Act, for which the Minister of National Revenue is responsible, creates the authority for the administration of Customs matters generally and for the Governor-in-Council to make specific administrative regulations. The collection of Customs duties is based on the principle of

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self-assessment and voluntary compliance by the Canadian importer or owner of imported goods who must report and account for all such goods as required by the Customs Act. The Customs Act, therefore, provides the mechanism for the collection of duties and taxes imposed on imported goods by other federal statutes, and for the enforcement of the many federal statutes that prohibit, regulate or control imported and exported goods.

Section 42 of the Customs Act specifically addresses verifications conducted for the purposes of determining origin, the statement of origin, the effective date of a re-determination of origin, the denial or withdrawal of the benefit of the preferential tariff treatment, and advance rulings.

1.4.2 Customs Tariff

Through the Customs Tariff Canada gives effect to the International Convention on the Harmonized Commodity Description and Coding System. It is this Customs Tariff that is used by Revenue Canada when confirming the classification of goods and materials during the course of a verification as it is the HS tariff classification of the country into whose territory the good is imported that is applicable.

ANNEX 1 CANADA

The Customs Tariff is a fiscal statute that: - imposes customs duties on imported goods; - provides for the tariff treatment accorded to imported goods depending on their country of origin; - provides for other conditions (e.g. relating to transshipment) that goods must meet in order to be entitled to a specific tariff treatment; and - provides for the tariff rate (rate of customs duty) applicable to goods, depending on the classification of the goods; and, provides for duty relief.

ANNEX 1 MEXICO

1.4 Legislative framework Articles 511 and 514 of the NAFTA published in the Official Gazette of the Federation on December 20, 1994, set out that the Parties shall establish, and implement through their respective laws the Uniform Regulations regarding the Interpretation, Application and Administration of Chapter Four of the NAFTA.

Article 506 of the NAFTA, published in the Official Gazette of the Federation on December 20, 1994 and rules 35 trough 66, of Section VII, of Title III of the Uniform Regulations regarding the Interpretation Application and Administration of Chapter Four of the NAFTA, published in the Official Gazette of the Federation on December 30, 1994, set out the verification procedures to conduct origin verifications of goods imported into Mexico for which preferential tariff treatment was claimed, in order to determine whether such goods qualify as originating as stated in their certificates of origin. Verifications are mainly conducted by using written questionnaires and performing verification visits.

In addition to the legal proviso referred to in the previous paragraph, articles 3, and 116 of the Customs Law and Article 48 of the Fiscal Federal Code and the Interim regulations of the Ministry of Finance and Public Credit set out that the Direction of International Audit, of the Direction General of Revenue Policy and International Fiscal Affairs, acting as a Customs Authority, may request exporters, producers, customs brokers and importers to provide the information regarding the origin of imported goods for verification purposes.

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The applicable importation duties for importations that received the benefit of the NAFTA preferential tariff treatment may also be verified by the Direction of International Audit mentioned before. The applicable importation duties are established in the General Importation Duty Law (Ley del Impuesto General de Importaci�on a most favored nation basis, and such Law is structured taking into account the guidelines provided for in the Harmonized System. In order to apply the General Importation Duty Law, it is required to observe the duty phase-out schedules, published on an annual basis for NAFTA purposes, for originating goods in accordance with the terms provided for in NAFTA Annex 302.2.

In addition to the legal provisions referred to in the previous paragraph the Direction of International Audit may verify the country of origin marking in accordance with the terms stated in Chapter III of the NAFTA and the Decree in which the country of origin marking guidelines were published on the Official Gazette of the Federation dated January 7, 1994.

The legal provisions above mentioned, provide the legal framework for administering and enforcing laws for NAFTA purposes, in the case of the Ministry of Finance and Public Credit of Mexico.

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CHAPTER 2 COOPERATION AMONG THE PARTIES

2.1 Exchange of Rulings

Both consultation and the exchange of rulings are required pursuant to paragraph 1, Article 512 of the North American Free Trade Agreement (NAFTA) which states, "Each Party shall notify the other Parties of the following determinations, measures and rulings, including to the greatest extent practicable those that are prospective in application: (a) a determination of origin issued as the result of a verification conducted pursuant to Article 506(1); (b) determination of origin that the Party is aware is contrary to; (i) a ruling issued by the customs administration of another Party with respect to the tariff classification or value of a good, or of materials used in the production of a good, or the reasonable allocation of costs where calculating the net cost of a good, that is the subject of a determination of origin, or (ii) consistent treatment given by the customs administration of another Party with respect to the tariff classification or value of a good, or of materials used in the production of a good, or the reasonable allocation of costs where calculating the net cost of a good, that is the subject of a determination of origin; (c) a measure establishing or significantly modifying an administrative policy that is likely to affect future determinations of origin, country of origin marking requirements or determinations as to whether a good qualifies as a good of a Party under the Marking Rules; and (d) an advance ruling, or a ruling modifying or revoking an advance ruling, pursuant to Article 509."

In order to ensure the uniform application of the rules of origin NAFTA meetings are held between the three Customs Administrations. NAFTA meetings are held at the audit level, Customs Sub-group level, and at the Working Group level. The auditors of each NAFTA Party meet to discuss issues and then report the results of the discussions to the Customs Sub-group. Refer to Chapter 7-NAFTA Working groups.

It is very important that this process of consultation and exchange of information continue, given that its primary objective is to ensure the uniform application of the rules of origin.

2.2 Confidentiality of Business Information

NAFTA Article 507, Confidentiality, states:

"1. Each Party shall maintain, in accordance with its law, the confidentiality of confidential business information collected pursuant to this Chapter and shall protect that information from disclosure that could prejudice the competitive position of the persons providing the information.

2. The confidential business information collected pursuant to this Chapter may only be disclosed to those authorities responsible for the administration and enforcement of determinations of origin, and of customs and revenue matters."

For specific legislation from the other Parties affecting confidentiality of business information, refer to the respective Annex 2, Section 2.2. at the end of this Chapter.

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Section 181.121 of the U.S. Customs Regulations reflects the principle of maintenance of confidentiality of business information set forth in NAFTA Article 507(1); and, Section 181.122 reflects the NAFTA Article 507(2) exception to non-disclosure in the case of disclosures to governmental authorities for administrative and enforcement purposes.

2.3 Communication

As much as possible, Customs issues under dispute with respect to the NAFTA are resolved through consultation and discussion between the three administrations. Refer to Chapter 7- NAFTA Working groups. Only in instances where no possible grounds for agreement exist between the Parties would an issue be referred to the Commission - Good Offices, Conciliation and Mediation, and then possibly to the Arbitral Panel for dispute settlement.

ANNEX 2 CANADA

2.2 Confidentiality of Business Information

Sections 107 and 108 of the Customs Act set out the restrictions on the communication of information and the circumstances under which information obtained under the Act may be disclosed. Section 160 of the Customs Act sets out the penalties for contravention of sections 107 and 108.

ANNEX 2 MEXICO

2.2 Confidentiality of business information

Articles 507 of the NAFTA, and 69 of the Fiscal Federal Code set out the confidentiality of any confidential business information gathered during the course of any verification and protect that information from disclosure that could prejudice the competitive position of the persons providing the information.

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CHAPTER 3 AUDITING STANDARDS

There is a need for harmonization of the approach for the rules of origin verifications conducted by all parties to a free trade agreement. Harmonization will provide for consistency in verification methodology and procedures. All Parties (Mexico, U.S. and Canada), while conducting audits, will follow Generally Accepted Auditing Standards with specific modifications to make the standards applicable to North American Free Trade Agreement(NAFTA)legislation/requirements. Section 3.1 sets out how each Party's Customs Administration complies with these standards in completing verifications for the NAFTA. Section 3.2 outlines each Party's working paper requirements. (Refer to Chapter 6 for a more detailed description of the verification process.)

3.1 Details of Auditing Standards

For the auditing standards of the other Parties, refer to the respective Annex 3, Section 3.1 at the end of this Chapter.

All exporter/producer verification visits performed by the Regulatory Audit Division will be conducted in conformance with Generally Accepted Government Auditing Standards (GAGAS). These standards are embodied in the publication entitled "Government Auditing Standards" issued by the Comptroller General of the United States, General Accounting Office (GAO). The Government Auditing Standards implement the GAO standards for audit of governmental organizations, programs, activities, and functions. It is based on Generally Accepted Accounting Principles and Generally Accepted Audit Standards, requiring adherence to auditing standards covering the auditor's professional qualifications, the quality of audit effort, and the characteristics of professional and meaningful audit reports. The Government Auditing Standards incorporate audit standards and procedures adopted by the American Institute of Certified Public Accountants (AICPA).

The Government Auditing Standards set forth the following basic standards for the Generally Accepted Government Auditing Standards (GAGAS):

- General standards - Field Work standards - Reporting standards

These standards will be applied to all exporter and producer verification visits.

3.1.1 General Standards:

(1) The staff assigned to conduct the audit should collectively possess adequate professional proficiency for the tasks required.

(2) In all matters relating to the audit work, the audit organization and the individual auditors, whether government or public, should be free from personal and external impairments to independence, should be organizationally independent, and should maintain an independent attitude and appearance.

(3) Due professional care should be used in conducting the audit and in preparing related reports.

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(4) Each audit organization conducting audits in accordance with these standards should have an appropriate internal quality control system in place and undergo an external quality control review.

3.1.2 Fieldwork Standards

(1) Work is to be adequately planned.

(2) Staff are to be properly supervised.

(3) When laws, regulations, and other compliance requirements are significant to audit objectives, auditors should design the audit to provide reasonable assurance about compliance with them. In all performance audits, auditors should be alert to situations or transactions that could be indicative of illegal acts or abuse.

(4) Auditors should obtain an understanding of management controls that are relevant to the audit. When management controls are significant to audit objectives, auditors should obtain sufficient evidence to support their judgement about those controls.

(5) Sufficient, competent, and relevant evidence is to be obtained to afford a reasonable basis for the auditors' findings and conclusions. A record of the auditors' work should be retained in the form of working papers. Working papers should contain sufficient information to enable an experienced auditor having no previous connection with the audit to ascertain from them the evidence that supports the auditors' significant conclusions and judgements.

3.1.3 Reporting Standards

(1) Auditors should prepare written audit reports communicating the results of each audit.

(2) Auditors should appropriately issue the reports to make the information available for timely use by management, legislative officials, and other interested parties.

(3) Auditors should report: audit objectives and the audit scope and methodology; significant audit findings, and where applicable, auditors' conclusions; recommendations for action to correct problem areas to improve operations; all significant instances of noncompliance and all significant instances of abuse that were found during or in connection with the audit; illegal acts should be reported directly to parties external to the audited entity; scope of work management controls and any significant weaknesses found; the view of responsible officials of the audited program concerning auditors' findings, conclusions, and recommendations, as well as corrections planned; noteworthy accomplishments, particularly when management improvements in one area may be applicable elsewhere; and, significant issues needing further audit work to the auditors responsible for planning future audit work.

(4) The report should be complete, accurate, objective, convincing, and as clear and concise as the subject permits.

(5) Written audit reports are to be submitted by the audit organization to the appropriate officials of the auditee and to the appropriate officials of the organizations requiring or arranging for the audits, including external funding organizations, unless legal restrictions prevent it. Copies of the report should also be sent to other officials who have legal oversight authority or who may be responsible for acting on audit findings and recommendations and to others authorized to receive such reports. Unless restricted by law or regulation, copies should be made available for public inspection.

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3.2 Audit Working Papers

For the working paper requirements of the other Parties, refer to the respective Annex 3, Section 3.2 at the end of this Chapter.

Working papers are the connecting link between the Regulatory Auditor's verification visit of the exporter and/or producer and the final report. They provide detailed information in support of the findings and conclusions set out in the report. In establishing the relationship of working papers to the audit report, considerable judgement must be exercised, keeping in mind that the objective is to explain in a clear and concise manner, what was done, what was found, conclusions arrived at, and recommendations made.

The following SOP RAD1-006-97 dated April 30,1997, provides a complete outline of working paper requirements of all audits and verifications performed by the Regulatory Audit Division.

ANNEX 3 CANADA

3.1 Details of Auditing Standards

All exporter verifications performed by the Origin Audits Unit are conducted in conformity with framework for Generally Accepted Auditing Standards (GAAS), modified where applicable in order to comply with NAFTA requirements.

In Canada, the Canadian Institute of Chartered Accountants (CICA) has set forth the following basic framework for GAAS:

- General standard (3.1.1) - Examination standards (3.1.2) - Reporting standards (3.1.3)

This framework is applied in the following way to on-site exporter or producer origin verifications:

3.1.1 General Standard:

"The examination should be performed and the report prepared by a person or persons having adequate technical training and proficiency in auditing, with due care and with an objective state of mind." (1)

The Revenue Canada verification team is usually comprised of the following people:

- Accountants possessing a professional accounting designation or working towards a professional accounting designation. In Canada, the following accounting designations are recognized: Chartered Accountant (CA); Certified General Accountant (CGA); and, Certified Management Accountant (CMA). - Employees with an appropriate combination of university education and work experience. - A specialist in the tariff classification of goods.

3.1.2 Examination Standards:

a.) "The work should be adequately planned and properly executed. If assistants are employed they should be properly supervised."

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i) The planning and preparation phase of an exporter/producer verification conducted by the Origin Audits Unit consists of the following steps:

Identification and Selection of Goods for Verification: A preliminary analysis of the company's response to a preference criteria B type questionnaire is performed by the Origin Audits Unit to determine whether the good should be the subject of an on-site origin verification.

Notification (Refer to Article 506 of NAFTA): Once it has been determined that an on-site origin verification will be conducted, all relevant parties will be notified that an origin verification will be conducted with respect to the specific goods under review. The relevant parties and reasons for notification are as follows:

- The exporter or producer will be sent a notice of the Department's intention to conduct a verification, by certified mail. Written consent must be given by the exporter or producer within 30 days of receipt of the notification. If the written consent is not received by Revenue Canada officials, a written determination with a notice of intent to deny preferential tariff treatment to the Canadian importers will be sent to the exporter or producer, allowing them another 30 days in which to consent before denying preferential tariff treatment.

- All known Canadian importers identified by the Origin Audits Unit as importing these products are notified in writing that the products are under review. For non-automotive goods, should it be determined that the goods under review do not qualify for a NAFTA Tariff Treatment, the assessment period generally commences with the date the importers are notified. The assessment period for automotive goods, where there is an election to average, will be based on the averaging period. Once the verification is completed, all known importers, including those who have begun to import from the exporter or producer during the course of the verification, will also be notified of the verification results.

- The Customs regions across Canada are notified of the origin verification in order to avoid further questionnaires from being sent during the course of the review. Should importations of the goods under review occur during the course of the verification, the Customs regions will usually set the entries aside in anticipation of the verification results.

- Representatives from the U.S. or Mexican Customs Services are notified of the verification visit to the exporter's or producer's premises.

Initial Planning: The initial planning of the verification involves: (1) reviewing the Certificate of Origin; (2) analyzing the response(s) to the Questionnaire; (3) the request to the exporter/producer for further information including a chart of accounts, product literature, bills of materials, information re: representative models (if applicable), organizational charts and a complete list of models manufactured and exported to Canada; (4) the collection of other Customs information from departmental resources, such as the volume and value of importations affected by the verification; and (5) the gathering of information on the industry sector to identify the significance of the verification.

Assignment Planning Memorandum: An Assignment Planning Memorandum is developed for each exporter/producer verification. The purpose of this memorandum is to ensure that the time spent at the exporter's premises is well coordinated and managed. This planning memorandum includes topics such as the reasons for verification selection, verification objectives, verification scope (and use of representative models, if applicable), an overview of the company, verification concerns, assignment of responsibilities, milestones, conduct of the verification, analysis of the potential assessment, and a listing of specific references for the verification.

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Contained in the appendices to the Assignment Planning Memorandum are the verification programs which document the specific procedures to be undertaken in order to reflect the verification concerns, the complexity of issues and the reliability of the company's record keeping system. (Refer to Chapter 4, Section 4.2 for Verification Program Objectives; and Chapter 5, Section 5.5 for the Recommended Verification Procedures.) Depending on the specific circumstances involved, origin auditors should be prepared to modify the verification procedures set out in the Assignment Planning Memorandum in accordance with any additional facts that come to the attention of the auditor during the course of the verification. Amendments to the verification procedures may be required throughout the verification process. An agenda of topics to be discussed at the opening interview may also be attached as an appendix.

ii) The execution of the verification refers to the on-site visit to the premises of the exporter/producer. The on-site visit includes an opening interview with company officials to explain the objectives of the verification, the execution of the verification procedures, the preparation of the working papers in accordance with standards set out in section 3.2 of this chapter and an exit interview with company officials to discuss the findings and their impact on the NAFTA eligibility of the product(s) shipped to Canada. Depending on the complexity of the verification and the degree of verification necessary for suppliers, an on-site visit can require two to ten calendar weeks at the premises of the exporter/producer.

iii) With respect to the supervision of assistants, the team leader is responsible for the supervision of the remainder of the team. The team leader then reports to the audit manager for guidance and advice.

b.) " A sufficient understanding of internal control should be obtained to plan the audit. When control risk is assessed below maximum, sufficient appropriate audit evidence should be obtained through tests of controls to support the assessment."

The purpose of the exporter/producer verifications conducted by the Origin Audits Unit are to ensure that the goods under review qualify as originating in accordance with the NAFTA, and therefore are primarily transaction-based as opposed to a detailed system-based verification. Therefore, the verification procedures require a brief evaluation of internal controls documented on a checklist called Review of Policies, Procedures, and Internal Controls Relative to Accounting and Management Systems. This evaluation also includes a review of manuals/procedures and internal/external audit reports, interviews with company officials , reconciliations of the cost submission made by the exporter/producer to the books and records and a walkthrough of the accounting system.

c.) "Sufficient appropriate audit evidence should be obtained, by such means as inspection, observation, enquiry, confirmation, computation and analysis, to afford a reasonable basis to support the content of the report."

Most evidence is accumulated over the course of the on-site visit during which tests and procedures are performed, such as interviews with company personnel and external auditors; walkthroughs of accounting, purchasing and other systems; evaluation of internal controls; system testing; reconciliation of the cost submissions provided in the response made by the exporter/producer to our Questionnaire to the General Ledger and other source documents; and confirmations with suppliers. Examples of documents reviewed during the verification process include policy and procedures manuals, bill of materials, vendor listings, supplier correspondence, purchasing reports/records, receiving reports/records, inventory reports/records, payable reports/records, journal entries, general ledgers and loan agreements.

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Sufficient and appropriate evidence is gathered using the concepts of materiality and risk. This means that the auditors design the verification procedures so as not to waste time searching for immaterial errors that would not affect the final outcome of the verification.

3.1.3 Reporting Standards:

"When engaged to express an opinion on compliance with criteria established by provisions of an agreement, statute or regulation, the auditor should:

(a) in the introductory paragraph of his or her report:

(i) state that compliance with criteria established by provisions of the agreement, statute or regulation identified in the report has been audited;

(ii) identify the provisions of the agreement, statute, or regulation;

(iii) describe or refer to disclosure of any significant interpretation of the provisions made by the management of the entity;

(iv) when a report on compliance with criteria established by provisions of the agreement, statute or regulation has been issued in the same circumstances for the preceding period, describe or refer to disclosure of a change in any significant interpretation of the provisions made by the management of the entity;

(v) indicate any other information having particular relevance to the party to whom the report is addressed including the subject of any reservation of opinion on the most recent audited financial statements;

(vi) state that such compliance is the responsibility of the management of the entity; and

(vii) state that it is the auditor's responsibility to express an opinion on this compliance based on the audit;

(b) in the scope paragraph of his or her report state that:

(i) the audit was conducted in accordance with generally accepted auditing standards;

(ii) those standards require that the audit be planned and performed to obtain reasonable assurance whether the entity complied with criteria established by provisions of the agreement, statute or regulation; and

(iii) such an audit includes:

- examining, on a test basis, evidence supporting compliance; - evaluating the overall compliance; and - assessing, where applicable, the accounting principles used and significant estimates made by the management of the entity;

(c) in the opinion paragraph of his or her report express an opinion whether the entity has complied, in all material respects, with criteria established by provisions of the agreement, statute or regulation; and

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(d) disclose the addressee, the name of the auditor (or firm), the date of the report and the place of issue."

The reporting phase of the exporter/producer verification conducted by the Origin Audits Unit involves the organization of the file, the writing of the initial and final written determinations for presentation to the exporter/producer, and the formal notification to the Canadian importers and Canada Customs regional offices as to the verification result. Assessments to importers are currently issued by the Canada Customs regional offices.

The flow and timing of the notifications issued as a result of the verifications are as follows:

After every verification, an initial written determination is issued to the exporter/producer. In general, the initial written determination is only issued after the file (working papers) and the written determination have been reviewed for quality control purposes and approved by the Audit Manager and/or Senior Management.

The initial written determination's purpose is to identify the verification objectives, the scope of the verification (the period under review is typically a combination of the period for which the response to the Questionnaire was prepared, and if a significant amount of time has elapsed, the current fiscal period; the products under review; and the areas focused on during the course of the review); to formally explain the verification findings to the exporter or producer; and to conclude our verification as to the eligibility of the product. Article 506(9) of the NAFTA states that "The Party conducting a verification shall provide the exporter or producer whose good is the subject of the verification with a written determination of whether the good qualifies as an originating good, including findings of fact and the legal basis for the determination". If the goods do not qualify, the written determination will serve as the notice of the intent to deny preferential tariff treatment to the importers. This notice allows 30 days to the exporter or producer to provide, in writing, comments or additional information regarding the eligibility of the product.

After 30 days, when all of the further information has been examined (if received), a final written determination is sent to the exporter/producer.

At the time the final written determination is issued, Revenue Canada will send notifications to Canadian importers and to Canadian Customs regional offices of whether the goods were found to be originating or non-originating. A re-determination of origin made as a result of a verification would be made under section 61(c) of the Customs Act (section 61(d) of the Customs Act for re-determination of origin where there is an election to average for an automobile manufacturer). This section of the Act enables Revenue Canada to re-assess additional duties on specific importations made by the Canadian importers of the goods that have been found to be non-originating. Therefore, as a result of the goods not qualifying for preferential tariff treatment, the Canada Customs regional offices will send out re-assessments identified in Detailed Adjustment Statements (DAS) invoicing the importers for duties and taxes owing on the affected entries. As well, for each re-assessment made to an importer, the exporter will receive a corresponding notice of denial.

3.2 Working Papers

3.2.1 Introduction

Working papers provide, where necessary, detailed information in support of the findings and conclusions set out in the written determination. In establishing the relationship of working papers to the written determination, considerable judgment must be exercised, keeping in mind that the objective is to explain as simply and clearly as possible what was done, what was found,

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conclusions arrived at, and recommendations made. Note that working papers or schedules will mostly be standardized and generated through laptop computers.

The working papers are the property of the Origin Audits Unit. Procedures have been established which ensure that the custody and confidentiality of the information obtained during the course of a verification. This information may be disclosed to those authorities responsible for the administration and enforcement of determinations of origin, and of customs and revenue matters, within the Administration that conducted the verification.

3.2.2 Purpose

The purpose of working papers are:

a) To provide an explanation of the nature and extent of the verification work performed.

b) To facilitate subsequent discussions with the exporter/producer.

c) To support any adjustments made, and aid in the preparation of the assessment.

d) To support significant items not requiring change, as set out in the written determination.

e) To cover any special situation that the auditor wishes to put on record such as:

- An explanation of a complex calculation; - Any difficulty encountered in public relations; - A problem with facilities provided, etc..

f) To provide evidence in support of fraud or evasion charges.

g) To identify items to be followed up in subsequent verifications.

3.2.3 Use

It is imperative to prepare the working papers in such a manner that they may be understood and utilized by appropriate parties, namely:

a) Senior officers in resolving problems (i.e. disputed assessment).

b) Officers conducting subsequent verifications.

c) Officers conducting special projects, such as industry surveys, etc.

d) Audit Unit Managers to assist in staff evaluation and identification of training needs.

e) Audit Unit Managers, Internal Audit and Auditor- General's Staff to monitor the quality of verification work and adherence to departmental standards.

f) Policy and investigations officers to review pertinent information about the exporter/producer.

g) Other departmental officers and the Department of Justice.

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3.2.4 Format

The format for working papers is as follows:

a) Each set of working papers requires an index. A master index along with a detailed volume index should be placed in front of each working paper file.

b) Working papers shall be arranged, coded and numbered in the sequence provided in the index.

c) Working papers shall be prepared using 8?" x 14" size paper or any prescribed form, as applicable, in order to facilitate the verification, review and report preparation.

3.2.5 Preparation and Disclosure Requirement

The following requirements apply to computer generated and manually prepared working papers:

a) Each working paper requires the following:

- the name of the company and the file number; - the initials of the auditor who prepared the working paper along with the date should be indicated in the upper right hand corner; - the page number (in accordance with the index) in the bottom right hand corner; - the diskette filename in the bottom left hand corner; and - the objective of the work, a reference to the procedure performed, a description of the content, the source of information, the methodology and the conclusions reached.

b) Photocopies of existing relevant documentation should be obtained, thus avoiding unnecessary hand copying. All documents obtained by the auditor should identify the following information:

- the name of the company and the file number; - the initials of the auditor along with the date should be indicated in the upper right hand corner; - the page number (in accordance with the index) in the bottom right hand corner; and - an indication of the source of the information i.e. prepared by client (PBC) and document name, along with the company representative's name who provided the document and the date when the document was received.

c) The information must be presented in an orderly, concise, legible and logical manner, be clear and understandable and free of clerical errors.

d) Working papers are to be indexed and cross-referenced, as they are prepared using a red pen or pencil. Using the grandfather, father, son model, cross referencing should take place from behind the "grandfather" amount or statement, to in front of the "father"; from behind the "father" to in front of the "son".

e) The file is to be properly organized, with old, irrelevant material stripped from the file.

f) Auditors should confine their use of colored marks to red, as other colors are reserved for the reviewers. A legend of the audit tick marks should appear in the beginning of the file, section of the file or at the bottom of each working paper.

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g) The audit tick marks used by the auditor should be discrete neat and legible. They should never be done on the original documents.

h) All verification procedures used by the auditor must be fully disclosed in the working paper.

i) The verification techniques employed by the auditor must be indicated in the working papers.

j) The content of the working papers must clearly disclose applicable legislation and compliance therewith.

k) Auditors are to confirm verbal advice, in writing, in order to avoid future misunderstanding, and note in the working papers information provided to the producer/exporter with respect to the NAFTA.

l) Working papers often contain confidential information and should be treated accordingly.

m) A disk copy of all working papers should be given to the auditor-in-charge when the verification is complete. 3.2.6 Verification Scope and Coverage The scope of the verification should be indicated on the working papers. The areas covered, the areas examined in depth and the areas excluded should be supported with reasons and in accordance with the assignment planning memorandum and the policies.

3.2.7 Standard Forms

The following are standardized forms, which should be completed and used in every verification file for control purposes:

a) A completed and signed Planning- Revenue Risk Analysis and Importer Notification Procedures form should be included in the file and is to be done prior to going out on an verification. The objective of these procedures is to calculate the revenue risk if the goods exported into Canada are determined to be non-originating under NAFTA and to identify all of the Canadian importers to be notified about the origin verification.

b) A profile sheet should be completed and placed in front of the file (this document contains the actual and projected completion dates, costs and time; the re-assessment amount; and the importers affected by the re-assessment). Where it is not self-evident, the auditor will explain the reasons for any unusual delay in commencing, completing and submitting the assignment.

c) A verification completion checklist should be placed in front of the file and completed in order to ensure that a complete file is submitted for review.

d) A completed and signed verification program should be placed in front of the applicable section of the file.

ANNEX 3 MEXICO

3.1 Generally Accepted Auditing Standards

In Mexico, the Instituto Mexicano de Contadores P?os, A.C. (IMPC) has set forth the following basic framework for Mexican GAAS:

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Auditing Standards

Auditing Standards are the minimum quality requirements related to the auditors work with respect to the general, examination and reporting standards.

General Standards

General Standards refer to the attributes the auditor must possess in order to conduct an audit. Within these standards, an auditor should have the adequate technical training, skills and professional proficiency before conducting any audit, and should maintain these standards as long as the auditor performs his/her professional audit activities.

The auditor is obliged to conduct an audit, and the preparation of the related reports thereof, with due professional care and professional diligence. In addition, the auditor should be free from any external impairment to independence in all matters related to the audit work.

Examination Standards

General Standards mention that due professional care should be used in conducting an audit and for the preparation of related reports. In spite the complexity of determining the extent of due professional care and diligence in every audit, there are certain important elements that must be followed. These basic elements represent the minimum procedures in order to achieve the audit objectives.

The examination standards are the basic elements to be observed while conducting audits in order to comply with the "due care" and "professional diligence" requirements referred to in the General Standards. The examination standards are the following:

a) An audit must be adequately planned. If assistants are used to conduct the work, they must be appropriately supervised.

b) An entity's internal control structure must be evaluated to provide the auditor a reasonable assurance of its effectiveness reliability and to determine the nature, timing, and extent of tests audit procedures to be performed applied.

c) In conducting audits, by the application of audit procedures, the auditors employ auditing procedures to must obtain sufficient, competent, and relevant evidence that enables them to count on will provide a reasonable and objective basis for supporting their opinions.

Reporting Standards

The final result of the auditor?s work is the standard report or opinion. By means of this report, all interested parties may be informed of the audit findings and the auditor?s opinion. The report provides reliability on assurance to the entity's financial position and results of operations that are stated in the financial statements. Moreover, clients and third parties are informed of the results of the auditor?s work through this report or opinion, and in most cases, the report is the only part of the audit work that is at their reach.

Every time a public accountant associates his/her name in connection with financial information or financial statements, the public accountant should clearly determine his relationship with the such information, his opinion of the latter and if applicable, limitations in the conduction of his examination, reservations that derive from these limitations and any other audit evidence that

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precludes constrain the auditor from reporting a professional opinion, even though his examination was conducted in accordance with GASS.

When issuing an opinion related to the financial statements, the auditor must observe the following:

a) That financial statements were prepared in accordance with generally accepted accounting principles (GAAP);

b) That GAAP was applied on a consistent basis;

c) That information stated in financial statements and related notes, is adequate and sufficient for a reasonable interpretation.

Consequently, in the event of any exception to (a),(b) or (c), the auditor must disclose such deviations and their quantified effect on the financial statements.

The reporting phase of the exporter/producer verification conducted by the Customs Administration involves the organization of the file, the writing of the initial and final written determinations for presentation to the exporter/producer, and the formal notification to the Mexican known importers and depending on each case to the Customs regional offices as to the verification result. Assessments and/or liquidation to importers are currently issued at the Ministry of Finance and Public Credit Headquarters.

The flow and timing of the notifications issued as a result of the verifications are as follows:

After every verification, an initial written determination is issued to the exporter/producer. In general, the initial written determination is only issued after the file (working papers) and the written determination have been reviewed for quality control purposes and approved by the Director of International Audit and the Director of the International Legal Department.

The initial written determination's purpose is to identify the verification objectives, the scope of the verification to formally explain the verification findings to the exporter or producer; and to conclude our verification as to the eligibility of the product. Article 506(9) of the NAFTA states that "The Party conducting a verification shall provide the exporter or producer whose good is the subject of the verification with a written determination of whether the good qualifies as an originating good, including findings of fact and the legal basis for the determination". If the goods do not qualify, the written determination will serve as the notice of the intent to deny preferential tariff treatment to the importers. This notice allows 30 days to the exporter or producer to provide, in writing, comments or additional information regarding the eligibility of the product. (Refer to Appendix N)

After 30 days, when all of the further information has been examined (if received), a final written determination is sent to the exporter/producer. (Refer to Appendix N)

After the final written determination is notified to the exporter or producer, the Direction of International Audit will send, pursuant to article 48 of the Fiscal Federal Code, notifications (oficio de observaciones) to the Mexican importers of the goods subject to verification, of whether the goods were found to be originating or non-originating. (Refer to Appendix O). This notice allows 15 labor days to the importer to provide, in writing, comments or additional information regarding the content of the notification.

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After the 15 labor day period, and depending upon the result of the analysis of the further information (if received), a liquidation for duties and taxes owing on the affected entries for the goods that have been found to be non-originating may be notified to the importer of such goods.

3.2. Working Papers

Introduction

Working papers provide, where necessary, detailed information in support of the findings and conclusions set out in the written determination. In establishing the relationship of working papers to the written determination, considerable judgment must be exercised, keeping in mind that the objective is to explain as simply and clearly as possible what was done, what was found, conclusions arrived at, and recommendations made. Note that working papers or schedules will mostly be standardized and generated through laptop computers.

The working papers are the property of the Customs Administration. Procedures have been established which ensure that the custody and confidentiality of the information obtained during the course of a verification. This information may be disclosed to those authorities responsible for the administration and enforcement of determinations of origin, and of customs and revenue matters, within the Customs Administration that conducted the verification.

Purpose

The purposes of working papers are:

a) To provide an explanation of the nature and extent of the verification work performed.

b) To facilitate subsequent discussions with the exporter/producer.

c) To support any adjustments made, and aid in the preparation of the assessment.

d) To support significant items not requiring change, as set out in the written determination.

e) To cover any special situation that the auditor wishes to put on record such as:

-An explanation of a complex calculation; -Any difficulty encountered in public relations; -A problem with facilities provided, etc.

f) To provide evidence in support of customs fraud or customs evasion charges.

g) To identify items to be followed up in subsequent verifications.

Use

It is imperative to prepare the working papers in such a manner that these may be understood and utilized by appropriate parties, namely:

a) Senior officers in resolving problems (i.e. disputed assessment).

b) Officers conducting subsequent verifications.

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c) Officers conducting special projects, such an industry surveys, etc.

d) Audit Unit Managers to assist in staff evaluation and identification of training needs.

e) Audit Unit Managers, Internal Audit and Auditor-General's Staff to monitor the quality of verification work and adherence to departmental standards.

f) Policy, collections and investigations officers to review pertinent information about the exporter/producer.

g) Other departmental officers within the Customs Administration.

Preparation and Disclosure Requirement

The following requirements apply to computer generated and manually prepared working papers:

a) Each working paper requires the following information:

- the name of the company and the file number; - the initials of the auditor who prepared the working paper along with the date should be indicated - the page number (in accordance with the index) in the bottom right hand corner; - the diskette filename - the objective of the work, a reference to the procedure performed, a description of the content, the source of information, the methodology and the conclusions reached (sometimes this may apply to a clearly identifiable group of working papers).

b) Photocopies of existing documentation should be obtained, thus avoiding unnecessary hand copying. All documents photocopied by the auditor should have an indication of the source of the information i.e. prepared by client (PBC) or document name. Only relevant photocopies should be included in the working papers.

c) The information must be presented in an orderly, concise, legible and logical manner, be clear and understandable and free of clerical errors.

d) Working papers are to be indexed and cross-referenced as they are prepared using a red pencil.

e) The file is to be properly organized, with old, irrelevant material stripped from the file.

f) The audit tick marks used by the auditor should be discrete neat and legible. They should never be done on the original documents.

g) All verification procedures used by the auditor must be fully disclosed in the working paper.

h) The verification techniques employed by the auditor must be indicated in the working papers.

i) The content of the working papers must clearly disclose applicable legislation and compliance therewith.

j) Auditors are to confirm verbal advice, in writing, in order to avoid future misunderstanding.

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k) Working papers often contain confidential information and should be treated accordingly.

Verification Scope and Coverage

The scope of the verification will be indicated in the notice of intention to conduct an on-site verification or will be attached to in the letter related to an origin verification questionnaire.

The working papers should include the areas covered, the areas examined in depth and the areas excluded supported with reasons and in accordance with the assignment planning memorandum and the policies.

Standard Forms

The following are standardized forms, which should be completed and used in every audit file for control purposes:

a) A completed and signed Planning-Memorandum analysis and importer notification procedures form should be included in the file and is to be done prior to going out on a verification. The objective of these procedures is to calculate the revenue risk if the goods exported into territory are determined to be non-originating under NAFTA and to identify all of the known importers to be notified about the exporter/producer origin verification.

b) A profile sheet should be completed and placed in front of the file (this document contains the actual and projected completion dates, costs and time; the re-assessment amount; and the importers affected by the re-assessment). Where it is not self-evident, the auditor will explain the reasons for any unusual delay in commencing, completing and submitting the assignment. (See Appendix R).

c) A verification completion checklist should be placed in front of the file and completed in order to ensure that a complete file is submitted for review.

d) A completed and signed verification program should be placed in front of the applicable section of the file. (Standard verification programs are found in section 5.5 "Recommended Verification Procedures". It should be noted that these programs may be modified to better reflect the concerns of the verification.)

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CHAPTER 4 OBJECTIVES OF NAFTA AUDITS (VERIFICATIONS)

This chapter explains the overall objective for conducting a North American Free Trade Agreement (NAFTA) exporter and/or producer verification. The specific verification program bjectives are also provided.

4.1 Verification Objective

The overall objective of the exporter and/or producer verification is to confirm that the product(s) certified by the exporter and/or producer qualify as originating in accordance with Chapter 4 of the NAFTA and the NAFTA Rules of Origin Regulations (the Regulations).

4.2 Objectives of the Verification Programs

Verification programs should be developed based on the verification objective stated in Section 4.1, the information gathered, and the concerns identified during the planning and preparation phase of the audit. Listed below are the specific verification program objectives subject to the verification process. Chapter 5 contains the verification programs and sub-programs which identify the recommended verification procedures to be utilized in meeting these objectives.

OBJECTIVES OF THE VERIFICATION PROGRAMS

A. NON-QUALIFYING OPERATIONS PROGRAM

To ensure that the good does not qualify as originating because of mere dilution with water or another substance or because of a production or pricing practice designed to circumvent the Rules of Origin as set out in Chapter 4 of the NAFTA.

B. TARIFF CLASSIFICATION PROGRAM

To ensure that all non-originating materials are sufficiently transformed in the NAFTA territory so as to undergo the necessary tariff classification change as required by the Specific Rule of Origin applicable to the exported good and to ensure that the finished good and the non-originating materials used to produce it are properly classified.

REGIONAL VALUE CONTENT REQUIREMENT

C. TRANSACTION VALUE METHOD - (RVC) - PROGRAM

To ensure that the Regional Value Content requirement, as required by the rules of origin, has been met where the Transaction Value Method has been used.

D. NET COST METHOD - (RVC) - PROGRAM

To ensure that the Regional Value Content requirement, as required by the rules of origin, has been met where the Net Cost Method has been used.

E. TRANSSHIPMENT PROGRAM

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To verify that the originating good, by reason of having undergone production that satisfies the requirements of Article 401 of the NAFTA, (1) Is not withdrawn from Customs control outside the territories of the NAFTA countries and (2) Does not undergo further production or any other operation outside the territories of the NAFTA countries, other than unloading, reloading, or any other operation necessary to preserve it in good condition, such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur dioxide or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the good that are spoiled or damaged and present a danger to the remaining units of the good, or to transport the good to the territory of a NAFTA country.

For additional verification programs from the other Parties, refer to the respective Annex, Section 4.2 at the end of this Chapter.

ANNEX 4 CANADA

4.2 Objectives of the Verification Programs

F. TARIFF TREATMENT PROGRAM

TO ENSURE THAT THE ORIGINATING GOODS ARE IMPORTED USING THE CORRECT TARIFF TREATMENT AS SET OUT IN ANNEX 302.2 OF THE NAFTA AND TO ENSURE THAT NON-ORIGINATING GOODS ARE IMPORTED USING THE CORRECT NON-NAFTA TARIFF TREATMENT.

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CHAPTER 5 SCOPE OF NAFTA AUDITS (VERIFICATIONS)

This chapter outlines the extent of the coverage for the exporter and/or producer audits conducted by the Customs Administrations of each Party. The scope has been defined to include the verification period, coverage, identification of importers, the assessment/liquidation period and the use of recommended verification procedures.

5.1 Verification Period

For establishment of the verification periods of the other Parties, refer to the respective Annex 5, Section 5.1 at the end of this Chapter.

The period subject to audit verification would in most cases be the fiscal year of the exporter/producer.

For this period, the goods imported should be matched to the period in which the goods were produced. In those cases involving a complex production process or where there is a time lapse between the production and the importation periods, appropriate measures will be taken to reasonably satisfy this requirement.

5.2 Coverage

For determining the coverage of verifications conducted by the Customs Administrations of the other Parties, refer to the respective Annex 5, Section 5.2 at the end of this Chapter.

The scope of verifications conducted by Regulatory Audit may include all models of goods reported on the Certificate of Origin produced by that exporter/producer that are exported to the U.S. for which preferential tariff treatment is claimed.

5.3 Identification of Importers

For the purposes of identification of importers by the Customs Administrations of the other Parties, refer to the respective Annex 5, Section 5.3 at the end of this Chapter.

An important function during the initial stages of a verification is the identification and notification of all known United States importers. The current policy followed by Regulatory Audit is to query the Automated Commercial System (ACS) using the Manufacturer's Identification Number to identify U.S. importers. The United States companies who have imported goods from that exporter/producer are identified and notified in writing that the goods are under review.

5.4 Assessment/Liquidation Period

For purposes of determining the assessment/liquidation period for the other Parties, refer to the respective Annex 5, Section 5.4 at the end of this Chapter.

Results of a verification will be applied to unliquidated entries.

5.5 Recommended Verification Procedures - Verification Programs

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Verification teams prepare verification programs based on factors such as the verification concerns identified during the planning and preparation phase, the complexity of the issues, and the reliability of the company's record keeping system.

Verification Programs are evolving documents, created during the planning phase and added to throughout the course of the verification as new concerns are identified or more comprehensive testing is required, based on the materiality of the costs involved.

This is not to say, however, that there are not procedures in the verification programs that can be standardized. With this in mind the following verification programs have been prepared, incorporating procedures used during the exporter and/or producer audits conducted by the Customs Administration of each Party. These procedures have been found to be useful during several verifications already conducted. The inclusion of these procedures in a verification program would of course be dependent on the risks and concerns associated with that particular situation.

Note that the following programs contain procedures that are oriented towards an on-site visit, verifying goods for which preference criterion B is applicable.

Also note that goods that fall under preference criterion B could be categorized as either non-automotive goods or automotive goods. The following programs (Chapter 5) contain the recommended verification procedures that are oriented towards verifying that a non-automotive good satisfied the rule of origin requirements

The Verification Programs contained in Chapter 5 are as follows:

A. VERIFICATION PROGRAM - NON-QUALIFYING OPERATIONS B. VERIFICATION PROGRAM - TARIFF CLASSIFICATION VERIFICATION PROGRAMS - REGIONAL VALUE CONTENT (RVC): C. TRANSACTION VALUE METHOD VERIFICATION PROGRAM

Sub-programs 1 through 13

1) Eligibility for the transaction value method 2) General- RVC information 3) Plant tour 4) Review of management of information system 5) Transaction value of the good 6) Originating and non-originating materials 7) Value of materials 8) Intermediate materials 9) Packaging materials and containers for retail sale 10) Packing materials and containers for shipment 11) Accessories, spare parts, and tools 12) Inventory management system 13) Calculation of the regional value content

D. NET COST METHOD VERIFICATION PROGRAM

Sub-programs 1 through 13 1) General- RVC information 2) Plant Tour

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3) Review of management of information system 4) Originating and non-originating materials 5) Value of materials 6) Intermediate materials 7) Net cost calculation i Total Costs ii Excluded costs 8) Packaging materials and containers for retail sale 9) Packing materials and containers for shipment 10) Accessories, spare parts and tools 11) Inventory management system 12) Accumulation 13) Calculation of the regional value content E. VERIFICATION PROGRAM - TRANSSHIPMENT

For additional verification programs from the other Parties, refer to the respective Annex, Section 5.5 at the end of this Chapter.

Appendix L is the verification program which contains the recommended verification procedures associated with verifying goods claimed to be wholly obtained or produced entirely in the territory of one or more of the Parties (preference criterion A).

Appendix M is the verification program which contains the recommended verification procedures associated with verifying goods claimed to be produced entirely in the territory of one or more of the Parties exclusively from originating materials (preference criterion C).

Appendix N is the verification program which contains the recommended verification procedures associated with verifying goods claimed to satisfy preference criterion D.

Appendix O is the verification program which contains the recommended verification procedures to be used in the verification of a light duty automotive good for which the motor vehicle producer has elected to average.

Appendix P is the verification program which contains the recommended verification procedures to be used in the verification of a light duty automotive good for which the motor vehicle producer has not elected to average.

Appendix Q is the verification program which contains the recommended verification procedures to be used in the verification of a heavy duty automotive good for which the motor vehicle producer has elected to average.

Appendix R is the verification program which contains the recommended verification procedures to be used in the verification of a heavy duty automotive good for which the motor vehicle producer has not elected to average.

Where applicable, the above noted verification programs for automotive goods contain procedures to verify the applicable regional value content when the provisions concerning new and refit plants are being used. As well, the programs consider the possibility of the automotive parts producers deciding to calculate RVC based on averaged costs.

- All of the above verification programs are identical and uniform for all Parties.

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VERIFICATION PROGRAM A NON-QUALIFYING OPERATIONS

VERIFICATION OBJECTIVE

TO ENSURE THAT THE GOOD DOES NOT QUALIFY AS ORIGINATING BECAUSE OF MERE DILUTION WITH WATER OR ANOTHER SUBSTANCE, OR BECAUSE OF A PRODUCTION OR PRICING PRACTICE DESIGNED TO CIRCUMVENT THE RULES OF ORIGIN AS SET OUT IN CHAPTER 4 OF THE NAFTA.

VERIFICATION PROCEDURES

Note- A good shall not be considered to be an originating good where:

- there is a production/assembly operation that consists of mere dilution. For purposes of this provision, dilution consists of the mixing of a material with water or with any other substance that does not materially alter the characteristics of the material diluted. No new substance is formed as a result; or

- there is a "preponderance of evidence" that the object of a production or pricing practice was to circumvent the Rules of Origin. In regards to unacceptable production practices, circumvention consists of any alteration or process performed on goods for the purpose of circumventing the rule of origin requirements. For example, when the processing or assembling performed in the territory of another Party of the Agreement is reversed or substantially altered after the goods have been imported and such processing or assembly was not performed for any commercial purpose other than to qualify the goods for NAFTA tariff treatment, then this will be considered circumvention.

NON-QUALIFYING PRODUCTION/ASSEMBLY OPERATIONS

1. During the on-site visit, interview company personnel to understand the production/assembly operations. Are any portions of the production process performed by subcontractors? Are any portions of the production process performed, in Maquiladora programs or operations, in foreign trade zones, or in any areas controlled by Customs? Document any concerns with respect to non-qualifying production/assembly operations.

2. Obtain and review a copy of the bill of materials and any product literature. Document any concerns with respect to non-qualifying production/assembly operations.

3. Review the section of the PLANT TOUR verification sub-program within the RVC verification programs, relating to non-qualifying production/assembly operations. Address any concerns noted with respect to non-qualifying production/assembly operations.

4. Review documents related to transportation. Consider documents obtained in the E. TRANSSHIPMENT verification program. Document any concerns with respect to the finished goods being altered subsequent to importation.

5. Relying on the interviews with company personnel, the bill of materials, product literature and the plant tour, prepare a written evaluation of the non-qualifying production/assembly operation and assess the evidence gathered. Were there any potential fungible goods?

6. When completing the VALUE OF MATERIALS verification subprogram, within the RVC verification programs, note any practice that could be construed as a pricing practice that has

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been implemented by the company for the purpose of circumventing the rule of origin requirements so that the exported product can qualify as originating.

7. Look for consistency in the pricing practices of the company by comparing the pricing practice of one period to that of another period within the scope of the verification through sales invoices, internal pricing practices, etc.

8. Where available review both domestic and foreign price lists of goods sold to unrelated customers during the same time period. Document any concerns.

9. Look for adjustments to sales at the end of the year and the beginning of the next year. Review subsequent adjusting journal entries or credit notes that may impact the price of the good.

10. Prepare a written evaluation of the non-qualifying pricing practice and assess the extent of evidence gathered.

CONCLUSION

11. Conclude on the results of the verification procedures for Non-qualifying Operations.

VERIFICATION PROGRAM B TARIFF CLASSIFICATION


TO ENSURE THAT ALL NON-ORIGINATING MATERIALS ARE SUFFICIENTLY TRANSFORMED IN THE NAFTA TERRITORY SO AS TO UNDERGO THE NECESSARY TARIFF CLASSIFICATION CHANGE AS REQUIRED BY THE SPECIFIC RULE OF ORIGIN APPLICABLE TO THE EXPORTED GOOD AND TO ENSURE THAT THE FINISHED GOOD AND THE NON-ORIGINATING MATERIALS USED TO PRODUCE IT ARE PROPERLY CLASSIFIED.

1. GENERAL PROCEDURES

1. Interview the person(s) responsible for tariff classification to determine how classification was determined. Inquire about and obtain any classification rulings issued by any Customs Administration.

2. Determine the responsible individual's knowledge of the tariff, their background in tariff classification, training, etc.

3. Prior to the on-site visit, and as part of the planning phase of the verification, gather the information from:

(1) PACKAGING MATERIALS AND CONTAINERS FOR RETAIL SALE verification sub-program;

(2) PACKING MATERIALS AND CONTAINERS FOR SHIPMENT verification sub-program; and,

(3) ACCESSORIES, SPARE PARTS AND TOOLS verification sub-program within the RVC verification programs to ensure that they are not included when evaluating tariff classification change requirements.

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4. Obtain a copy of all Intermediate Material (IM) designations with the corresponding IM's Harmonized System (HS) Number(s). This information will be used in the INTERMEDIATE MATERIAL verification subprogram within the RVC verification programs.

5. Document the potential for fungible materials used in the production of the goods and/or any intermediate materials, while doing the verification procedures in this verification program. (If fungible materials exist, this information will be used in the verification sub-program INVENTORY MANAGEMENT SYSTEM within the RVC verification program.)

6. Obtain information from the company pertaining to the de minimis calculations when the company has applied the de minimis provision to qualify goods.

2. CLASSIFICATION OF THE FINISHED GOOD

Sub-objective:

Determine the Tariff Classification in accordance with the Harmonized System (HS) and the Rule of Origin of the finished good under verification.

7. Obtain and review documentation on the good, i.e., bill of materials, owner's manual, catalogues. public brochures, engineering specifications, etc.

8. Obtain information with respect to the production of the good from the PLANT TOUR verification sub-program with the RVC verification program to assist in identifying the correct classification number and rule of origin of the finished good.

9. Physically inspect the good under review and compare with the product literature to aid in confirming the correct tariff classification. (consider any potential of fungible goods).

10. Ensure that the goods under review is/are properly classified in any RVC information and Certificate of Origin to the tariff sub-heading level (6th digit) or tariff item level (8th digit) depending on the detail needed in the specific Rule of Origin. Compare the models of goods under review to the Certificate of Origin to ensure that any or all models are included in the automotive parts averaging election, if applicable.

11. Identify the correct rule of origin for the good, taking into account the work performed on the non-originating and originating materials.

12. Prepare a conclusion of the tariff classification declared by the company for the good under review.

3. CLASSIFICATION OF INTERMEDIATE MATERIALS

Sub-objective:

Only if the exporter declares intermediate materials, ensure that the correct Tariff Classification in accordance with the Harmonized System (HS) and applicable rule of origin have been declared for the intermediate materials used in the production process of the good under verification.

13. Obtain information concerning the transformation processes applicable to intermediate materials from the PLANT TOUR verification sub-program within the RVC verification programs.

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14. Ensure that the intermediate materials declared by the company are properly classified to the tariff sub-heading level (6th digit) or to the tariff item

level (8th digit), depending on the detail needed in the Specific Rule of Origin.

15. Using the tariff classification determined above, identify the specific Rule of Origin for each intermediate material declared by the company.

16. Ensure that the materials used to produce each intermediate material meet the tariff classification change required by the Rules of Origin for that intermediate material.

17. Prepare a conclusion on the classification of the declared intermediate material(s) as to whether they are originating or non-originating. (Refer to the Net Cost RVC verification program "D", if there is an RVC requirement.)

4. CLASSIFICATION OF ORIGINATING MATERIALS

Sub-objective:

To determine the tariff classification of originating materials and to assist in other areas of the verification, specifically the identification of materials that should be the subject of supplier confirmation letters. Coordinate this review with the ORIGINATING AND NON-ORIGINATING MATERIALS sub-programs within the RVC verification programs.

18. Obtain an accurate description of the materials using such information as the supplier parts catalogue, engineering documents, supplier contracts, and by physical examination and classify the materials on the bill of materials to the tariff sub-heading level (6th digit) or the tariff item level (8th digit), depending on the detail needed in the specific rule of origin.

19. Note the source of the materials (if such information comes to your attention), using the information gathered while obtaining the description of the material. This information will be used in ORIGINATING AND NON-ORIGINATING sub-programs within the RVC verification programs.

20. Identify any materials that would not undergo the required tariff classification change if it was determined that they were non-originating. Consider these as high risk for confirmation purposes in the ORIGINATING AND NON-ORIGINATING sub-program within the RVC verification programs.

21. Using the tariff classification determined above, identify the specific Rule of Origin for the originating materials selected for confirmation purposes.

5. CLASSIFICATION OF NON-ORIGINATING MATERIALS AND TARIFF CLASSIFICATION CHANGE RULE OF ORIGIN

Sub-objective:

To verify the tariff classification of the non-originating materials and to determine whether the required tariff classification change rule has been met.

22. Obtain an accurate description of the non-originating materials using such information as the supplier parts catalogue, engineering documents, supplier contracts, and physical examination and verify the tariff classification of the non-originating materials to the tariff sub-heading level (6th digit) or the tariff item level(8th digit), depending on the detail needed in the specific Rule of

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Origin. During the verification period check the consistency of the tariff classification numbers for each imported material used by the company.

NOTE: In accordance with subsection 4(8), self-produced materials may be considered non-originating for tariff shift purposes.

23. Ensure that the non-originating materials meet the tariff classification change requirements.

24. Prepare a conclusion on the classification of non-originating materials and whether the non-originating materials have met the specific tariff classification change.

VERIFICATION PROGRAM B - TARIFF CLASSIFICATION CONTINUED;

6. DE MINIMIS PROVISION

Sub-objective:

To verify whether the de minimis provision is applicable and to ensure that the de minimis calculation has been performed correctly.

25. Ensure that the de minimis provision is applicable. Is the good identified in subsection 5(4)?

26. Verify that the value of non-originating materials has been calculated in accordance with subsections 7(1) through (4) of the NAFTA Rules of Origin Regulations. Refer to the VALUE OF MATERIALS verification sub-program within the RVC verification program.

27. Where a good is subject to an RVC requirement and the de minimis provision outlined in subsection 5(5) has been applied instead of satisfying that RVC requirement, ensure the de minimis calculation is performed in accordance with 5(5)(a) of the NAFTA Rules of Origin Regulations and the good satisfies all other requirements of the Regulations. Where total cost is being used in the de minimis calculation, ensure it is being calculated in accordance with subsection 5(10) of the NAFTA

Rules of Origin Regulations.

28. For those non-originating materials that are used in the production of the good and that do not undergo an applicable change in tariff classification, and

(a) the calculation is performed in accordance with subsection 5(1), verify that the calculation is correctly performed; or

(b) the calculation is performed in accordance with subsection 5(11), request information (in writing) regarding how the calculation was performed, the period over which the Value of Non-Originating Materials (VNM) was calculated; and if Schedule X was used which method was selected. Ensure the calculation has been properly performed.

Where total cost is being used in the de minimis calculation, ensure it is being calculated in accordance with subsection 5(10) of the NAFTA Rules of Origin Regulations.

29. Prepare a conclusion as to whether the de minimis provision was applicable and performed correctly.

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VERIFICATION PROGRAM C REGIONAL VALUE CONTENT - TRANSACTION VALUE

METHOD


TO ENSURE THAT THE REGIONAL VALUE CONTENT REQUIREMENT, AS REQUIRED BY THE RULES OF ORIGIN, HAS BEEN MET WHERE THE TRANSACTION VALUE METHOD HAS BEEN USED.


1. ELIGIBILITY FOR THE TRANSACTION VALUE METHOD.

Sub-objective:

To determine if the Transaction Value (TV) method can be applied in determining the Regional Value Content (RVC) of the good.

If one of the following items <(a) to (f)> occurs, then the RVC shall be calculated on the basis of the Net Cost Method. (Paragraph 402(5) of NAFTA)

a) There is no TV for the good (Refer to Subsection 2(1) of Schedule III of the NAFTA Rules of Origin Regulations) or where no objective or quantifiable data exists with regard to the additions required to be made to the price paid or payable under Section 4 of Schedule II of the NAFTA Rules of Origin Regulations (Refer to Subsection 4(3) of Schedule II of the Uniform Regulations);

b) The TV is unacceptable under Article 1 of the Customs Valuation Code (Refer to Subsection 2(2) of Schedule III of the NAFTA Rules of Origin Regulations) if the following occur:

b) - there are restrictions on the disposition or use of the good by the buyer other than restrictions which:

(i) are imposed or required by law or by the public authorities in the country of importation;

(ii) limit the geographical area in which the goods may be resold; or

(iii) do not substantially affect the value of the goods;

- The sale or price is subject to a condition or consideration for which a value cannot be determined with respect to the good;

- Part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the producer, and an appropriate adjustment cannot be made. (Paragraph 4 (1)(d) of Schedule II of the NAFTA Rules of Origin Regulations). Review specific documents such as general ledger, communications with client, correspondence, sales contracts, etc.;

- The producer and the buyer are related and the relationship between them influenced the price actually paid or payable; review the minutes of the shareholders board, general ledgers, sales ledger, chart of accounts, etc.;

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c) The good is sold by the producer to a related person and the volume, by units of quantity, of sales of identical or similar goods, or any combination thereof, to related persons during the 6 months immediately preceding the month in which the good is sold, exceeds 85% of the producer's total sales to all persons whether or not related and regardless of location, of such goods during that period. Review the shareholders agreements, equity participation, minutes to shareholders board meetings, chart of accounts, general ledger, and sales journal;

d) The good is (i) a motor vehicle provided for in headings 87.01 or 87.02, subheading 8703.21 through 8703.90, or heading 87.04, 87.05 or 87.06; (ii) identified in Schedule IV or Schedule V of the Regulations and is for use in a motor vehicle provided for in headings 87.01 or 87.02, subheading 8703.21 through 8703.90, or heading 87.04, 87.05 or 87.06; (iii) provided for in subheading 6401.10 through 6406.10 (certain footwear); or (iv) provided for in tariff item 8469.10.40 (word processing machines);

e) The exporter or producer chooses to accumulate the RVC of the good; or

f) The good is designated as an intermediate material and is subject to a RVC requirement.

2. GENERAL - RVC

Sub-objective:

To ensure that the RVC percentage has been calculated correctly for each good subject to verification.

a) Obtain from company officials RVC information for each good under review;

b) Ensure that all calculations are correct; and that the good has met the RVC requirement based on these calculations; and

c) Consider whether the de minimis provision applies. Refer to the de minimis provision section in the B. Tariff Classification verification program.

3. PLANT TOUR

VERIFICATION SUB-OBJECTIVE

To obtain an understanding of the entire operations of the company (i.e. manufacturing, assembly, warehouse, accounting, etc.).


a) Obtain an Organization Chart. Ensure all operations and or departments whose costs are included in the total cost calculation for RVC purposes have been reviewed and documented.

--Document the potential for costs to be included in total cost that should be excluded (i.e. costs not directly related to the production of the good including: sales promotion, marketing and after-sales service costs; royalties; shipping and packing costs; and non-allowable interest costs).

b) Observe and document the existence of the goods under review.

i) Confirm that the good under review is manufactured at that production facility.

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ii) Identify any differences that may exist with respect to the tariff classification of the good under review.

c) Where the producer designates an intermediate material review the assembly process and observe the completed intermediate material (IM). Conclude on whether or not the IM is a self-produced material. This information will be used in 8. INTERMEDIATE MATERIALS DESIGNATION verification sub-program.

d) Observe and document any concerns with regard to any possible

Non-Qualifying Operations (i.e. unacceptable production or pricing practice used to circumvent the Rules of Origin) noted during the plant tour.

This information will be used in the Non-Qualifying Operations subprogram.

e) Observe and document the Research and Development and/or Engineering Operations.

--Document any concerns with respect to the potential allocation problems of costs not directly related to the goods included in the averaging calculation.

f) Observe and document the warehouse operations (i.e. receiving material inventory, storing material inventory and storing of finished goods).

i) Document any concerns with respect to the tariff classification of materials for which there may be classification differences.

ii) Document any concerns with respect to the ownership of material.

iii) Document any concerns with respect to the source of materials (i.e. dual sourcing, markings on materials, fungible materials, etc.) noted during the plant tour.

iv) Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the goods under review.

v) Document any concerns with respect to the shipping of finished goods (i.e. any costs of shipping and packing that may be included in the net cost calculation).

vi) Document any concerns with respect to the inventory and turnover of finished goods.

g) Observe and document the production /manufacturing operations. Ensure each inhouse manufacturing and sub-assembly operations that are incorporated into the good under review have been documented.

i) Document any concerns with respect to the out-sourcing of manufacturing/production or sub-assembly operations. Evaluate whether assists may be provided to the out-sourced producers.

ii) Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the good under review.

This information will be used in 6. VALUE OF MATERIALS verification sub-program.

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h) Observe and document the financial accounting operations. Ensure the materials ordering, receiving, inventory flow, direct labor costing, indirect material costing and overhead allocation determination are all documented.

i) Observe and document the Management of Information System Operations. Inquire as to the type of management reports that are produced (i.e. bills of materials, production reports, labor reports, material stock reports, etc.).

This information will be used in 4. REVIEW OF MANAGEMENT OF INFORMATION SYSTEM verification sub-program.

4. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM


To ensure the Management of Information System (MIS) used to develop the Regional Value Content calculation is reliable and accurate.


a) Obtain the relevant information concerning the Management of Information System (MIS) gathered through the 3. PLANT TOUR verification sub-program. Identify the areas of concern with respect to the MIS.

b) Obtain and review the policies and procedures manual. Identify the areas of concern with respect to the MIS.

c) Obtain the independent auditor's report. Review this report to assess the reliance the auditors placed on the MIS.

d) Interview the personnel responsible for the MIS. Assess their knowledge of Electronic Data Processing (EDP) and the importance the organization places on controls within the MIS.

e) Document the MIS. Use the policies and procedures manual and the interviews with the MIS personnel as a guide.

i) Document how the Bill of Materials is created within the system. Document how the following items are entered into the system:

A)engineering documents/specifications (including changes to engineering specifications)

B)list of materials and suppliers - approved vendor listing

C)development of standards for costing purposes (i.e. materials, labor and overhead standards).

ii) Include a review of the following:

A)how are orders for the good under review entered into the system

B)what determines production for the period

C)how are production reports generated

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D)how are material stock reports (i.e. KAN-BAN) and picking lists generated

E)inventory (i.e. purchase from supplier(s), receipt, transfer to production, work-in-process, finished goods, shipment of finished goods)

iii) Document how the actual costs are recorded in the system. Include a review of payments for materials inventory, direct and indirect labor, manufacturing overhead and all other costs included in the total cost calculation.

f) Document the controls inherent in the MIS (i.e. the general and application controls). Ensure adequate controls over materials inventory, production, labor, overhead, etc.

i) General Controls

Review information pertaining to the organization controls and standard operating procedures. Review the systems development and documentation controls. This includes:

A) systems development methodology;

B) programming conventions and procedures;

C) technical, management, user and auditor review and approval;

D) system testing;

E) conversion control (if applicable);

F) program change controls;

G) system documentation standards -- program documentation, operations documentation, user documentation.

Review the systems software controls. This includes:

A) handling errors;

B) program protection;

C) file protection;

D) security protection.

Document how changes are made (i.e. authorization of changes to the system).

ii) Application Controls

Review the data capture and batch data entry controls. This includes:

A) control methodology (exposures resulting from errors and irregularities, management control objectives, system objectives, role of controls in EDP systems)

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B) audit trail;

C) data capture controls;

D) data entry controls.

Review the on-line entry, processing and output controls. This includes controls to ensure:

A) reliable, proper, authorized and valid transaction entry;

B) unreliable and improper data entry is detected;

C) unreliable and improper data is corrected;

D) processing is reliable, proper and authorized;

E) unreliable, improper, and unauthorized processing is detected;

F) unreliable, improper, and unauthorized processing is corrected;

G) errors detected in output are properly corrected and resubmitted to data processing on a timely basis.

5. TRANSACTION VALUE OF THE GOOD


To ensure that the transaction value of the good is properly calculated, in order to use it in the determination of the RVC.

Transaction value means the price actually paid or payable for a good adjusted to a F.O.B. (free on board at the point of direct shipment) basis.

Adjusted to a F.O.B. basis means:

a) Where the following costs are included in the transaction value of the good, deduct:

i) the costs of transporting the good after it is shipped from the point of direct shipment;

ii) the costs of unloading, loading, handling, and insurance that are associated with that transportation; and,

iii) the cost of packing materials and containers.

b) Where the following costs are not included in the transaction value of the good, add:

i) the costs of transporting the good from the place of production to the point of direct shipment;

ii) the costs of loading, unloading, handling, and insurance that are associated with that transportation; and,

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iii) the costs of loading the good for shipment at the point of direct shipment. (Refer to Sections 2, 3 and 4 of Schedule II and Section 2 of the NAFTA Rules of Origin Regulations)


a) Determine the price actually paid or payable, determined in accordance with Section 3 of Schedule II of the NAFTA Rules of Origin Regulations, for the good, by reviewing Customs Documents supported by commercial invoices, purchase orders, checks, etc.; (Ensure that the following are not included in the price paid or payable: charges for construction, erection, assembly, maintenance, or technical assistance related to the good undertaken after the good has been sold to the buyer; duties and taxes paid in the country in which the buyer is located with respect to the good; the flow of dividends or other payments from the buyer to the producer that do not relate to the purchase of the good.) NOTE: costs relating to bring the value of the good to a F.O.B. basis as defined above should be considered.

b) add to the price actually paid or payable for the imported goods the following, to the extent that they are incurred by the buyer or by a related person on behalf of the buyer and are not included in the price actually paid or payable for the goods:

(Note that the verification risk for the transaction value of the good is overstatement, therefore a quick scan of the chart of accounts should be sufficient in order to ensure that the following have been added, but most of the verification work should be done in order to ensure that the following costs that have been added have in fact occurred)


(i) commissions and brokerage fees, except buying commissions;

(ii) the costs of transporting the good to the producer's point of direct shipment and the costs of loading, unloading, handling and insurance that are associated with that transportation;

(iii) the cost of packaging materials and containers in which the goods are packaged for retail sale which are classified with the good under the Harmonized System;

- the value, reasonably allocated, of the following goods and services where supplied directly or indirectly to the producer by the buyer free of charge or at a reduced cost for use in connection with the production and sale of the good:

(i) a material, other than an indirect material, used in the production of the good;

(ii) tools, dies, molds and similar indirect materials used in the production of the good (a tour and quick scan of the fixed asset records will ensure the existence of the item and its value);

(iii) an indirect material used in the production of the good;

(iv) engineering, development, artwork, design work, and plans and sketches necessary for the production of the good regardless of where performed;

- the royalties related to the good, other than charges in respect of the right to reproduce the good in the territory of one or more of the NAFTA countries, that the buyer must pay directly or indirectly, as a condition of sale of the good;

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- the value of any part of the proceeds of any subsequent resale, disposal or use of the good that accrues directly or indirectly to the producer.

6. ORIGINATING AND NON-ORIGINATING MATERIALS


To ensure that all originating and non-originating materials have been identified among all materials used in the production of the good.


6.1 Bill of Materials (BOM)

Verify that the Bill of Materials (BOM) supplied by the exporter for the good under review includes all the materials used in the production of the good and identify any changes made throughout the verification period.

a) Obtain a copy of the company's RVC calculation for each good under review. Also obtain the BOM and any additional supporting documentation used by the exporter to prepare the RVC calculations. Recalculate the values for materials using the BOM and other supporting documentation and compare to the totals used by the company to calculate the RVC percentage.

b) Consider reviewing the policy and procedures manual for the BOM with respect to the definition of the BOM, use of the BOM, what is reported on the BOM, who and when changes are made to the BOM, etc.

c) Obtain from the 10. PACKING MATERIALS AND CONTAINERS FOR SHIPMENT verification subprogram any packing materials and containers for shipment which should not be included in the RVC calculation of the finished good. Exclude these materials from further verification work on the value of the non-originating materials.

d) To ensure that the BOM for the good is complete, compare part numbers, descriptions, and values with other company documents such as a picking list (used to obtain parts for production from inventory), engineering specifications (used to determine which materials would be required for the good), replacement parts listings and service manuals. Obtain explanations from company officials for any differences and adjust the BOM if required.

e) To ensure that the standard costs for materials on the BOM are consistent throughout the year:

i) review the company's standard costing policies;

ii) inquire of company officials if there have been any changes in the production process, BOM, or standard costs during the year;

iii) compare the BOM to another (or other) BOM(s) from a different date(s) during the year and inquire with company officials if any differences are found.

f) If more than one year is under verification, compare the BOM with a BOM of another year to determine whether there have been any significant changes in part numbers, descriptions or value of materials from one production year to the other.

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g) Ensure that all verification adjustments required for materials as a result of BOM verification procedures have been recorded.

h) Conclude as to whether the BOM is complete and consistent throughout the verification period.

6.2 Source of Materials

Ensure that all non-originating materials have been identified among all materials used in the production of the good.

a) Obtain information from the exporter's policy and procedures manuals and from the 3. PLANT TOUR verification sub-program to assist in identifying the source of materials used in the production of the finished good.

b) For each good:

i) determine which materials the exporter has designated as originating;

ii) interview company officials to determine who was responsible for this decision and what procedures they used to verify the origin of the materials. Document strengths and weaknesses of the manner in which the company gathered information and has assigned origin for consideration in conducting further tests; iii) determine the responsible individual's understanding of the NAFTA, training received, knowledge of suppliers, etc.

iv) if the company has received supplier certifications to verify the source of the materials, review them, compare them to the BOM and determine if the results are adequate for verification purposes (if not it may be required to confirm these items).

c) Obtain the listing of originating materials that would not undergo the required tariff classification change if it was determined that they were non-originating from the B. TARIFF CLASSIFICATION verification program. Confirm the origin of those materials by reviewing supplier statement/Certifications, purchase orders, invoices and/or receiving documents.

d) Identify any part of the production process that may be sub-contracted and determine the origin of the resulting product.

e) Obtain a list of suppliers for all materials on the BOM of the good. For suppliers of originating materials only, perform the following verification procedures:

i) determine whether any of the suppliers have companies in a non-NAFTA country, or if the suppliers are U.S., Mexican or Canadian distributors (these suppliers will be considered high-risk items for confirmation purposes);

ii) inquire of company officials to determine whether there were any supplier changes during the verification period, i.e., for a material, did the company switch to a supplier in the NAFTA territory from a supplier outside of the NAFTA territory during the verification period (or vice versa); or from a supplier that was a producer to a supplier that is a distributor;

iii) to determine whether there are any fungible materials examine the parts and supplier lists, the Approved Vendor List and inquire as to whether the same material is sourced from both a supplier from a NAFTA country and from one of a non-NAFTA country and if they source parts from distributors. If fungible materials exist refer to the 12. INVENTORY MANAGEMENT SYSTEM verification sub-program.

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f) If the exporter does not have supplier statements/Certifications, or they are not considered adequate for the verification:

i) select a sample of originating (and non-originating materials for value of material purposes) suppliers for confirmation of the source/value of materials and document the selection criteria. Factors to be considered when selecting the sample would include:

1) suppliers of originating materials identified as not undergoing a tariff classification change if it had been sourced from a non-NAFTA country (keeping in mind the possibility of applying the 7% De Minimis rule) in the B. TARIFF CLASSIFICATION verification program,

2) suppliers of high value originating materials,

3) suppliers who have plants in a non-NAFTA country,

4) suppliers who are U.S., Mexican or Canadian distributors,

5) a selection for value of materials and

6) a judgmental sample of the remaining suppliers;

ii) send out Custom's format supplier confirmations for the selected suppliers (see Appendix I) and ensure that confirmations are sent out to all suppliers of material if there is more than one supplier or if suppliers were changed during the period under review;

iii) prepare a working paper to control the confirmation process including the supplier name and address, material confirmed, date sent, date of receipt of the reply, date of the second follow-up letter, comments, source per reply, value per reply, etc.;

iv) if no response to the supplier confirmation is received, consider the material to be non-originating; and,

v) prepare a written determination pertaining the material for each supplier confirmation sent.

g) Obtain from the B. TARIFF CLASSIFICATION verification program any materials that had been designated as originating by the exporter were in fact sourced from a non-NAFTA country i.e., information from supplier catalogues and the 3. PLANT TOUR verification sub-program.

h) Select a sample of originating and non-originating materials and perform the following:

i) scan the purchase invoice, any attached shipping documents, the bank endorsement stamp on the canceled check and any related credit notes as indicators for support to the exporter's claim for the source (and value) of the material;

ii) using professional judgement, select materials from this sample to verify markings;

iii) follow up on any contradictory observations.

i) Ensure that all verification adjustments required for materials as a result of sourcing verification procedures have been recorded.

j) Conclude as to whether the sourcing of the materials is correct.

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7. VALUE OF MATERIALS


To ensure that the value of non-originating materials have been calculated in accordance with NAFTA. (For Canada Customs: And ensure that the value of materials obtained from either the U.S. or Mexico has been correctly calculated in accordance with NAFTA for tariff treatment purposes.)

Section 7 of the NAFTA Rules of Origin Regulations states that except in the case of indirect materials, intermediate materials, and packing materials and containers, for purposes of calculating the RVC of a good, and for the purpose of subsection 5(1) and (5), the value of a material that is used in the production of the good shall be;

(a) where the originating or non-originating material is imported by the producer of the good into the territory of the NAFTA country in which the good is produced, the customs value of the material with respect to that importation, except where the customs value was not determined in a manner consistent with Schedule VIII of the NAFTA Rules of Origin Regulations, then the value of the material shall be determined in accordance with Schedule VIII, with respect to the importation of that material or (b) where the originating or non-originating material is acquired by the producer of the good from another person located in the territory of the NAFTA country in which the good is produced;

i) the transaction value, determined in accordance with Subsection 2(1) of Schedule VIII, with respect to the transaction in which the producer acquired the material, or

ii) the value determined in accordance with Sections 6 through 11 of Schedule VIII, where, with respect to the transaction in which the producer acquired the material, there is no transaction value under Subsection 2(2) of that Schedule or the transaction value is unacceptable under Subsection 2(3) of that Schedule, and shall include the following costs (1) to (4) if they are not included under paragraph (a) or (b):

(1) the costs of freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer;

(2) duties and taxes paid or payable with respect to the material in the territory of one or more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable;

(3) customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries;

(4) the cost of waste and spoilage resulting from the use of the material in the production of the good, minus the value of any reusable scrap or by-product;

Schedule VIII states that in determining the transaction value of a material, the following costs (5 to 9) shall be added to the price paid or payable referred to in (b) above:

(5) commissions, except buying commissions, incurred by the producer;

(6) the costs of containers incurred by the producer which, for customs purposes, are classified with the material under the Harmonized System;

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(7) the value of the following elements (assists) where they are supplied directly or indirectly to the seller by the producer free of charge or at a reduced cost for use in connection with the production and sale of the material:

- a material, other than an indirect material, used in the production of the material being valued

- tools, dies, molds and similar indirect materials used in the production of the material being valued

- an indirect material (see Subparagraph 5(1)(b)(iii) of Schedule VIII)

- engineering, development, artwork, design work, and plans and sketches performed outside the territory of the NAFTA country in which the producer is located that are necessary for the production of the material being valued;

(8) the royalties related to the material, other than charges with respect to the right to reproduce the material in the territory of the NAFTA country in which the producer is located that the producer must pay directly or indirectly as a condition of sale of the material, to the extent that such royalties are not included in the price paid or payable;

(9) The value of any part of the proceeds of any subsequent disposal or use of the material that accrues directly or indirectly to the seller.

(Refer to Section 7 and Schedule VIII of the NAFTA Rules of Origin Regulations)

Note that where non-originating materials are the same as one another in all respects, including physical characteristics, quality and reputation, the value of non-originating materials may, at the choice of the producer, be determined in accordance with one of the methods set out in Schedule IX.


a) Review the calculations prepared by the company including any supporting documentation, and interview company personnel for the purposes of identifying how the value of materials was calculated. Identify assumptions made by the exporter, all cost types included in the calculations, allocation procedures, and the accounts from which the information was extracted. How were price and usage variances accounted for?

b) Determine if the value for materials used by the company to calculate the RVC percentage match the values included in the BOM and verify that such values are reasonable. Are direct material costs allocated in accordance with Schedule VII of the Regulations?

c) Assess the internal controls in place to preserve the quality and accuracy of the data available by reviewing policy and procedures manuals with respect to the purchase of materials, internal auditor's reports, setting of standards and identification of variances and by performing a walk through of the purchasing and receiving function and documenting the flow of information by tracing material requisitioning, ordering, receiving and reporting, returns, accounting, and cash disbursement.

d) Determine whether there are any related suppliers by:

i) reviewing company documents, (i.e. vendor listing, annual report, organizational charts), and inquire of company officials

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ii) determine whether this relationship influenced the cost of materials purchased by examining purchase contracts, invoices or other documentation and by inquiring of company officials; if possible compare the exporter's purchase price with the related company to the price paid to unrelated companies.

iii) if it is determined that the relationship has influenced the price, then the Transaction Value is unacceptable. One of the alternate methods of valuation must be used, i.e., Transaction Value of Identical or Similar Materials, or the Deductive, Computed or residual methods. (You may want to use the "test values" as set out in Schedule VIII Sub-sections 3(4) to 3(7) to ensure that the Transaction Value is acceptable in instances where there are materials bought between related parties.)

e) Determine if any of the following occurred, making the transaction value of the material unacceptable: restrictions on the disposition or use of the material by the producer other than those imposed by law; that limit the geographical area where the material may be used; or that does not substantially affect the value of the material.

f) Identify if there is any waste and spoilage from the use of non-originating materials by doing the following:

- Inquire of company officials.

- Obtain from 3. PLANT TOUR verification sub-program, indications of waste and spoilage.

- Inquire of potential value and document the system or method for valuation, if one exists. Review the system or method used for determining reusable scrap or by-products and ensure that they are deducted from the price paid for the materials (scan the general ledger for these accounts and inquire into what they relate to).

- Analyze the material price variances and if these are a result of production waste and spoilage and assess the impact on the reported value of materials.

- Ensure allocation of waste and spoilage to originating and/or non-originating materials is reasonable.

g) Identify and examine any assists.

- review purchase contracts and supplier correspondence files

- inquire of company officials

h) Select a sample of both originating and non-originating materials from the RVC information (or BOM) and document the selection criteria ensuring that high value parts are included in the sample. Coordinate with the work being done in the 6. ORIGINATING AND NON-ORIGINATING MATERIALS verification sub-program where there are confirmations and sample work done on invoices.

- trace to a sample of purchase contracts and invoices to determine the actual price paid by the exporter/producer; trace to canceled checks, credit or debit notes;

- for non-originating imported materials (and originating imported materials, if applicable), select a sample of materials to trace to Customs importation documents. Compare the value on these documents to the value identified in the RVC information and purchase invoices. Document the

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basis on which these materials were valued (i.e. Customs Value, Transaction Value (per Schedule VIII) etc.) and any concerns.

- calculate the difference between the actual and standard cost and compare with the price variance or variance from standard claimed by the exporter/producer; follow-up on any substantial differences;

- trace the total invoice amount to the appropriate ledgers and sub-ledgers to verify that purchases have been recorded correctly in the exporter's books and records;

- determine that costs incurred in transporting the material to the location of the producer have been identified and correctly reported. (freight, insurance, packing, etc.). If these costs are accounted separately from the invoice, you will have to trace these costs to the books and records and ensure that they are properly allocated to the material.

- determine that duty, taxes, and brokerage fees with respect to the purchase and importing of materials have been identified and correctly reported, making verification adjustments as required and identify whether the company actively takes part in a duty drawback program - if so, how has the duty drawback refund been considered (examine supporting documentation for these costs).

- determine the existence of in-house customs clerks and verify the correct allocation to the value of the materials, of the salaries of these clerks, especially in the case of non-originating materials. NOTE: While doing (h), you should look for indications of improper sourcing, or fungible materials.

i) Ensure that all verification adjustments required for materials as a result of value of materials verification procedures have been recorded.

j) Conclude as to whether the value of materials is correct and consistent throughout the verification period.

8. INTERMEDIATE MATERIALS


The objective of this section of the verification program is to review any self-produced materials including self produced packaging materials and containers, self produced accessories, spare parts and tools, designated as an intermediate material by the producer. If intermediate materials are designated by the company, and are found to qualify, 100% of that value is considered as an originating material for RVC calculation purposes.

NOTE: For purposes of calculating the RVC of the good, the producer of the good may designate as an intermediate material any self-produced material that is used in the production of the good, provided that where an intermediate material is subject to a RVC requirement no other self-produced material that is subject to a RVC requirement and is incorporated into that designated self-produced material is also designated by the producer as an intermediate material. Also, intermediate materials are goods in their own right and must therefore meet the rule of origin applicable to an intermediate material.


a) Ensure that material costs related to the production of the Intermediate Material are not double counted as material costs related to the production of the final good.

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b) Ensure that verification procedures have been completed with respect to:

- verifying the tariff classification of the intermediate materials;

- determining the correct rule of origin; - ensuring that the non-originating materials used in the production of the intermediate material have undergon the required tariff classification change. Refer to B. TARIFF CLASSIFICATION verification program.

c) If the rule of origin contains a RVC requirement, perform a RVC test based on the net cost method. Complete the D. RVC NET COST METHOD verification program, treating the intermediate material as a good.

d) If more than one intermediate material has been identified, ensure that, where the intermediate material is subject to a regional value-content requirement, no other self-produced material subject to a regional value content requirement is used in the production of that intermediate material.

e) Conclude as to whether the Intermediate Material is an originating material.

9. PACKAGING MATERIALS AND CONTAINERS FOR RETAIL SALE


The objective of this section of the verification program is to ensure that packaging materials and containers in which a good is packaged for retail sale, classified under the HTS with the good that is packaged therein, are taken into consideration when determining the RVC, but disregarded when determining whether all the non-originating materials used in production of the good undergo the applicable change in tariff classification.


a) Identify materials considered to be packaging materials (i.e., decorative boxes for retail sale) by:

- interviewing company personnel; - reviewing the bill of materials

b) Do not include these materials in the procedures set out in the B. TARIFF CLASSIFICATION verification program.

Include these materials in the procedures set out in the RVC verification programs, specifically the ORIGINATING AND NONORIGINATING MATERIALS and VALUE OF MATERIALS verification sub-programs.

10. PACKING MATERIALS AND CONTAINERS FOR SHIPMENT


The objective of this section of the verification program is to identify packing materials and containers in which the good is packed in order to ensure that they are disregarded when

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calculating the RVC of the good as well as when determining whether the non-originating materials used in the production of the good undergo the applicable change in tariff classification.


a) Identify materials considered to be packing materials and containers for shipment purposes by:

- interviewing company personnel; - reviewing the bill of materials

b) Ensure that the value for packing materials is not included in the procedures set out in the B. TARIFF CLASSIFICATION verification program as well as the RVC verification programs, specifically the ORIGINATING AND NON-ORIGINATING MATERIALS and VALUE OF MATERIALS verification subprograms.

11. ACCESSORIES, SPARE PARTS AND TOOLS


The objective of this section of the verification program is to ensure that accessories, spare parts and tools delivered with the good are taken into consideration when determining the RVC of the good, but disregarded when determining whether all the non-originating materials used in the production of the good undergo the applicable change in tariff classification.


a) Identify materials considered to be accessories, spare parts and tools

by:

- interviewing company personnel; - reviewing the bill of materials; - reviewing the owner's manual; and - reviewing sales contracts.

b) Do not include these materials in the procedures set out in the B. TARIFF CLASSIFICATION verification program.

Include these materials in the procedures set out in the RVC verification programs, specifically the ORIGINATING AND NON-ORIGINATING MATERIALS and VALUE OF MATERIALS verification sub-programs.

12. INVENTORY MANAGEMENT SYSTEM


The objective of this section of the verification program is to determine if an acceptable inventory management system is in place for fungible materials and/or goods that are commingled as well as for physically segregated originating and non-originating materials used in the production of the good to identify the origin of the goods of a specific shipment. If an acceptable inventory

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management system does not exist, all the fungible materials must be considered non-originating for the purposes of the RVC calculation. NOTE: The existence of fungible materials does not automatically require that this section of the program be used, as the exporter/producer may wish to treat the fungible material as non-originating or withdraw the certificate of origin for the good into which the fungible material is incorporated or used.


a) Using the information from the

6. ORIGINATING AND NON-ORIGINATING verification sub-program, obtain a listing of identified fungible materials.

b) If the material is dual sourced and commingled, determine the impact on the origin of the good should no inventory management system exist - that is if the material is determined to be non-originating. Evaluate the impact in terms of the tariff classification change requirement (consider the use of the de minimus provision) by reviewing the information obtained in the B. TARIFF CLASSIFICATION verification program, as well as in terms of the RVC requirements, by reviewing the information obtained in the 7. VALUE OF MATERIALS and the 13. CALCULATION OF THE RVC PERCENTAGE verification sub-programs if the impact is significant, proceed with the evaluation of

13. INVENTORY MANAGEMENT SYSTEM.

c) If originating and non-originating fungible materials (goods) exist, determine if the company used one of the following inventory management systems outlined in the NAFTA Rules of Origin Regulations - Schedule X to determine the materials originating status: Specific Identification FIFO LIFO

Average Method

d) Document the inventory management system from beginning to end, (i.e., purchasing, receiving, storage of materials, removal from storage into production of goods, storage of goods and removal of goods from storage for shipment of goods).

e) If Specific Identification was used, ensure that originating and nonoriginating fungible materials (goods) were physically segregated, or ensure the existence of an origin identifier, and that inventory management records are available to substantiate that originating materials (or goods) were in fact tracked.

f) If FIFO was used, review the company's receipts and withdrawals from the inventory record system Ensure that the origin of fungible materials (goods) first received was considered to be the origin of fungible materials (goods) first withdrawn.

g) If LIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the origin of fungible materials (goods) last received was considered to be the origin of fungible materials (goods) first withdrawn.

h) If the average method was used, ensure that the company applied the correct materials averaging ratio provisions (in the case of fungible goods, the ratio is applied to each shipment).

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i) Ensure that whichever method is chosen, including the averaging period in the case of the averaging method, it was used from the time it was chosen to the end of the fiscal year. Has the system changed since the inception of NAFTA?

j) Determine that the company correctly identified the origin and/or supplier of materials (goods) in its opening inventory by: -Identifying, in the books of the producer, the latest receipts of fungible materials (goods) that add up to the amount of fungible materials (goods) in opening inventory at the time an inventory method is chosen. Determine the origin and/or supplier of materials that make up those receipts. Determine the origin and/or supplier of those fungible materials (goods) to be the origin of the fungible materials (goods) in opening inventory.

k) Review the inventory management system by performing compliance tests on a sample of purchase transactions. The sample should include transactions involving materials that were fungible materials (goods) at the inception of NAFTA and materials (goods) that were identified as fungible since the inception (i.e. change in supplier)

l) Is the inventory management system tested periodically? Obtain a description of periodic testing and evaluate its effectiveness.

m) Test a sample of fungible material (goods) inventories by identifying the origin of opening inventory, adding receipts/adjustments of materials (goods) and deducting withdrawals/adjustments and compare your result to the company's records. (can test a variety of periods, materials(goods), and production processes)

n) Conclude on whether the exporter/producer has an acceptable inventory management system (refer to Schedule X of the NAFTA Rules of Origin Regulations) and how these materials (goods) should be accounted for in the determination of origin of the good subject to verification.

o) Conclude on the need for an inventory management system and on whether:

1. the inventory management system used by the company meets all the requirements of Schedule X of the NAFTA Rules of Origin Regulations; or

2. the inventory management system used by the company requires improvement to meet the requirements of Schedule X of the NAFTA Rules of Origin Regulations - document the impact on the origin of the goods under review - document the weaknesses of the system; or

3. the inventory management system does not meet the requirements of Schedule X and the company can/ cannot construct the necessary inventory management system - document the impact on the origin of the goods under review.

13. CALCULATION OF THE REGIONAL VALUE CONTENT PERCENTAGE


The objective of this final stage of the verification program is to actually calculate the regional value content percentage.


a) Obtain the value of all non-originating materials from the 7. VALUE OF MATERIALS verification sub-program and obtain the transaction value of the good from the 5. TRANSACTION

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VALUE OF THE GOOD verification sub-program. b) Subtract the value of all non-originating materials (including packaging, accessories, spare parts, tools) from the transaction value of the good. and

c) Divide the difference by the transaction value of the good. and

d) Multiply the result by 100 e) Conclude as to whether the good satisfies the NAFTA RVC requirement.

VERIFICATION PROGRAM D REGIONAL VALUE CONTENT - NET COST METHOD


TO VERIFY THAT THE REGIONAL VALUE CONTENT REQUIREMENT, AS REQUIRED BY THE RULES OF ORIGIN, HAS BEEN MET WHERE THE NET COST METHOD HAS BEEN USED

1. GENERAL - RVC


To ensure that the RVC percentage has been calculated correctly for each good.


a) Obtain from company officials RVC information for the good(s) under review; Obtain a written statement from the company regarding their choice to average. A choice to average must include the goods averaged and the averaging period in accordance with subsection 2(7) and 6(15) of the Regulations.

b) Ensure that all calculations are correct and that the good has met the RVC requirement based on these calculations; and

c) Compare the information contained in the election of average with the RVC information.

d) Ensure the same averaging period has been used for the remainder of the producer's fiscal year.

1. GENERAL - RVC CONTINUED;

e) If the good is of a provision listed in Schedule IV of the Regulations that is for use as an after-market part; or an automotive component assembly or automotive component that is for use as an after market part; or a sub-component; or a listed material, determine if the company has elected to average under Section 12 of the Regulations. If an election has been made, using the information from the B. TARIFF CLASSIFICATION verification program, ensure that all goods of the same tariff provision are identified and, determine based on the election category, which should be included in the regional value content calculation. Identify the motor vehicle producer(s) included in the averaging calculation, and their respective fiscal years. Ensure averaging period is in accordance with paragraph 12(5)(b) of the Regulations.

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g) Consider whether the de minimis provision applies. Refer to the DE MINIMIS section of the B. TARIFF CLASSIFICATION verification program.

2. PLANT TOUR



VERIFICATION PROCEDURES a) Obtain an Organization Chart. Ensure all operations and or departments whose costs are included in the total cost calculation for RVC purposes have been reviewed and documented. --Document the potential for costs to be included in total cost that should be excluded (i.e. costs not directly related to the production of the good under review including: sales promotion, marketing and after-sales service costs; royalties; shipping and packing costs; and non-allowable interest costs).

b) Observe and document the existence of the good under review.

i) Confirm the good under review is manufactured at that production facility.



d) Observe and document any concerns with regard to any possible Non-Qualifying Operations (i.e. unacceptable production or pricing practice used to circumvent the Rules of Origin) noted during the plant tour. This information will be used in the A. NON-QUALIFYING OPERATIONS verification program.

e) Observe and document the Research and Development and/or Engineering Operations. --Document any concerns with respect to the potential allocation problems of costs not directly related to the production of the goods under review.




iii) Document any concerns with respect to the source of materials (i.e. dual sourcing, markings on materials, fungible materials, etc.) noted during the plant tour.

iv).Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the good under review.

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v).Document any concerns with respect to the shipping of finished goods (i.e. any costs of shipping and packing that may be included in the net cost calculation).

vi) Document any concerns with respect to the inventory and turnover of finished goods. g) Observe and document the production /manufacturing operations. Ensure each in-house manufacturing and sub-assembly operations have been documented.

i). Document any concerns with respect to the out-sourcing of manufacturing/production or sub-assembly operations. Evaluate whether assists may be provided to the out-sourced producers. This information will be used in 5. VALUE OF MATERIALS verification sub-program.

ii). Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the good under review.


i) Observe and document the Management of Information System Operations. Inquire as to the type of management reports that are produced (i.e. bills of materials, production reports, labor reports, material stock reports, etc.). This information will be used in 3. REVIEW OF MANAGEMENT OF INFORMATION SYSTEM verification sub-program.





a) Obtain the relevant information concerning the Management of Information System (MIS) gathered through the 2. PLANT TOUR verification sub-program. Identify the areas of concern with respect to the MIS.






A) engineering documents/specifications (including changes to engineering specifications)

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B) list of materials and suppliers - approved vendor listing

C) development of standards for costing purposes (i.e. materials, labor and overhead standards)


A) how are orders for the good under review are entered into the system

B) what determines production for the period

C) how are production reports generated

D) how are material stock reports (i.e. KAN-BAN) and picking lists generated E) inventory (i.e. purchase from supplier(s), receipt, transfer to production, work-in-process, finished goods, shipment of finished goods)


f) Document the controls inherent in the MIS (i.e. the general and application controls). Ensure adequate controls over materials inventory, production, labor, overhead, etc. i) General Controls Review information pertaining to the organization controls and standard operating procedures. Review the systems development and documentation controls. This includes: A) systems development methodology; B) programming conventions and procedures; C) technical, management, user and auditor review and approval; 3. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM CONTINUED; D) system testing; E) conversion control (if applicable); F) program change controls; G) system documentation standards -- program documentation, operations documentation, user documentation. Review the systems software controls. This includes: A)handling errors; B)program protection; C)file protection; D)security protection. Document how changes are made (i.e. authorization of changes to the system). ii) Application Controls Review the data capture and batch data entry controls. This includes: A) control methodology (exposures resulting from errors and irregularities, management control objectives, system objectives, role of controls in EDP systems)

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B)audit trail; C)data capture controls; D)data entry controls. Review the on-line entry, processing and output controls. This includes controls to ensure: A) reliable, proper, authorized and valid transaction entry; B) unreliable and improper data entry is detected; C) unreliable and improper data is corrected; D) processing is reliable, proper and authorized; 3. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM CONTINUED; Done W/P by Ref E) unreliable, improper, and unauthorized processing is detected; F) unreliable, improper, and unauthorized processing is corrected; G) errors detected in output are properly corrected and resubmitted to data processing on a timely basis. 4. ORIGINATING AND NON-ORIGINATING MATERIALS VERIFICATION SUB-OBJECTIVE To ensure that all originating and non-originating materials have been identified among all materials used in the production of the good. (For Canada Customs: and that the originating materials are correctly identified as obtained from either the U.S. or Mexico for tariff treatment purposes.) Bill of Materials Verify that the Bill of Materials (BOM) supplied by the Exporter/Producer for the good under review includes all the materials used in the production of the good and identify any changes made throughout the verification period. VERIFICATION PROCEDURES a) Obtain a copy of the completed RVC calculation for each good under review. Also obtain the BOM and any additional supporting documentation used by the exporter to prepare the RVC calculations. Recalculate the values for materials using the BOM and other supporting documentation and compare to the totals used by the company to calculate the RVC. Also compare the origin of materials indicated on the BOM and other documentation to the information reported in the RVC. b) Consider reviewing the policy and procedure manual for the BOM with respect to the definition of the BOM, use of the BOM, what is reported on the BOM, who and when changes are made to the BOM, etc. 4. ORIGINATING AND NON-ORIGINATING MATERIALS CONTINUED; c) Obtain from 9. PACKING MATERIALS AND CONTAINERS FOR SHIPMENT verification program any packing materials and containers for shipment which should not be included in the RVC calculation of the finished good. Exclude these materials from further verification work on the origin and value of the materials. NOTE: Ensure that packaging materials and containers for retail sale as identified in 8. PACKAGING MATERIALS AND CONTAINERS FOR RETAIL SALE verification sub-program, and 10. ACCESSORIES, SPARE PARTS AND TOOLS verification sub-program are included in these procedures. Indirect materials are all originating materials. d) To ensure that the BOM for the good is complete, compare part numbers, quantities (when

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average costs are used), descriptions, and values with other company documents such as a picking list used to obtain parts for production from inventory, engineering specifications used to determine which materials would be required for the good, replacement parts listings and service manuals. Obtain explanations from company officials for any differences and adjust the BOM if required. e) To ensure that the standard costs for materials on the BOM are consistent throughout the verification period: i) review the company's standard costing policies; 4. ORIGINATING AND NON-ORIGINATING MATERIALS CONTINUED; ii) inquire of company officials if there have been any changes in the production process, BOM, or standard costs during the verification period; iii) compare the BOM to another (or other) BOM(s) from a different date(s) during the verification period and inquire with company officials if any differences are found. f) If more than one year is under review, compare the BOM with a BOM of another year to determine whether there have been any significant changes in part numbers, descriptions, sourcing or value of materials from one production year to the other. g) Ensure that all verification adjustments required for materials as a result of BOM verification procedures have been recorded. h) Conclude as to whether the BOM is complete and consistent throughout the verification period. Source of Materials: Ensure that all non-originating materials have been identified among all materials used in the production of the good. a) Obtain information from the exporter's policy and procedures manuals and complete a plant tour to assist in identifying the source of materials used in the production of the finished good. Refer to the 2. PLANT TOUR verification sub-program to identify concerns noted previously. b) For each good: i) determine which materials the exporter has designated as originating; ii) interview company officials to determine who was responsible for this decision and what procedures they used to verify the origin of the materials and document strengths and weaknesses of the manner in which the company gathered information and has assigned origin; iii) determine the responsible individual's understanding of the NAFTA, training received, knowledge of suppliers, etc. 4. ORIGINATING AND NON-ORIGINATING MATERIALS CONTINUED; iv) If the company has received supplier statements/Certifications to verify the source of the materials, review them, compare them to the BOM, and determine if they are adequate and sufficiently identify the materials and the certification period (if they are not adequate, these items may be considered high risk items for confirmation purposes) c) Obtain a listing of originating materials that would not undergo the required tariff classification change if it was determined that they were non-originating from the B. TARIFF CLASSIFICATION verification program. Confirm the origin of these materials by reviewing supplier statements/Certifications purchase orders, invoice, and/or receiving documents. d) Identify any part of the production process that may be sub-contracted and determine the origin of the resulting product.

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e) Obtain a list of suppliers for all materials on the BOM of the good. For suppliers of originating materials only, perform the following verification procedures: i) determine whether any of the suppliers have companies in a non-NAFTA country, or if the suppliers are U.S., Canadian or Mexican distributors (these suppliers will be considered high-risk items for confirmation purposes); ii) inquire of company officials to determine whether there were any supplier changes during the verification period i.e. for a material did the company switch to a supplier in the NAFTA territory from a supplier outside of the NAFTA territory during the verification period (or vice versa) or from a supplier that was a producer to a supplier that is a distributor; iii) to determine whether there are any fungible materials examine the parts and supplier lists, the Approved Vendor List and inquire as to whether the same material is sourced from both a supplier from a NAFTA country and from one of anon-NAFTA country and if they source parts from distributors. If fungible materials exist this information will be used in the 11. INVENTORY MANAGEMENT SYSTEM verification sub-program. f) If the Exporter/Producer does not have supplier certifications, or they are not considered adequate for the verification: i) Select a sample of originating and non-originating materials for value purposes. Select a sample of material suppliers for confirmation of the source/value of materials and document the selection criteria. Factors to be considered when selecting the sample would include: 1) suppliers of originating materials which have been identified as not undergoing a tariff classification change if it had been sourced from a non-NAFTA country (keeping in mind the possibility of applying the 7% De Minimis rule). Refer to the B. TARIFF CLASSIFICATION verification program. 2) suppliers of high value originating materials, 3) suppliers who have plants in a non-NAFTA country, 4) suppliers who are U.S., Canadian, or Mexican distributors, 5) a selection for value of materials and 6) a judgmental sample of the remaining suppliers; ii) Send out the Custom's format supplier confirmations for the selected suppliers (see Appendix I). Ensure that confirmations are sent out to all suppliers of materials if there is more than one supplier of a material or if suppliers were changed during the period under review; iii) prepare a working paper to control the confirmation process including the supplier name and address, material confirmed, date sent, date of receipt of the reply, date of the second follow-up letter, comments, source per reply, value per reply, etc.; iv) prepare a list of suppliers that did not respond to the confirmation, treat materials purchased from these suppliers as non-originating; and v) prepare a written determination pertaining to the material for each supplier confirmation sent. g) Determine whether conclusions documented in the B. TARIFF CLASSIFICATION verification program include findings that materials that had been designated as originating by the exporter were in fact sourced from a non-NAFTA country i.e. information from supplier catalogues and the 2. PLANT TOUR verification sub-program. h) Select a sample of originating and non-originating materials and perform the following: i) scan the purchase invoice, any attached shipping documents, the bank endorsement stamp on the canceled check and related credit notes to determine whether they support the exporter's claim for the source (and value) of the material; ii) using professional judgment, select materials from this sample to verify markings; iii) follow up on any contradictory observations.

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i) Ensure that all verification adjustments required for materials as a result of sourcing verification procedures have been recorded. j) Conclude as to whether the sourcing of the materials is correct. 5. VALUE OF MATERIALS VERIFICATION SUB-OBJECTIVE To ensure that the value of materials has been calculated in accordance with NAFTA. Section 7 of the NAFTA Rules of Origin Regulations states that except in the case of indirect materials, intermediate materials, and packing materials and containers, for purposes of calculating the RVC of a good, and for the purpose of subsection 5(1) and (5), the value of a material that is used in the production of the good shall be; (a) where the originating or non-originating material is imported by the producer of the good into the territory of the NAFTA country in which the good is produced, the customs value of the material with respect to that importation, except where the customs value was not determined in a manner consistent with Schedule VIII of the NAFTA Rules of Origin Regulations, then the value of the material shall be determined in accordance with Schedule VIII, with respect to the importation of that material, or (b) where the originating or non-originating material is acquired by the producer of the good from another person located in the territory of the NAFTA country in which the good is produced, i) the transaction value, determined in accordance with Subsection 2(1) of Schedule VIII, with respect to the transaction in which the producer acquired the material, or ii) the value determined in accordance with Sections 6 through 11 of Schedule VIII, where, with respect to the transaction in which the producer acquired the material, there is no transaction value under Subsection 2(2) of that Schedule or the transaction value is unacceptable under Subsection 2(3) of that Schedule, (c) and shall include the following costs ( 1 to 4 ) if they are not included under paragraph (a) or (b): 1) the costs of freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer; 5. VALUE OF MATERIALS CONTINUED; 2) duties and taxes paid or payable with respect to the material in the territory of one or more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable; 3) customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries; 4) the cost of waste and spoilage resulting from the use of the material in the production of the good, minus the value of any reusable scrap or by-product; Schedule VIII states that in determining the transaction value of a material, the following costs (5 to 9) shall be added to the price paid or payable refereed to in (b) above.

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5) commissions, except buying commissions, incurred by the producer; 6) the costs of containers incurred by the producer which, for customs purposes, are classified with the material under the Harmonized System; 7) the value of the following elements (assists) where they are supplied directly or indirectly to the seller by the producer free of charge or at a reduced cost for use in connection with the production and sale of the material: - a material, other than an indirect material, used in the production of the material being valued - tools, dies, molds and similar indirect materials used in the production of the material being valued - an indirect material (see Subparagraph 5(1)(b)(iii) of Schedule VIII) - engineering, development, artwork, design work, and plans and sketches performed outside the territory of the NAFTA country in which the producer is located that are necessary for the production of the material being valued; 5. VALUE OF MATERIALS CONTINUED; 8) the royalties related to the material, other than charges with respect to the right to reproduce the material in the territory of the NAFTA country in which the producer is located that the producer must pay directly or indirectly as a condition of sale of the material, to the extent that such royalties are not included in the price paid or payable; 9) the value of any part of the proceeds of any subsequent disposal or use of the material that accrues directly or indirectly to the seller. (Refer to section 7 of Schedule VIII of the NAFTA Rules of Origin Regulations and Chapter 4 of the NAFTA) Note that where non-originating materials are the same as one another in all respects, including physical characteristics, quality and reputation, the value of non-originating materials may, at the choice of the producer, be determined in accordance with one of the methods set out in Schedule IX. VERIFICATION PROCEDURES a) Review the calculations prepared by the company including any supporting documentation, and interview company personnel for the purposes of identifying how the value of materials was calculated. Identify assumptions made by the exporter, all cost types included in the calculations, allocation procedures, and the accounts from which the information was extracted. How are price and usage variances accounted for? b) Determine if the value of materials reported by the company in the RVC information and the BOM is reasonable. Are direct material costs allocated in accordance with Schedule VII of the Regulations? c) Assess the internal controls in place to preserve the quality and accuracy of the data available by reviewing policy and procedures manuals with respect to the purchase of materials, internal auditor's reports, setting of standards and identification of variances and by performing a walk through of the purchasing and receiving function and documenting the flow of information by tracing material requisitioning, ordering, receiving and reporting, returns, accounting, and cash disbursement. d) Determine whether there are any related suppliers by:

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i) reviewing company documents, i.e. vendor listing, annual report, organizational charts, and inquire of company officials; ii) determine whether this relationship influenced the cost of materials purchased by examining purchase contracts, invoices or other documentation and by inquiring of company officials; if possible compare the exporter's purchase price with the related company to the price paid to unrelated companies. iii) if it is determined that the relationship has influenced the price, then the Transaction Value is unacceptable. One of the alternate methods of valuation must be used i.e. Transaction Value of Identical or Similar materials or the Deductive, computed or residual methods. (You may want to use the "test values" as set out in Schedule VIII Subsections 3(4) to 3(7) to ensure that the Transaction Value is acceptable in instances where there are materials bought between related parties.) e) Determine if any of the following occurred, making the Transaction Value of the material unacceptable: restrictions on the disposition or use of the material by the producer other than those imposed by law; that limit the geographical area where the material may be used; or that does not substantially affect the value of the material. f) Identify if there is any waste and spoilage from the use of non-originating materials by doing the following: - Inquire of company officials - Obtain from the 2. PLANT TOUR verification sub-program indications of waste and spoilage. - Inquire if there is any value for reusable scrap or by-products and ensure that they are deducted from the cost (you may want to scan the general ledger to see if any of these accounts exist and to what they relate to) - Analyze the material price/usage variances and if these are a result of production waste and spoilage and assess the impact on the reported value of materials. - Ensure the allocation of waste and spoilage to originating and non-originating materials is reasonable. g) Identify and examine any assists. - review purchase contracts, supplier correspondence files - inquire of company officials h) Select a sample of both originating and non-originating materials from the RVC information (or BOM) and document the selection criteria ensuring that high value parts are included in the sample. Coordinate with the work done in 4. ORIGINATING AND NON-ORIGINATING MATERIALS verification sub-program where there are confirmations and sample work done on invoices. - trace to a sample of purchase contracts and invoices to determine the actual price paid by the exporter /producer trace to canceled checks; and debit/credit notes. For originating and non-originating imported materials, select a sample of materials to trace to Customs importation documents. Compare the value on these documents to the value identified in the RVC information and purchase invoices. Document the basis on which these materials were valued (i.e. Customs Value, Transaction Value (per Schedule VIII etc.) and any concerns. - calculate the difference between the actual and standard cost and compare with the price variance or variance from standard claimed by the exporter/producer; follow-up on any substantial differences; - trace the total invoice amount to the appropriate ledgers and sub-ledgers to verify that purchases have been recorded correctly in the exporter's/producer's books and records; - determine that costs incurred in transporting the material to the location of the producer have been identified and correctly reported (freight, insurance, packing, etc.). If these costs are accounted separately (i.e. not recorded on the invoice for the material purchase), you will have to trace these costs to the books and records and ensure that they are properly allocated to the material;

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- determine that duty, taxes, and brokerage fees with respect to the purchase and importing of materials have been identified and correctly reported, making adjustments as required and identify whether the company actively takes part in a duty drawback program - if so, has the duty drawback refund been netted against the duty claimed above (examine supporting documentation for these costs). Determine the existence of in-house customs clerks and verify the correct allocation to the value of the materials of the salaries of these clerks, especially in the case of non-originating materials. NOTE: While doing h), you should look for indications of improper sourcing, or fungible materials. i) Ensure that all verification adjustments required for materials as a result of value of materials verification procedures have been recorded. j) Conclude as to whether the value of materials is correct and consistent throughout the verification period. 6. INTERMEDIATE MATERIALS VERIFICATION SUB-OBJECTIVE The objective of this section of the verification program is to review any self-produced materials including self-produced packaging materials and containers, self-produced accessories, spare parts and tools, designated as an intermediate material by the producer. If intermediate materials are designated by the company, and are found to qualify, 100% of that value is considered as an originating material for RVC calculation purposes. NOTE: For purposes of calculating the RVC of the good, the producer of the good may designate as an intermediate material any self-produced material that is used in the production of the good, provided that where an intermediate material is subject to a RVC requirement no other self-produced material that is subject to a RVC requirement and is incorporated into that designated self-produced material is also designated by the producer as an intermediate material. Also intermediate materials are goods in their own right and therefore the rule of origin applicable to an intermediate material. VERIFICATION PROCEDURES a) Inquire of the company officials as to how the value of the intermediate material was calculated. b) Ensure that material, labor, overhead costs etc. related to the Intermediate Material are not double counted in the respective costs related to the final good. c) Ensure that the verification procedures have been completed with respect to: - verifying the tariff classification of the intermediate materials; - determining the correct rule of origin; - ensuring that the non-originating materials used in the production of the intermediate material have undergone the required tariff classification change. Refer to the B. TARIFF CLASSIFICATION verification program. d) If the rule of origin contains a RVC requirement perform a RVC test based on the net cost method. Refer to the D. NET COST METHOD verification program for determining RVC using the net cost content calculation. e) If more than one intermediate material has been identified, ensure that, where the intermediate material is subject to a regional value-content requirement, no other self-produced material subject to a regional value content requirement is used in the production of that intermediate material.

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f) Conclude as to whether the Intermediate material is an originating material. g) If an intermediate material is determined to be originating, calculate the total cost in accordance with subsection 7(6) and subsections 2(6) through 2(9) of the NAFTA Rules Origin Regulations. Refer to 7. NET COST CALCULATION verification sub-program of the intermediate material and carry forward that value, as an originating cost, to the net cost of the good. 7. NET COST CALCULATION VERIFICATION SUB-OBJECTIVE To ensure that the net cost has been determined correctly by using only eligible costs and reasonable cost allocation methods (where needed). The components needed in order to calculate the net cost are the total cost and the excluded costs. Total costs The total cost of a good consists of all product costs, period costs and other costs, incurred in the territory of one or more of the NAFTA countries, that are recorded on the books of the producer, without regard to the location of the persons to whom payments with respect to those costs are made. But total costs do not include the following: - profits that are earned by the producer of the good, regardless of whether they are retained or paid out to other persons as dividends, or taxes paid on those profits, including capital gains taxes; - gains related to currency conversion that are related to the production of the good; (See subsection 6(12) of the NAFTA Rules of Origin Regulations) - costs of a service provided by a producer of a good to another person where the service is not related to the good; - gains and losses resulting from the disposition of a discontinued operation; - costs relating to the cumulative effect of accounting changes reported in accordance with a specific requirement of the applicable Generally Accepted Accounting Principles; - gains or losses resulting from the sale of a capital asset of the producer; (See Schedule VII of the NAFTA Rules of Origin Regulations) Note: The value of materials with respect to which production is accumulated, shall be determined in accordance with section 14 of the NAFTA Rules of Origin Regulations (Refer to 12. ACCUMULATION verification sub-program). Total costs a) Reconcile costs, submitted in the RVC information to the records (general ledger, etc.) of the company. b) Ensure by scanning the detail in support of the total cost, the period costs, product costs, and other costs incurred in the territory of one or more of the Parties are included in the total cost figure. And ensure that the total costs do not include profits, corporate or personal taxes on income, dividends, or other accounts that should be classified as assets or reductions to income accounts, gains related to currency conversion, service costs not related to the good, gains or losses related to a discontinued operation, costs related to accounting changes, and gains or losses resulting from the sale of a capital asset.

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c) Evaluate the method(s) used to allocate labor and overhead costs to the product under review and assess whether the methods used are consistent with the recommendations in Schedule VII of the Uniform Regulations. Were allocation methods applied throughout the fiscal year? For purposes of calculating the net cost, the excluded costs: - shall be the excluded costs that are recorded on the books of the producer of the good; - that are included in the value of a material that is used in the production of the good shall not be subtracted from or otherwise excluded from the total cost; and - do not include any amount paid for research and development services performed in the territory of a NAFTA country (i.e. royalties are excluded costs, but research and development performed in the Territory is to be included in the total cost calculation). (See subsection 6(13) of the NAFTA Rules of Origin Regulations) The excluded costs are: sales promotion, marketing and after-sales service costs; royalties; shipping and packing costs; and non-allowable interest costs. The verification objective for this part of the program is to verify that the expenses pertaining to sales promotion, marketing, and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs have all been considered as excluded costs for the purpose of the calculation of the Net Cost. The following is the definition of sales promotion, marketing, and after-sales service costs as defined in the NAFTA Rules of Origin Regulations: (a) sales and marketing promotion; media advertising; advertising and market research; promotional and demonstration materials, exhibits; sales conferences, trade shows and conventions; banners; marketing displays; free samples; sales, marketing and after-sales service literature(product brochures, catalogues, technical literature, price lists, service manuals, sales aid information); establishment and protection of logos and trademarks; sponsorships; wholesale and retail restocking charges; entertainment; (b) sales and marketing incentives; consumer, retailer or wholesaler rebates; merchandise incentives; 7. NET COST CALCULATION CONTINUED; (c) salaries and wages, sales commissions, bonuses, benefits(for example, medical, insurance, pension), traveling and living expenses, membership and professional fees, for sales promotion, marketing and after-sales service personnel; (d) recruiting and training of sales promotion, marketing and after-sales service personnel, and after-sales training of customers' employees, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on the financial statements or cost accounts of the producer; (e) product liability insurance; (f) office supplies for sales promotion, marketing and after-sales service of goods, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on

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the financial statements or cost accounts of the producer; (g) telephone, mail and other communications, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on the financial statements or cost accounts of the producer; (h) rent and depreciation of sales promotion, marketing and after-sales service offices and distribution centers; (i) property insurance premiums, taxes, cost of utilities, and repair and maintenance of sales promotion, marketing and after-sales service offices and distribution centers, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on the financial statements or cost accounts of the producer; and (j) payments by the producer to other persons for warranty repairs. 7. NET COST CALCULATION CONTINUED; Excluded costs--royalties; The following is the definition of royalties as defined in Section 2 of the NAFTA Rules of Origin Regulations: Royalties means payments of any kind, including payments under technical assistance agreements or similar agreements, made as consideration for the use of, or right to use, any copyright, literary, artistic, or scientific work, patent, trade-mark, design, model, plan, secret formula or process, excluding those payments under technical assistance agreements or similar agreements that can be related to specific services such as: a) Personnel training, without regard to where performed; and b) If performed in the territory of one or more of the Parties, engineering, tooling, die-setting, software design and similar computer services, or other services. Excluded costs--shipping and packing costs The following is the definition of shipping and packing costs as defined in Section 2 of the NAFTA Rules of Origin Regulations: Shipping and packing costs means those costs incurred in packing a good for shipment and shipping the good from the point of direct shipment to the buyer, excluding costs of preparing and packaging the good for retail sale. Excluded costs--non-allowable interest costs The following is the definition of non-allowable interest costs as defined in Section 2 of the NAFTA Rules of Origin Regulations: Non-allowable interest costs means interest costs incurred by a producer on the producer's debt obligations that are more than 700 basis points above the yield on debt obligations of comparable maturities issued by the federal government of the country in which the producer is located. The methods for calculating non-allowable interest costs are set out in Schedule XI of the NAFTA Rules of Origin Regulations.

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Excluded costs VERIFICATION PROCEDURES The following verification procedures are recommended to verify that a proper dollar amount has been deducted from total costs for sales promotion, marketing, and after sales service costs; royalties; shipping and packing costs; and non-allowable interest costs. The emphasis on verification testing should be to ensure that these costs have not been understated by the company and have been properly allocated to the good under review. a. Trace the detail of the net cost reported in the RVC calculation to the company's working schedule. Trace in turn these working schedules to the books and records. b. Interview company personnel to understand how these costs are accounted for in the company's books and records. Review the above definitions with company personnel to ensure that they understand what costs are involved and to document rationale where little or no cost has been accounted for a particular item provided for in the definition (this is to ensure that there are no such costs in other accounts). c. Obtain copies of agreements related to sales promotions and marketing. Review the terms of the agreements and ensure that they were properly accounted for in the net cost calculation. d. Obtain copies of contracts related to shipping costs. Review the terms of the contracts and ensure they were properly accounted for in the net cost calculation. e. Obtain copies of royalty agreements, technical assistance agreements, and other similar documents. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation. (Remember that research and development performed in the Territory of a NAFTA country are includable costs) f. Obtain copies of loan agreements. Review the terms of these agreements, particularly the interest rates charged, relate them to the products under review and identify loans by type (i.e. fixed or variable rate). Confirm payments have been made in accordance with the terms of the loan agreement. Ensure that any non-allowable interest costs have been properly taken into account in the net cost calculation (refer to Schedule XI of the NAFTA Rules of Origin Regulations). g. Refer to the 9. PACKING MATERIALS AND CONTAINERS FOR SHIPMENT verification sub-program to identify any materials that should be included in the net cost of calculation. h. Review the chart of accounts and the company's trial balance to identify those accounts which fall within the above definitions and conduct the following tests: - select a sample of costs and trace to supporting commercial documentation, paying particular attention to journal voucher type entries; and - where costs have been allocated for these costs, ensure that the method of allocation is consistent with that recommended in Schedule VII of the NAFTA Rules of Origin Regulations; and -where it is determined that these costs should not be included in the net cost, ensure the reveal is only for the amount originally allocated. i. Review the chart of accounts and the company's trial balance to identify accounts which appear to be included costs but that the company has ignored in the Net cost calculation. List these accounts for further testing to supporting documentation and discussion with company personnel. j. Prepare a working paper to adjust the net costs figure on the submission of RVC information for any excluded or not allowable costs are deducted by the producer.

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k. Conclude on the verification sub-objective. 8. PACKAGING MATERIALS AND CONTAINERS FOR RETAIL SALE VERIFICATION SUB-OBJECTIVE: The objective of this section of the verification program is to ensure that packaging materials and containers in which a good is packaged for retail sale, classified under the HTS with the good that is packaged therein, are taken into consideration when determining the RVC, but disregarded when determining whether all the non-originating materials used in production of the good undergo the applicable change in tariff classification. VERIFICATION PROCEDURES a) Identify materials considered to be packaging materials (i.e. decorative boxes for retail sale) by interviewing the company personnel and by reviewing the bill of materials. b) Do not include these materials in the procedures set out in B. TARIFF CLASSIFICATION verification sub-program. c) In the 4. ORIGINATING AND NON-ORIGINATING MATERIALS verification sub-program determine the origin of these materials. d) Determine the value of these packaging materials: i) where the packaging materials are acquired by the producer of the good from another person, refer to 5. VALUE OF MATERIALS verification sub-program; or ii) where the packaging materials are produced by the producer of the good, at the choice of the producer; - the total cost incurred with respect to all goods produced by the producer of the good, calculated on the basis of the costs that are recorded on the books of the producer, that can be reasonably allocated to those packaging materials and containers in accordance with Schedule VII; or - the aggregate of each cost calculated on the basis of the costs that are recorded on the books of the producer, that forms part of the total cost incurred with respect to those packaging materials and containers that can be reasonably allocated to those packaging materials in accordance with Schedule VII. (Refer to the 7. NET COST CALCULATION verification sub-program. 9. PACKING MATERIALS AND CONTAINERS FOR SHIPMENT VERIFICATION SUB-OBJECTIVE: The objective of this section of the verification program is to identify packing materials and containers in which the good is packed in order to ensure that they are disregarded when calculating the RVC of the good as well as when determining whether the non-originating materials used in the production of the good undergo the applicable change in tariff classification. a) Identify materials considered to be packing materials and containers for shipment purposes by: - interviewing company personnel; and - reviewing the bill of materials.

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b) Ensure that the value for packing materials (i.e. the costs that are recorded on the books and records of the producer) is not included in the B. TARIFF CLASSIFICATION verification program as well as the 4. ORIGINATING ANDNON-ORIGINATING MATERIALS, 5. VALUE OF MATERIALS, AND 7. NET COST CALCULATION verification sub-programs. 10. ACCESSORIES, SPARE PARTS AND TOOLS VERIFICATION SUB-OBJECTIVE: The objective of this section of the verification program is to ensure that accessories, spare parts and tools delivered with the good are taken into consideration when determining the RVC of the good, but disregarded when determining whether all the non-originating materials used in the production of the good undergo the applicable change in tariff classification. Done W/P by Ref a) Identify materials considered to be accessories, spare parts and tools by interviewing company personnel, reviewing the bill of materials, reviewing the owner's manual and by reviewing sales contracts. b) Exclude these materials in the procedures set out in B. TARIFF CLASSIFICATION verification program. c) Include the materials in the work done in the 4. ORIGINATING AND NON-ORIGINATING MATERIALS and 5. VALUE OF MATERIALS verification sub-programs. 11. INVENTORY MANAGEMENT SYSTEM VERIFICATION SUB-OBJECTIVE: The objective of this section of the verification program is to determine if an acceptable inventory management system is in place for fungible materials and/or goods that are commingled as well as for physically segregated originating and non-originating materials used in the production of the good and to identify the origin of goods of a specific shipment. If an acceptable inventory management system does not exist, all the fungible materials must be considered non-originating for the purposes of the RVC calculation. NOTE: The existence of fungible materials does not automatically require that this section of the program be used, as the exporter/producer may wish to treat the fungible material as non-originating or withdraw the certificate of origin for the good into which the fungible material is incorporated or used. VERIFICATION PROCEDURES a) Using the information from the 4. ORIGINATING AND NON-ORIGINATING MATERIALS verification sub-program obtain a listing of identified fungible materials. b) If the material is dual sourced and commingled, determine the impact on the origin of the good should no inventory management system exist - that is if the material is determined to be non-originating, evaluate the impact in terms of the tariff classification change requirement (consider the use of the de minimis provision) by reviewing the information obtained in the B. TARIFF CLASSIFICATION verification program as well as in terms of the RVC requirement by reviewing the information obtained in the 5. VALUE OF MATERIALS and 13. CALCULATION OF THE RVC PERCENTAGE verification sub-programs. If the impact is significant, proceed with the evaluation of the Inventory management System. c) If originating and non-originating fungible materials (goods) exist, determine if the company

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used one of the following inventory management systems outlined in the NAFTA Uniform Regulations - Schedule X to determine the materials originating status: Specific Identification FIFO LIFO Average Method d) Document the inventory management system from beginning to end, i.e., purchasing, receiving, storage of materials, removal from storage into production of goods, storage of goods and removal of goods from storage for shipment of goods. e) If Specific Identification was used, ensure that originating and non-originating fungible materials (goods) were physically segregated, or ensure the existence of an origin identifier, and that inventory management records are available to substantiate that originating materials (or goods) were in fact tracked. f) If FIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the origin of fungible materials (goods) first received was considered to be the origin of fungible materials (goods) first withdrawn. g) If LIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the origin of fungible materials (goods) last received was considered to be the origin of fungible materials (goods) first withdrawn. h) If the average method was used, ensure that the company applied the correct materials averaging ratio provisions (in the case of fungible goods, the ratio is applied to each shipment) i) Ensure that whichever method was chosen, including the averaging period in the case of the averaging method, it was used from the time it was chosen to the end of the fiscal year. Has the system changed since the inception of NAFTA? j) Determine that the company correctly identified the origin and/or supplier of materials (goods) in its opening inventory by: -Identifying, in the books of the producer, the latest receipts of fungible materials (goods) that add up to the amount of fungible materials (goods) in opening inventory at the time an inventory method is chosen. Determine the origin and/or supplier of materials (goods) that make up those receipts. Determine the origin of those fungible materials (goods) to be the origin of the fungible materials (goods) in opening inventory. k) Review the inventory management system by performing compliance tests of a sample of purchase transactions. The sample should include transactions involving materials (goods) that were fungible materials (goods) at the inception of NAFTA and materials (goods) that were identified as fungible since the inception (i.e. change in supplier). l) Is the inventory management system tested periodically? Obtain a description of periodic testing and evaluate its effectiveness. m) Test a sample of fungible material (goods) inventories by identifying the origin of opening inventory, adding receipts /adjustments of materials (goods) and deducting withdrawals/adjustments and compare your result to the company's records (can test a variety of periods, materials and production processes). n) Conclude on whether the exporter /producer has an acceptable inventory management system (refer to Schedule X of the Uniform Regulations) and how these materials (goods) should be accounted for in the determination of origin of the good subject to verification.

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o) Conclude on the need for an inventory management system and on whether: 1. the inventory management system used by the company meets all the requirements of Schedule X of the NAFTA Rules of Origin Regulations; or 2. the inventory management system used by the company requires improvement to meet the requirements of Schedule X of the NAFTA Rules of Origin Regulations - document the impact on the origin of the good under review. -document the weaknesses of the system; or 3. the inventory management system does not meet the requirements of Schedule X and the company can/cannot construct the necessary inventory management system - document the impact on the good under review. 12. ACCUMULATION VERIFICATION SUB-OBJECTIVE To ensure that the exporter/producer that chose to accumulate the production of one (or more) of his suppliers did so in accordance with Section 14 of the NAFTA Rules of Origin Regulations. General For purposes of determining whether a good is an originating good, an exporter or producer of a good may choose to accumulate the production of one or more producers, in the territory of one or more of the NAFTA countries, of materials that are incorporated into that good so that the production of the materials shall be considered to have been performed by that exporter or producer, provided that: - all non-originating materials used in the production of the good undergo an applicable tariff classification change, and the good satisfies any applicable RVC requirement, entirely in the territory of one or more of the Parties; and - the good satisfies all other rules of origin requirements. Requirements: -In order to accumulate the production of a material, i) where the good is subject to an RVC requirement, the producer of the good must have a certification as described above that is signed by the producer of the material, and ii) where an applicable change in tariff classification is applied to determine whether the good is an originating good, the producer of the good must have a statement signed by the producer of the material that states the tariff classification of all non-originating materials used by that producer in the production of that material and that the production of the material took place entirely in the territory of one or more of the NAFTA countries; - a producer of a good who chooses to accumulate is not required to accumulate the production of all materials that are incorporated into the good; 12. ACCUMULATION CONTINUED; - any information contained in the certification that concerns the value of materials or costs shall

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be in the same currency as the currency of the country in which the person who provided the statement is located. Statement needed Non-averaging costs from accumulated production Where a good is subject to a RVC requirement and an exporter or producer of the good has a statement signed by a producer of a material that is used in the production of the good that: a) states the net cost incurred and the value of non-originating materials used by the producer of the material in the production of that material; i) the net cost incurred by the producer of the good with respect to the material shall be the net cost incurred by the producer of the material plus, where not included in the net cost incurred by the producer of the material the costs referred to in Paragraphs 7(1)(c) through (e) of the NAFTA Rules of Origin Regulations (i.e. freight, insurance, packing, transport to location of producer, duties and taxes, customs brokerage fees); and ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of non-originating materials used by the producer of the material or b) states any amount, other than an amount that includes any of the value of non-originating materials, that is part of the net cost incurred by the producer of the material in the production of that material, i) the net cost incurred by the producer of the good with respect to the material shall be the value of the material determined in accordance with Subsection 7(1) of the NAFTA Rules of Origin Regulations (refer to 5. VALUE OF MATERIALS verification sub-program), and ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of the material, determined in accordance with Subsection 7(1), minus the amount stated in the statement. 12. ACCUMULATION CONTINUED; Averaging of Costs from Accumulated Production Where an exporter or producer of the good does not have a statement provided in (a) or (b) above, but does have a statement signed by a producer of a material that is used in the production of the good that: c) states the sum of the net costs incurred and the sum of the values of non-originating material used by the producer of the material in the production of that material and identical materials or similar materials, or any combination thereof, produced in a single plant by the producer of the material over a month or any consecutive three, six or twelve month period that falls within the fiscal year of the producer of the good, divided by the number of units of material with respect to which the statement is made, i) the net cost incurred by the producer of the good with respect to the material shall be the sum of the net costs incurred by the producer of the material with respect to that material and the identical materials or similar materials, divided by the number of units of materials, with respect to which the statement is made, plus, where not included in the net costs incurred by the producer of the material, the costs referred to in paragraphs 7(1)(c) through (e) of the NAFTA Rules of Origin Regulations, and ii) the value of non-originating materials used by the producer of the good with respect to the

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material shall be the sum of the values of non-originating materials used by the producer of the material with respect to that material and the identical materials or similar materials divided by the number of units of materials with respect to which the statement is made; or d) states any amount, other than an amount that includes any of the values of non-originating materials, that is part of the sum of the net costs incurred by the producer of the material in the production of that material and identical materials or similar materials, or any combination thereof, produced in a single plant by the producer of the material over a month or any consecutive three, six or twelve month period that falls within the fiscal year of the producer of the good, divided by the number of units of materials with respect to which the statement is made, i) the net cost incurred by the producer of the good with respect to the materials shall be the value of the material, determined in accordance with subsection 7(1), (Refer to 5. VALUE OF MATERIALS verification sub-program) and 12. ACCUMULATION CONTINUED; ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of the material, determined in accordance with subsection 7(1), minus the amount stated in the statement. VERIFICATION PROCEDURES a) Determine that only the net cost method has been used to calculate the RVC requirement where the producer has chosen to use accumulation. b) Review the information received from the producer, that has accumulated the production, to ensure that it is mathematically correct and ensure that it has been correctly included in the RVC calculation. c) Evaluate the quality of the statements and ensure that they contain all of the required information as stated above. When accumulated costs are averaged ensure that the statement includes the periods referred to in subsection 14(3) and verify if it falls within the fiscal year of the producer of the good. d) Ensure that the profit component of the material being accumulated is not included in the net cost information by examining the supplier information and by comparing the price paid by the producer to the cost information provided by the supplier. e) Use the applicable verification procedures in the following to evaluate the information received: B. TARIFF CLASSIFICATION verification program, and 4. ORIGINATING AND NON-ORIGINATING MATERIALS, 5. VALUE OF MATERIALS, 6. INTERMEDIATE MATERIALS, 7. NET COST CALCULATION, and 11. INVENTORY MANAGEMENT SYSTEMS verification sub-programs. NOTE: Consideration should be given to the use of supplier confirmations and visits to the supplier to verify the authenticity of the information reported to the exporter/producer. 13. CALCULATION OF THE REGIONAL VALUE CONTENT PERCENTAGE The objective of this final stage of the verification program is to actually calculate the regional value content percentage. a) Obtain the value of all materials to be included in the net cost of the good and the value of non-originating materials identified in the 5. VALUE OF MATERIALS verification sub-program.

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b) Add to the value of all materials to be included in the net cost, the value of other costs from the 7. NET COST CALCULATION verification sub-program to arrive at the net cost of the good. c) Subtract the value of all non-originating materials (including packaging, accessories, spare parts, tools) from the net cost of the good. d) Divide the difference by the net cost of the good. and e) Multiply the result by 100 and f) Conclude as to whether the good satisfies the NAFTA RVC requirement.

VERIFICATION PROGRAM E TRANSSHIPMENT VERIFICATION OBJECTIVE

TO VERIFY THAT THE ORIGINATING GOOD, BY REASON OF HAVING UNDERGONE PRODUCTION THAT SATISFIES THE REQUIREMENTS OF ARTICLE 401 OF THE NAFTA, (1) IS NOT WITHDRAWN FROM CUSTOM CONTROL OUTSIDE THE TERRITORIES OF THE NAFTA COUNTRIES; AND (2) DOES NOT UNDERGO FURTHER PRODUCTION OR ANY OTHER OPERATION OUTSIDE THE TERRITORIES OF THE PARTIES, OTHER THAN UNLOADING, RELOADING, OR ANY OTHER OPERATION NECESSARY TO PRESERVE IT IN GOOD CONDITION, SUCH AS INSPECTION, REMOVAL OF DUST THAT ACCUMULATES DURING SHIPMENT, VENTILATION, SPREADING OUT OR DRYING, CHILLING, REPLACING SALT, SULPHUR DIOXIDE OR OTHER AQUEOUS SOLUTIONS, REPLACING DAMAGED PACKING MATERIALS AND CONTAINERS AND REMOVAL OF UNITS OF THE GOOD THAT ARE SPOILED OR DAMAGED AND PRESENT A DANGER TO THE REMAINING UNITS OF THE GOOD, OR TO TRANSPORT THE GOOD TO THE TERRITORY OF THE PARTY. Note: The transshipment rule does not apply to a good of any of HTS subheading numbers 8541.10 through 8541.60 and 8542.11 through 8542.80 where any further production or other operation that the good undergoes outside the territories of the NAFTA countries does not result in a change in the tariff classification of the good to a subheading outside subheading numbers 8541.10 through 8542.90. VERIFICATION PROGRAM - TRANSSHIPMENT VERIFICATION PROCEDURES 1. Obtain and review copies of the invoices, bills of lading or waybills for the goods subject to verification for a sample period. Document the shipping route and all points of shipment and transshipment prior to the importation of the goods. Determine if the goods have been conveyed directly from the exporter on a through bill of lading to a consignee. Consider the need to gather information from the importer. VERIFICATION PROGRAM - TRANSSHIPMENT CONTINUED; VERIFICATION PROCEDURES 2. If the goods have not been shipped directly on a through bill of lading, they may be transshipped to an intermediary country, provided that: (a) the goods remain under Customs transit control in the intermediary country - obtain copies of customs control documents to substantiate this;

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(b) the goods undergo no operations in the intermediary country other than unloading, reloading, or operations necessary to preserve the good in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur dioxide or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the good that are spoiled, or damaged and present a danger to the remaining units of the good or any operation necessary to transport the good to a NAFTA country. (c) In order to substantiate (a) and (b) above request from the importer/exporter: -Customs receipt and release documents, exporter/producer shipment/production records, serial numbers of the goods, serial numbers of containers holding the goods, temporary import and corresponding export documentation, research material explaining the Non-NAFTA customs operations and procedures. 3. Determine whether any of the goods shipped were not produced by the producer. Consider the potential for fungible goods. If fungible goods are found, refer to INVENTORY MANAGEMENT SYSTEM verification sub-programs within RVC programs. From the transshipment information requested in procedure 2 of this program consider requesting that the exporter /producer develop a working paper which shows a reconciliation of shipments of goods exported by the producer and imported into the territory of the other NAFTA Party taking into account their quantities and values. 4. Conclude against the verification objective for transshipment. ANNEX 5 CANADA 5.1 Verification Period The verification period under review, for verifications conducted by the Origin Audits Unit, is typically a combination of the period for which the response to the Questionnaire was prepared, and if a significant amount of time has elapsed, the current fiscal period. Therefore, the goods produced in this entire period would be the subject of the origin verification. As such, the goods imported should be matched to the period in which the goods were produced. In those cases involving complex production processes or where there is a lapse of time between the production and the importation periods, appropriate measures would be taken to reasonably satisfy this requirement. 5.2 Coverage The scope of verifications conducted by the Origin Audits Unit, wherever possible, includes all models of goods manufactured by that exporter/producer that are exported to Canada and certified as originating. This often results in the identification of representative models where a product line is comprised of several, sometimes hundreds of models. Representativeness Many of the companies reviewed by the Origin Audits Unit manufacture several, sometimes hundreds of models of the same basic product. Often, the models are very similar with only a few minor differences. For example, the primary difference between each model could be the color of the paint. The concept of representativeness has been developed by the Origin Audits Unit to reduce on-site verification time by reviewing representative models, rather than all models manufactured and exported to Canada and certified as originating. The concept of representativeness involves allowing the exporter/producer to complete one questionnaire for a specific model within a product line and have that model represent the remaining products in the

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product line. This releases the company from the administrative burden of completing a response for every model in a product line, and implies that the origin decision for the representative model will be the decision for the other models in that product line. In order for the Department to consider a model as representative for a complete product line, the sourcing of materials and the manufacturing process must be similar to all other models within that line. The onus is on the company to prove that the selected model should represent the rest of the product line and this should be done as early in the verification process as possible, preferably in the initial planning stages of the verification. Should the results of the verification indicate that the models selected by the company are indeed representative of their respective lines and that these models qualify as originating in accordance with the NAFTA and the rules of origin contained therein, all models within those lines will be considered to qualify. Conversely, if the representative models do not satisfy the rules of origin, all models within these product lines will not qualify for a NAFTA preferential rate of duty. 5.3 Identification of Importers An important function during the initial stages of a verification is the identification and notification of all known Canadian importers. The current policy followed by the Origin Audits Unit is that when a referral for a verification is received, all Canadian companies who have imported goods from that exporter/producer are identified and notified in writing that the goods are under review. Once the file has been assigned to a verification team, it is the responsibility of the verification team to identify and notify all new importers who have begun to import from the exporter/producer during the course of the verification. 5.4 Assessment / Liquidation Period The assessment period for verifications, other than the auto industry, conducted by the Origin Audits Unit is based on the date the Canadian importers were first notified that the origin of goods imported from the exporter/producer is under review. The existing policy has been set by Senior Management in order to allow the Canadian importer, who has relied in good faith on a Certificate of Origin provided by the U.S. or Mexican exporter/producer, to prepare for the possibility of being assessed additional duties and taxes. Therefore, during the planning phase it is necessary to advise in writing all known importers that the goods are under review. With this in mind, the verification period for verifications conducted under the NAFTA will include the fiscal year of the exporter/producer during which the importer has been notified. The assessment period for the auto industry, where there is an election to average, will be based on the averaging period. 5.5 Recommended Verification Procedures

During the course of a verification, Revenue Canada also conducts procedures directed towards verifying the applicable tariff treatment in accordance with Annex 302.2 of the NAFTA. The verification program for tariff treatment is as follows: VERIFICATION PROGRAM - TARIFF

TREATMENT

VERIFICATION OBJECTIVE:

TO ENSURE THAT THE ORIGINATING HAVE BEEN IMPORTED INTO CANADA USING THE CORRECT TARIFF TREATMENT AS SET OUT IN ANNEX 302.2 OF THE NAFTA AND TO

ENSURE THAT NON-ORIGINATING GOODS ARE IMPORTED USING THE CORRECT NON-NAFTA TARIFF TREATMENT.

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VERIFICATION PROCEDURES: Originating Goods

1. Before doing the following steps, ensure that the good satisfies its applicable rule of origin (if not, go to step 6) and: a) for U.S. goods ensure i) all tariff classifications for Mexican materials have been determined; ii) all materials of Mexican origin have been identified while verifying the source of materials; iii) the value of Mexican materials has been determined while verifying the value of materials; and iv) where there is subsequent processing in Mexico, the transaction value of the good upon entry into Mexico or the VFD of the goods when imported into Canada has been determined. VERIFICATION PROGRAM - TARIFF TREATMENT (CONT) b) for Mexican goods ensure i) all tariff classifications for U.S. materials have been determined; ii) all materials of US origin have been determined while verifying the source of materials; iii) the value of U.S. materials has been determined while verifying the value of materials; and iv) where there is subsequent processing in the U.S., the transaction value of the good upon entry into the U.S. or the VFD of the goods when imported into Canada has been determined. VERIFICATION PROGRAM - TARIFF TREATMENT (CONT) Originating goods (produced in the U.S.) 2. a) Re-evaluate the origin of the good using its specific rule of origin considering all operations performed in and materials (note: this includes materials produced through subcontract work) obtained from Mexico as if they were performed in or obtained from a non-NAFTA country (removing costs associated with subsequent processing); and b) If there is subsequent processing done in Mexico, determine the value and ensure that the subsequent processing: i) has not increased the TV of the good by greater than 7%, calculated as: (TV of goods after processing in Mexico, less the TV of goods prior to processing in Mexico) divided by TV of goods prior to processing in Mexico, the quotient to be multiplied by 100, or ii) does not have a value which exceeds 6.5421% of the VFD of the goods when they are imported into Canada, calculated as: the value of processing in Mexico divided by the VFD of goods imported into Canada, the quotient to be multiplied by 100.

3. Based on the calculations performed in step 2, if a) the good is still originating and there is no subsequent processing in Mexico then USTT applies; b) the good is still originating and the subsequent processing in Mexico is under the limit then USTT applies; c) if the good is still originating and the subsequent processing in Mexico is above the limit i) determine if MT applies following the steps for originating goods in Mexico, if not ii) MUST applies; d) the good is non-originating and there is no subsequent processing in Mexico then MUST applies; e) the good is non-originating and subsequent processing in Mexico is under the limit then MUST applies; f) the good is non-originating and subsequent processing in Mexico is above the limit i) determine if MT applies following the steps for originating goods in Mexico, if not

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ii) MUST applies. Originating goods (produced in Mexico) 4 a) For those goods produced in Mexico that meet the NAFTA rules of origin, re-evaluate the origin of the good using its specific rule of origin considering all operations performed on and materials obtained from the U.S.(note: this includes materials produced through subcontract work) as if they were performed in or obtained from a non-NAFTA country (removing any costs associated with subsequent processing), and b) if there is subsequent processing done in the U.S. determine the value and ensure that the subsequent processing: (i) has not increased the TV of the good by more than 7% calculated as: (TV of the goods after processing in the U.S., less TV of the goods prior to processing in the U.S.) divided by the TV of the goods prior to processing in the U.S.,the quotient to be multiplied by 100. (ii) does not have a value which exceeds 6.5421% of the VFD of the goods when they are imported into Canada, calculated as: value of processing in U.S. divided by VFD of goods imported into Canada, the quotient to be multiplied by 100. 5. Based on the calculation performed in step 4, if a) there is no subsequent processing in the U.S., then MT applies; b) the subsequent processing in the US, is under the limit then MT applies; c) the subsequent processing in the U.S., is above the limit i) determine if USTT applies following the steps for originating goods in the U.S., if not ii) MUST applies; d) step 4(a) does not apply and there is no subsequent processing in the U.S., then MUST applies; e) step 4(a) does not apply and subsequent processing in the U.S., is under the limit then MUST applies; f) step 4(a) does not apply and subsequent processing in the U.S., is above the limit i) determine if USTT applies following the steps for originating goods in the U.S., if not ii) MUST applies. Non-Originating Goods The following steps should be done only when a good does not qualify as an originating good under the NAFTA rules of origin. Non-originating goods exported from the United States 6. For non-originating goods exported from the United States, the Most-Favored-Nation tariff treatment (MFN) is the appropriate tariff treatment. No further verification steps are required because it is the highest rate of duty that can be paid on these goods. Non-originating goods exported from Mexico 7. For goods entitled only to the GPT, ensure that the GPT conditions have been met (refer to step 9 for the conditions) 8. For goods entitled only to the MFN, no further verification work is required. 9. For non-originating goods exported from Mexico that are entitled to both the MFN or the GPT tariff treatments, choose the lower of the two. If GPT is the tariff chosen, the importer holds the

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responsibility to substantiate the claim for the GPT treatment. The importer requires proof of origin and a through bill of lading. Proof of origin can be either the Certificate of Origin Form A or a statement contained on the commercial invoice or CCI or separately, and must state the percentage of the ex-factory price which originates in GPT countries (> 60%). Consult the D-Memo for the verification of the GPT tariff treatment. NOTE: If the goods are agricultural, textile and apparel goods, there are special provisions for these goods which are explained in Memorandum D11-4-19.

10. Conclude on the verification objective. ANNEX 5 MEXICO

5.1 Verification Period The verification period under review, for verifications conducted by the Direction of International Audit (DIA), is the period in which the goods imported into Mexico were actually produced. The scope of the verification will be indicated by DIA in the origin verification questionnaire or in the intent to conduct a verification visit notification. For this period, the goods imported should be matched to the period in which the goods were produced. In those cases involving complex production processes or where there is a time lapse between the production and the importation periods, appropriate methods would be taken to reasonably satisfy this requirement. 5.2 Coverage The scope of verifications conducted by the DIA, wherever possible, includes all models of goods manufactured by that exporter/producer that are exported to Mexico and certified as originating. 5.3 Identification of Importers An important function during the initial stages of a verification is the identification and notification of all known importers. The current policy followed by the DIA is that when a referral for a verification is received, all known importers who have imported goods from the exporter or producer are requested to provide a copy of the certificate of origin issued by the exporter and/or producer of the imported goods, and copies of all documents related to the importation. Once the information is analyzed, the file is assigned to a verification team. 5.4Assessment/Liquidation period. The assessment period for verifications conducted by DIA commences on the date of importation into Mexico and finalizes on the date in which the duties and taxes owed are paid.

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CHAPTER 6 METHODOLOGY FOR RULE OF ORIGIN AUDITS (VERIFICATIONS) This Chapter reviews the verification process. This process has already been briefly described in Chapter 3, Section 3.1. This Chapter will analyze the process in the context of an overview of the operation of the verification function within the Customs Administration of the Party conducting the verification. The Sections of this Chapter describe the origin verification process, which can be highlighted as follows (refer to Exhibit A at the end of this Chapter for an overview of the verification process): 6.1 Types of verifications 6.2 Identification and Selection of Goods for Verification 6.3 Notification to Relevant Parties 6.4 Planning 6.5 On-Site Verification 6.6 Analysis of Information and Finalization 6.7 Written Determinations 6.8 Notifications and Reassessment/Liquidation For an outline of the verification process for the other parties, refer to the respective Annex 6, Sections 6.1 through 6.8 at the end of this Chapter. Due to the implementation of the NAFTA, the U.S. Customs Service has issued several Customs Directives. These Directives are included here to cover the topics of Chapter 6. Sections 6.1 through 6.6 will be covered by Customs Directive 3810-08, entitled Notification of Proposed Verification Visits Under the North American Free Trade Agreement (NAFTA). Sections 6.7 and 6.8 will be covered by Customs Directive 3810-010, entitled Issuance of Origin Determinations Under the North American Free Trade Agreement (NAFTA).

SECTIONS 6.1 through 6.6 CUSTOMS DIRECTIVE 3810-08

Notification of Proposed Verification Visit Under the NAFTA

SECTIONS 6.7 and 6.8

CUSTOMS DIRECTIVE 3810-10

Issuance of Origin Determinations Under the NAFTA

ANNEX 6 CANADA

6.1 Types of Verifications

Article 506, paragraph 1 of the NAFTA states that a verification may be conducted solely by means of: written questionnaires to an exporter or producer in the territory of another Party; visits to the premises of an exporter or producer in the territory of another Party to review the records and observe the facilities used in the production of the good; and such other procedure as the Parties may agree. The Uniform Regulations For The Interpretation, Application, and

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Administration of Chapters Three (National Treatment and Market Access For Goods) and Five (Customs Procedures) Of The North American Free Trade Agreement (Chapter 5 Regulations) state that these other procedures may involve: a verification letter that requests information from the exporter or producer of the good in the territory of another Party; or any other method of communication customarily used by the customs administration of the Party in conducting a verification. Verifications can be categorized by the preference criterion which is applicable to the good. That is, there are verifications of: goods identified as wholly obtained or produced in the territory; goods subject to a tariff change and/or a regional value content requirement; and goods identified as produced exclusively from originating materials. At this point, it may be beneficial to draw a distinction between verifications conducted by the regional offices and verifications conducted by the Origin Audits Unit. Verifications conducted by the regional offices usually involve cases where the goods are identified as goods wholly obtained or produced in the territory of one or more of Parties, where the goods are produced entirely from originating materials in the territory of one or more of the Parties, or where the claimed origin criterion applicable to the goods only involves a tariff change requirement, as outlined in Schedule 1 of the Rules of Origin Regulations. When these verifications require an on-site visit, the regional officer may observe the manufacturing or assembling process and review the relevant books and records to ascertain the origin of the materials used in the production of the goods and to gather other information required to determine the origin of the goods. Verifications conducted by the Origin Audits Unit usually involve a regional value content requirement and/or complex issues such as inventory management systems reviews and tracing for automotive goods. These verifications involve a detailed examination of all books and records pertaining to the origin, purchase, costs and value of, and payment for, the goods in question; all components and materials forming part of the goods in question; the inventory management control system; and, the process involved in the production of the goods in question to the point where they are ready for export to the territory of the other Party. A verification that does not result in a visit to the premises of the exporter or producer is referred to as a desk review. There exists a verification program which contains the recommended procedures for a desk review conducted by the Origin Audits Unit of a good subject to preference criteria B. The remainder of the Canadian sections in this chapter focuses on the methodology used by the Origin Audits Unit when conducting verifications at the premises of the exporter or producer. 6.2 Identification and Selection of Goods for Verification: Since, as explained in section 6.1, both the Regional Offices and the Origin Audits Unit initiate and conduct verifications, the identification and selection for verification would vary according to preference criteria being claimed. Reasons for selection include an obviously incorrect origin criteria identified on the Certificate of Origin, complex products with complex rules of origin, and products considered risky in terms of satisfying the rules of origin. As well, the Origin Audits Unit also responds to referrals for a thorough on-site verification of books and records, and often, in this situation preliminary verification work has already been completed. This is elaborated on below. However, when a company is initially selected for verification, origin questionnaires are used to assist Canada Customs in collecting the information required to verify that a good qualifies for the preferential tariff treatment. General questionnaires are currently being developed, however, specific questionnaires exist for the following criteria:

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- Goods Wholly Obtained or Produced Entirely in the Territory of One or More of the Parties; - Goods Produced Entirely in the Territory of One or More of the Parties Exclusively From Originating Materials; - Tariff Change; - Regional Value Content - Transaction Value Method; and - Regional Value Content - Net Cost Method. These questionnaires are sent to the exporter or producer following the procedures set out in the Chapter 5 Regulations, who is then asked to complete and return it to the Department. Based on a review of all of the information received, the officer will make a decision as to whether the product does or does not satisfy the rules of origin or whether a more in-depth review is required. The Origin Audits Unit receives referrals for verifications initiated by the regional offices in those situations where the rule of origin includes a Regional Value Content requirement, and there is a high risk associated with the case (such as a marginal Regional value content percentage). Other sources of referrals, on a less frequent basis, are industry complaints from Canadian companies questioning whether their competitors are entitled to the NAFTA preferential rates of duty; tariff analysis of high volume; high risk importation; and referrals from the Intelligence Section of the Enforcement Directorate questioning entitlement based on their separate analysis. Subsequent to a good being identified and a questionnaire being sent out by the Department a preliminary risk analysis of the company's response to a questionnaire is performed by the Origin Audits Unit to determine whether the good should be the subject of an on-site origin verification. For those situations in which an on-site origin verification is considered to be necessary, priorities are set to determine which verifications should be done first. The following criteria are relied upon to set the on-site verification priority: i. an industry complaint; ii. revenue risk to the Department; iii. interest expressed by Senior Management; iv. outstanding B2 refund claims attached to the request for verification from a regional office; v. availability of resources (auditors), including matching the more experienced auditor with the more complex assignment; vi. compliance history by companies to Customs requirements; vii. difficulties/complexities of the company/industry affected by verification; viii. length of time a referral has been awaiting verification action, and ix. other factors (such as providing guidance to field officers). Currently, industry complaints are given first priority due to the sensitivity usually involved and the level of responsiveness that is expected. Other verifications are ranked according to ii., iii., iv., and v. above. Factors vi. and vii. will impact on the ranking but to date have not significantly affected the priorities. 6.3 Notification to Relevant Parties Once it has been determined that a particular exporter/producer will be subject to an on-site origin verification, all relevant parties are identified and notified that an origin verification will be conducted with respect to the specific goods under review. The parties subject to notification are as follows: i. Exporter/Producer: The exporter/producer is initially contacted by telephone to arrange for an on-site visit and to ensure co-operation with regard to access to the relevant records, a guided plant tour upon the verification team's arrival and the availability of company officials to meet the auditors' requests during the course of the verification.

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The exporter or producer will be sent a notice of the Department's intention to conduct a verification, by certified mail. Written consent must be given by the exporter or producer within 30 days of receipt of the notification. If the written consent is not received by Revenue Canada officials, a written determination with a notice of intent to deny preferential tariff treatment to the Canadian importers will be sent to the exporter or producer, allowing the exporter or producer 30 days in which to provide consent for a verification to the Department before denying preferential tariff treatment. ii. Importers: All known Canadian importers who have imported goods from the exporter or producer are identified and notified in writing that the origin of the goods is under review. Once the verification is completed, all known importers, including those who have begun to import from the exporter or producer during the course of the verification, will also be notified of the verification results. It should be noted that, generally the reassessment period commences with the date the importers are notified should it be determined that the goods under review do not qualify for the preferential rate of duty. iii. Regional Customs Offices The regional offices are informed of the upcoming review of certain products produced by the exporter/producer in an attempt to avoid further questionnaires from being sent to the exporter/producer during the course of the verification. Regional offices are provided with a complete commodity description which includes a description of the product and the tariff classification of the product to the six-digit level. iv. Other Interested Parties A notification by way of facsimile or certified mail is sent to representatives of Mexican or U.S. Customs prior to sending the notifications to the exporter/producer, importers and Customs regional offices. When a desk review is being performed, the exporter/producer, as well as the importers, are notified of the initiation of the verification. 6.4 Planning The planning stage includes the following activities: i. Analysis of the response to the Regional Value Content Questionnaire ii. Collection of additional information from the exporter/producer that would assist in the preparation for the on-site visit to ensure efficient use of the time spent at the company's location. A request for additional information may require completion of the Statement of Cost Accounting Practices Questionnaire. iii. Collection of other customs information from Departmental resources (ie. Facilities Information Retrieval Management System (FIRM), Technical Reference System (TRS)), such as the volume and value of importations affected by the verification. iv. Collection of information from library reference material on the industry sector to identify the significance of the verification. v. Collection of information from the Intelligence Section, Investigations Section and the Valuations Division with respect to the product and/or exporter/producer under review. vi. An Assignment Planning Memorandum is developed for each exporter/producer verification. The purpose of this memorandum is to have a written plan with respect to the performance of the verification, which is approved by management and available to each member of the team. This also provides the audit manager with the background information required when providing

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assistance to the team, especially during the on-site visit. It is preferable to management that the structure of the planning memorandum remains consistent from one verification to another, however, the content for each planning memorandum will vary with the different types of products/industries under review, the complexity of the issues, and the verification concerns. The typical planning memorandum contains the following sections: i. Verification Objectives ii. Scope of the Verification - (period and products/use of representative models) iii. Team Members iv. Assignment of Responsibilities - (referenced to verification programs) v. Milestones - (verification planning dates, verification visit dates, file completion, evaluation and report target dates, total estimated hours for completion) vi. Reasons for Verification Selection - (applicable rule of origin, regional value content submission, duty differential, revenue risk) vii. Overview of the Company Being Reviewed - (general information, primary contact, plant statistics, annual sales to Canada, subsidiaries and/or related companies, fiscal year, cost accounting method) viii. Verification Concerns - (sensitivity of eligibility, intermediate materials, fungible materials, related suppliers, etc.,) ix. Conduct of the Verification - (guidelines, responsibilities, interviews, working papers standards, disposition of verification findings) x. Assessment Process - (responsibility, assessment period) xi. Specific References for the Verification - (NAFTA, Departmental Memorandums, Customs Act) xii. Detailed Verification Programs - non-qualifying operations, tariff classification, Regional Value Content (transaction value method or net cost method), transshipment, and tariff treatment. xiii. Agenda of items to be discussed in the opening interview. The verification programs document the specific verification procedures to be undertaken in order to fulfil the verification objectives. There is a verification program for each major part of the verification. The verification program(s) for each verification are developed incorporating the recommended verification procedures (Refer to Chapter 5, section 5.5 for the detail on the Recommended Verification Procedures). The planning phase requires approximately three weeks to complete. Those procedures for verifications which remain a desk review will follow the verification program for a desk review. A desk review may also require a request for additional information from the exporter / producer. 6.5 On-site Verification This phase of the verification process includes: - An opening interview with company officials to explain the objectives of the verification; - The execution of the verification procedures, as documented in the Assignment Planning Memorandum prepared in the planning stages of the verification; - The preparation of working papers in accordance with verification standards; and - An exit interview with company officials to discuss verification findings and their impact on the NAFTA eligibility of the product shipped to Canada. Specifically, during the on-site visit, the team will conduct tests and procedures considered necessary to determine that: i. all parts originating in a non-NAFTA country have been identified; ii. all parts originating in a non-NAFTA country have been sufficiently transformed during

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processing so as to undergo the necessary tariff change as required by the specific rule of origin; iii. the value of materials have been calculated in accordance with the NAFTA; iv. the imported good into Canada does not undergo further production or any other operation outside the territories of the other parties, other than unloading, reloading, or any other operation necessary to preserve it in good condition or to transport the good to Canada. v. the Regional Value Content requirement using either the net cost method or the transaction value method has been met. vi. the proper NAFTA tariff treatment has been used for the imported originating goods. Examples of tests and procedures considered necessary would be: a.) interviews with company personnel and external auditors; b.) walkthroughs of the accounting, purchasing and other systems; c.) evaluation of internal controls; d.) system testing; e.) reconciliation of the response to the Regional Value Content Questionnaire to the documents such as the General Ledger; f.) obtaining source (supporting) documents such as invoices, supplier certifications etc.; g.) conducting verifications of suppliers of materials. The Origin Audit Unit has developed supplier confirmation questionnaires to be used to verify the origin of a material. Three types of supplier confirmation questionnaires have been developed for different types of goods under review: the non-automotive good; the light-duty automotive good; and the heavy-duty automotive good. A supplier involved in the supplier confirmation process will receive a notification as to whether or not the material under review is an originating material. If more detailed information is required, a specific NAFTA origin questionnaire may be forwarded to the supplier. As well, an on-site visit to the supplier's premises may be required. A more detailed supplier verification will result in a more detailed written determination. All supplier verifications are conducted following the procedures set out in the Chapter 5 Regulations. It is important to note that this type of exporter/producer verification is transaction-based as opposed to system-based and therefore a complete and thorough evaluation of the internal control system is not performed. An example of the evaluation made of internal controls is documented in a standard checklist called the Review of Policies, Procedures and Internal Controls Relative to Accounting and Management Systems. Depending on the complexity of the verification, the on-site verification can require two to ten weeks at the premises of the exporter/producer. 6.6 Analysis of Information and Finalization The finalization stage of both desk reviews and on-site verifications involve the review of the verification file and the written determination by the Audit Manager and/or Senior Management for quality control reasons. A Verification File Completion Checklist exists to assist the team in the finalization of the file. 6.7 Written Determinations The Origin Audits Unit issues two types of written determinations: the initial written determination, and the final written determination. The preparation of the initial written determination associated with an on-site verification takes place upon the team's return to the office and includes the organization of the verification file in addition to the writing of the determination. An initial written determination is also prepared for verifications conducted by desk review. The purpose of the initial written determination is to formally explain the verification findings to the exporter/producer and to conclude our verification as to the eligibility of the good for a NAFTA preferential tariff treatment. If the goods do not

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qualify, this report will serve as a notice of the intent to deny the preferential tariff treatment. This notice allows 30 days to the exporter/producer to provide in writing comments or additional information relevant to the origin verification. Once the 30 days allowed in the initial written determination have expired the final written determination is sent to exporter/producer. If the goods are found to be non-originating, the final written determination serves as a re-determination notice of the origin of the goods. If the goods are determined to be eligible for a NAFTA preferential rate of duty, only one written determination will be prepared. 6.8 Notifications and Re-assessments / Re-Liquidations Once the final written determination is sent to the exporter/producer, notifications of the verification results are sent to the Canadian importers and the Canadian customs regional offices. Attached to the letters sent to the importers and customs regional offices are schedules which calculate the re-assessment applicable to each importer. Currently, the customs regional offices prepare the Detailed Adjustment Statements to invoice the importers for additional duties owing and the corresponding notice of denial to be sent to the exporter.

MEXICO

ANNEX 6 6.1. Types of Verifications In accordance with NAFTA, the Direction of International Audit (DIA) may conduct a verification of origin with respect to the good that is imported into its territory by means of a verification questionnaire or verification visit to the premises of the exporter or producer. Verifications conducted by the DIA involve cases where the goods are identified as goods wholly obtained or produced in the territory of one or more of Parties to NAFTA, where the goods are produced entirely from originating materials in the territory of one or more of the Parties to the NAFTA, or where the claimed origin criterion applicable to the goods only involves a tariff change requirement, as outlined in Annex 401. When these verifications require an on-site visit, the DIA may observe the manufacturing or assembling process and review the relevant books and records to ascertain the origin of the materials used in the production of the goods and to gather other information required to determine the origin of the goods. Verifications conducted by the DIA also involve a regional value content requirement and/or complex issues such as inventory management systems reviews and tracing for automotive goods. These verifications involve a detailed examination of all books and records pertaining to the origin, purchase, costs and value of, and payment for, the goods in question; all components and materials forming part of the goods in question; the inventory management control system; and, the process involved in the production of the goods in question to the point where they are ready for export to the territory of Mexico. 6.2. Identification and Selection of Goods for Verification: The DIA receives referrals for verifications from different sources such as industry complaints questioning whether some importers are entitled to the NAFTA preferential rates of duty, tariff economic trend analysis of high volume, high risk importations (i.e. products subject to quotas or antidumping or countervailing quotas, etc.), complex rule of origin goods, and referrals from other Government ministries based on their separate analysis. Currently, most of the verifications which are conducted by the DIA are self initiated and are identified through its own targeting project

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system. Subsequent to a good being identified, a preliminary risk analysis of the importer is performed by the DIA to determine whether the good should be the subject of an on-site origin verification or if a verification through questionnaire is needed. For those situations in which an on-site origin verification is considered to be necessary, priorities are set to determine which verifications should be performed first. The following criteria are relied upon to set the on-site verification priority: i. an industry complaint; ii. revenue risk to the Department; iii results of the analysis of the targeting project system; iv. availability of resources (auditors), including matching the more experienced auditor with the more complex assignment; v. compliance history by importers or exporters to DIA requirements of information; vi. difficulties/complexities of the company/industry affected by verification; vii. length of time a referral has been awaiting verification action, and viii.other factors 6.3.Notification to Relevant Parties Once it has been determined that a particular good will be subject to an origin verification, all relevant parties are identified and notified that an origin verification will be conducted with respect to the specific goods under review. The parties subject to notification are as follows: (Refer to Appendix J for examples of the notifications). I. Exporter/Producer: The exporter/producer is initially contacted by means of a notice of intention to conduct a verification sent by certified mail, in order to arrange for an on-site visit and to ensure co-operation with regard to access to the relevant records, a guided plant tour upon the verification team's arrival and the availability of company officials to meet the auditors' requests during the course of the verification. The exporter or producer will be sent a notice of the DIA's intention to conduct a verification, by certified mail. Written consent must be given by the exporter or producer within 30 days upon receipt of the notification. If the written consent is not received by DIA officials, a written determination with a notice of intent to deny preferential tariff treatment to the Mexican importers will be sent to the exporter or producer, allowing the exporter or producer to provide consent for a verification to the DIA before denying preferential tariff treatment. When the origin verification is conducted by means of an origin verification questionnaire, the first notification of intention to conduct such verification will be the origin verification questionnaire. ii.Importers All known Mexican importers who have imported goods from the exporter or producer are identified and requested to provide a copy of the certificate of origin. By this mean the importer is notified that the goods imported are subject to origin review. iii.Other Interested Parties A notification by way of facsimile or certified mail is sent to representatives of Canadian and U.S. Customs Services, 5 days prior to sending the notifications to the exporter/producer.

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6.4 Planning The planning stage includes the following activities: i. Analysis of the response to an origin verification questionnaire (if sent). ii.Collection of additional information from the exporter/producer that would assist in the preparation for the on-site visit, in order to ensure efficient use of the time spent at the company's premises. iii.Collection of other customs information from Departmental resources, such as the volume and value of importations affected by the verification. iv.Collection of technical information from reference material on the industry sector. v.Collection of information from other divisions within the Ministry of Finance with respect to the product and/or exporter/producer under review. vi.An Assignment Planning Memorandum is developed for each exporter/producer verification. The purpose of this memorandum is to have a written verification, which is approved by management and available to each member of the team. This also provides all audit team members with the background information required while conducting the on-site visit. The content for each planning memorandum will vary depending upon the different types of goods under review, the complexity of the specific rule of origin applicable to the goods subject to verification and addresses all verification concerns and the application of verification procedures. The typical planning memorandum contains the following sections (Refer to Appendix L): i. Verification Objectives ii.Scope of the Verification (period and goods) iii.Team Members iv.Assignment of areas under review to verification team members (referenced to verification programs) v.Schedules (verification planning dates, verification visit dates, file completion, evaluation and report target dates) vi.Reasons for Verification Selection (applicable rule of origin, revenue risk, etc.) vii.Overview of the Company Being Reviewed - (general information, primary contact, subsidiaries and/or related companies, fiscal year, cost accounting method) vii.Verification Concerns - (accumulation, intermediate materials designation, fungible materials, related suppliers, etc.,) ix.Guidelines, responsibilities, interviews to be made, working papers standards x.Specific References for the Verification - (NAFTA, Departmental Memorandums, Internal legislation) xi.Detailed Verification Programs - non-qualifying operations, tariff classification, Regional Value Content (transaction value method or net cost method), transshipment, and tariff treatment. xii.Agenda of items to be discussed in the opening interview. The verification programs document the specific verification procedures to be undertaken in order to fulfill the verification objectives. The verification program(s) for each verification are developed incorporating the recommended minimum verification procedures (Refer to Chapter 5, section 5.5 for detail on the Recommended Verification Procedures). Depending upon the circumstances and the verification findings, in some instances, the verification procedures included in the verification programs may vary. All changes to the verification procedures developed during the planning phase of the verification must be indicated in the working papers, stating the reasons that originated such changes. 6.5On-site Verification This phase of the verification process includes: - An opening interview with company officials to explain the objectives of the verification (refer to

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Appendix L); -The execution of the verification procedures, as documented in the Assignment Planning Memorandum prepared in the planning stages of the verification; -The preparation of working papers in accordance with verification standards; and -An exit interview with company officials to discuss verification findings and their impact on the NAFTA eligibility of the product imported to Mexico. Specifically, during the on-site visit, the team will conduct tests and procedures considered necessary to determine that: i.all materials originating in a non-NAFTA country have been identified; ii.all materials originating in a non-NAFTA country have been sufficiently transformed during processing so as to undergo the necessary tariff change as required by the specific rule of origin; iii.the value of materials have been calculated in accordance with the NAFTA; iv.the imported good into Mexico does not undergo further production or any other operation outside the territories of the other parties, other than unloading, reloading, or any other operation necessary to preserve it in good condition or to transport the good to Mexico v.the Regional Value Content requirement using either the net cost method or the transaction value method has been met. vi.the proper NAFTA tariff treatment has been used for the imported originating goods. Examples of tests and procedures considered necessary would be: a) interviews with company personnel and external auditors; b)walkthroughs of the accounting, purchasing and other systems; c)evaluation of internal controls; d)system testing; e)when applicable reconciliation of the response to the Regional Value Content Questionnaire to source documents such as the General Ledger; and f)obtaining external confirmations from suppliers. Depending on the complexity of the verification, the on-site verification can require two to ten weeks at the premises of the exporter/producer. 6.6 Analysis of the information and finalization The finalization stage involves the review of the verification file and the written determination by the Audit Manager and/or Senior Management for quality control reasons. 6.7 Written Determinations For the initial written determination for each party please refer to Appendix A. The preparation of the initial written determination takes place after the verification team left the auditee's premises and includes the organization of the verification file. The initial written determination's purpose is to formally explain the verification findings to the exporter/producer and to conclude the verification as to the eligibility of the good. If the goods do not qualify this report will serve as a notice of the intent to deny preferential tariff treatment. This notice allows 30 calendar days to the exporter/producer to provide in writing comments or additional information regarding the eligibility of the good. (Refer to Appendix N) Once the 30 days allowed in the initial written determination have expired the final written determination is sent to exporter/producer. If the goods are found to be non-originating, the final written determination serves as a re-determination notice of the origin of the goods. (Refer to Appendix N)

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6.8 Notifications and Re-assessments/Liquidation Once the final written determination is notified to the exporter/producer, notifications of the verification results are sent to the Mexican importers in the terms stated in article 48 of the Fiscal Federal Code.. Appendix N contains samples of initial and final written determination and Appendix O contains a sample notification of the verification results used to notify the importers. The importer has a 15 labor day period in which can provide in writing any additional comment or information regarding the content of the final origin determination. Once the 15 labor day period is expired, or the importer does not demonstrate that the good subject to verification qualifies, a reassessment letter is notified to the importer detailing the duties owed, indexation surcharges, etc.

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CHAPTER 7 NAFTA WORKING GROUPS

7.1 Article 513 of the North American Free Trade Agreement

The North American Free Trade Agreement, in Article 513, provides for the establishment of two committees: 1) a Working Group on Rules of Origin; and 2) a Customs Subgroup. The Audit Group reports directly to the Customs Subgroup and is further detailed in section 7.4 of this Chapter. Sections 7.2 and 7.3 explain the activities of the Working Group on Rules of Origin and the Customs Subgroup respectively.

7.2 Working Group on Rules of Origin

The Working Group is charged with facilitating cooperation and considering modifications to the NAFTA on rules of origin, NAFTA Rules of Origin Regulations, drawback, and country of origin markings. It will meet at least four times a year to exchange information and ensure uniform and consistent interpretation and application. The group has 30 days to reach agreement on issues passed to it by the Customs Subgroup. Representatives of each Party attending the Customs Subgroup meeting, (i.e., Customs representative) will attend the Working Group meeting.

7.3 Customs Subgroup

The Customs Subgroup reports to the Working Group on Rules of Origin and is charged with ensuring that the cooperative process continues. The Customs Subgroup will review, update, and monitor how the Customs Administrations are going about administering the NAFTA. It will also meet at least four times a year, and on the request of any Party, and will endeavor to agree on:

i) the uniform interpretation, application and administration of various articles of Chapter 3, all of Chapters 4 and 5, the Marking Rules and the NAFTA Rules of Origin Regulations;

ii) tariff classification and valuation matters relating to determination of origin;

iii) equivalent procedures and criteria for the request, approval, modification, revocation and implementation of advance rulings;

iv) revisions to the Certificate of Origin;

v) any other matter referred to it by a Party, the Working Group or the Committee on Trade in Goods; and,

vi) other Customs related matters arising from the NAFTA.

Matters that cannot be resolved within 60 days at this level must be referred to the Working Group on Rules of Origin.

The Subgroup will also be responsible for the exchange of advance rulings and origin determinations.

7.4 Audit Group

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The Audit Group reports directly to the Customs Subgroup, and is responsible for assisting the Customs Subgroup by discussing and developing technical papers. It will meet at least four times per year, and in addition to being a technical arm of the Customs Subgroup, the Audit Group will also be specifically responsible for:

i) developing and improving this Audit (Verification) Manual and recommended verification procedures;

ii) developing and improving the verification questionnaires, forms and brochures;

iii) resolving complex issues which were referred by the Customs Subgroup.

The minutes of the Audit Group meeting will be submitted to the respective members of the Customs Subgroup on a regular and timely basis.

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LIST OF APPENDICES U.S. NAFTA VERIFICATION MANUAL

A Certificate of Origin: CF-434 B General Questionnaire CF- 446 C Election to Average Form for Vehicles D Sample Letter Proposing NAFTA Verification Visit(Attachment B to CD 3810-008 dated 04/20/94) E Sample Notification of NAFTA Verification of Goods to Known Importers of Record F Review of Policies, Procedures, and Internal Controls Checklist G Final Written Determinations- Positive and Negative Attachments A & B to CD 3810-010 dated 07/27/94) H Sample Notification of Verification Results to Known Importers (1) Goods met NAFTA rules of origin requirements (2) Goods did not meet NAFTA rules of origin requirements I Supplier Confirmation Letters (1) for non-automotive parts suppliers (2) for automotive parts suppliers J Supplier Verification Notification (DRAFT) K Regulatory Audit Final Audit Reports

SOP RAD1-007-97 dated May 1, 1997

List of Appendices, page 2

AUDIT PROGRAMS - (Tri-lateral)

L Goods Wholly Obtained or Produced Entirely in the Territory of One or more of the Parties M Goods Produced entirely in the Territory of One or More of the Parties Exclusively from Originating Materials N Preference Criteria D O Light Duty Automotive Goods - Averaged P Light Duty Automotive Goods- Non-Averaged Q Heavy Duty Automotive Goods - Averaged R Heavy Duty Automotive Goods - Non-Averaged

EXHIBITS

A. Verification (Audit) Process - Flow Chart

APPENDIX A

NORTH AMERICAN FREE TRADE AGREEMENT

CERTIFICATE OF ORIGIN

CUSTOMS FORM 434

APPENDIX B

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NAFTA

GENERAL QUESTIONNAIRE

CUSTOMS FORM 446

APPENDIX C

NAFTA

UNITED STATES ELECTION TO AVERAGE FORM

CF - 447

APPENDIX D

NAFTA VERIFICATION MANUAL

This appendix is a sample of the letter to be sent to the exporter/producer regarding the initiation of a NAFTA verification visit. This sample had been previously distributed as Attachment B to Customs Directive 099 3810-008 dated April 20, 1994, entitled Notification of Proposed Verification Visits Under the North American Free Trade Agreement (NAFTA).

APPENDIX E


SAMPLE NOTIFICATION OF PROPOSED NAFTA VERIFICATION OF GOODS

TO KNOWN IMPORTERS OF RECORD

DATE

NAME OF IMPORTER OF RECORD

ADDRESS OF IMPORTER OF RECORD

To Whom It May Concern:

According to our records, you are listed as an importer of record for goods imported from (NAME OF EXPORTER/PRODUCER). Please be advised that the origin of (TYPE OF PRODUCTS) imported from (NAME OF EXPORTER/PRODUCER) is currently under review by this office. We are requesting that you provide copies of Certificate(s) of Origin relating to all entries for the merchandise above shipped from this exporter/producer since (TIME PERIOD UNDER REVIEW) for which duty free treatment under NAFTA was claimed. Importations of such goods may be subject to full duty if the goods are determined not to be entitled to the preferential rate of duty under the North American Free Trade Agreement. Following this review, when a determination with respect to the eligibility of such goods is made, you will be notified. Please provide the Certificate(s) of Origin no later than 30 days from the date of this letter to: (NAME OF CUSTOMS OFFICER AND MAILING ADDRESS). Should you have

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any questions regarding this matter, you may contact (NAME OF CUSTOMS OFFICER) at (TELEPHONE NUMBER OF CUSTOMS OFFICER).

Sincerely, Field Director Regulatory Audit or Port Director

APPENDIX F


REVIEW OF POLICIES, PROCEDURES AND INTERNAL CONTROLS CHECKLIST RELATIVE TO

ACCOUNTING AND MANAGEMENT SYSTEMS

EXPORTER/PRODUCER AUDIT PERIOD

Purpose

The Policies, Procedures and Internal Controls Checklist can be used to assist with the evaluation of policies, procedures and the control environment in order to understand their effects on the accounting and management systems of the organization. This checklist is relevant only to a NAFTA Origin Verification. Ensure that discussions concerning controls are directed to key personnel which have the appropriate knowledge of the internal controls. The answers to the questions below are necessarily subjective and require considerable judgement. Definitive, reportable answers are not expected at this stage in the audit. Rather, the checklist is intended to help develop the audit approach by: evaluating the adequacy of controls, and the extent of reliance placed on these controls for compliance to the NAFTA rules of origin.

Yes / No Comments

General

1. Has Regulatory Audit previously reviewed the internal control systems including financial management, budget preparation and control, accounting and control of expenditures, standard costing, operating reports, and computerization?

2. Has there been any significant changes in operations (including accounting and financial systems) implemented during the period under review?

(A) CONTROL

Organization

3. Briefly describe the organization structure. 4. Obtain a current organization chart. 5. Are there job descriptions for all personnel? 6. Are the instructions or compliance requirements clear, understood and well delegated for: - purchase, approval for payment and payment?

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- obtaining and reviewing supplier certifications? - completion of the NAFTA certificate of origin and any related customs documentation? Provide a brief description of the company policies for the above. 7. Are the lines of authority, responsibility and control between the entity and common service agencies and/or outside service centers (i.e. suppliers, subcontractors, etc.) clearly defined? 8. With respect to related parties: - obtain a list of related parties; - obtain a list of related party transactions related to the goods in question; - obtain a list and details of any related party royalty agreements. 9. Is there an effective internal audit department which reviews policies, procedures, controls and plant operations? - obtain the most recent internal audit department report on policies procedures and controls. 10. Does the external auditor perform on-site audit activity (i.e. a financial and/or compliance audit) on a periodic basis? - obtain the most recent external audit report on policies, procedures and controls. 11. Were any activities performed (evaluation of policies, procedures and internal controls) by the trade consultants, or lawyers, or accountants who were involved in the calculation of the RVC percentage?

System Design, Maintenance and Supervision

12. Obtain available documentation on accounting systems and procedures and controls to ensure the policies are consistent with prudent business practices and cost accounting standards? 13. Is there a uniform systems development policy which is followed for all new programs either purchased or developed with respect to: - budgeting; - accumulating costs; - engineering and development of goods being produced; and - reporting costs? 14. Does a uniform policy regarding the procedures required to change existing programs exist with respect to: - budgeting; - accumulating costs; - engineering and development of goods being produced; and - reporting costs? 15. Does each stage of development or change require active participation of users (i.e. production line management)? 16. Does testing of Ad Hoc reports (i.e., produced by spreadsheet, report generator or EDP department) occur where they are relied on? 17. Do standards require uniform documentation for each of the following applications that control the financial aspects of operations: - system documentation; - operating instructions; - user documentation; and - acceptance testing for both automated and manual tasks or functions? If so, is documentation available for our review? 18. Do financial reports provide adequate information for appropriate NAFTA certification management and control? For example, - review of standard cost of products; - review of origin of goods at year end when averaging has been used to certify goods; - review of usage and variances and how they have affected the origin of the goods certified as originating;

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- origin of the materials being purchased; and - review when there is a change in suppliers and sourcing of materials.

System Monitoring

19. Are the following methods used to monitor the reliability of financial data: - comparisons to nonfinancial reports (i.e., to data prepared outside the accounting department)? - preparation of capital and operating budgets? - use of variance reports to control the operations? - comparison of interim financial statements to budgets, variance reports, etc? 20. Can product costs used to calculate the RVC percentage be traced to books of accounts? 21. Are cost systems integrated and/or reconciled to financial records such that each type of cost is allocated only once and on only one basis to a product cost or cost objective? 22. Does the internal audit function review: - existing manual accounting systems? - existing EDP accounting systems? - new accounting systems (manual and EDP) at critical points in development?

Reporting

23. To ensure the accuracy of financial data, are interim financial statements: - prepared regularly? - prepared on a timely basis? - prepared in sufficient detail? - prepared using proper cut-off procedures? - reconciled to the accounting records? 24. Is the cost accounting system capable of producing actual unit or job lot costs, and/or are operations or product costs reported to the profit center level? 25. Are burden, center, or departmental costs developed providing segregation for activities such as fabrication, assembly, repair, overhead, research and development, sales and marketing functions, shipping activities, etc.? 26. Determine the procedures followed with respect to charges from corporate office or related companies pertaining to such costs as direct material, royalties, selling activities, non-allowable interest and shipping activities (are these charges material?). (B) PROTECTION OF ASSETS AND RECORDS 27. Does the entity have a record retention program or policy (it should assure that records are retained at least five years as required by the NAFTA)? (C) EVALUATION OF COST ACCOUNTING SYSTEM

28. Determine the type of cost accounting system utilized by the manufacturer. A written outline of the accounting system, prepared by the exporter/producer, would be useful. 29. Ensure that indirect costs (i.e. overhead) are accumulated into a cost pool that has been allocated in accordance with Schedule VII of the NAFTA Rules of Origin Regulations. 30. Ensure that the cost allocation method selected by the exporter/producer has been used consistently throughout the exporter's/producer's fiscal year. 31. Ensure that any variances (i.e. material price and quantity variances; and labor rate and time variances) have been appropriately disposed of within the cost accounting system and are reflected in the costs used to calculate the regional value content percentage (considering the materiality of the variances and the effect on the final result). 32. Ensure that the company has identified the integration of the cost accounting system with the financial accounting system. 33. Determine whether the practices for setting and revising of standards, use of standard costs,

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and disposition of variances is stated in writing and consistently followed. 34. Compare product unit selling price to unit cost per the regional value content (net cost method) calculation (and unit value for duty claimed for U. S. Customs purposes) ensuring that: - margin is consistent with margin reported for divisional operations and/or financial statements; - margin is sufficient to provide for a reasonable allocation of additional product related costs such as the \excluded costs, with the balance of this margin attributable as a normal profit levels; (D) EFFECT ON AUDITING PROCEDURES

In your judgement, if any of the answers on this worksheet require special audit attention (either modification in the nature, timing, and extent of procedures or a heightened sense of awareness while performing the procedures), amend audit programs accordingly.

APPENDIX G


This appendix includes two sample origin determinations. Both are completed on a Customs Form 29. The first CF-29 is a sample of a positive determination, and the second CF-29 is a sample of a negative determination, along with the notice of intent to deny. The origin determination (CF-29) would be sent to the exporter/producer whose goods were subject to a NAFTA verification. These samples had been previously distributed as Attachments A and B to Customs Directive 099 3810-010 dated July 27, 1994, entitled Issuance of Origin Determinations Under the North American Free Trade Agreement (NAFTA).

APPENDIX H(1)


SAMPLE NOTIFICATION OF VERIFICATION RESULTS TO KNOWN IMPORTERS

GOODS MET NAFTA RULE OF ORIGIN REQUIREMENTS

DATE

CERTIFIED MAIL NAME OF IMPORTER OF RECORD ADDRESS OF IMPORTER OF RECORD

To Whom It May Concern:

As importer of record, and further to our letter dated (DATE OF INITIAL NOTIFICATION TO IMPORTER OF RECORD OF THE REVIEW), please be advised that the verification of origin of (TYPE OF PRODUCTS) imported from (NAME OF EXPORTER/PRODUCER) is now complete. The purpose of this verification was to determine whether the (TYPE OF PRODUCTS) imported into the United States during (TIME PERIOD), met the rule of origin requirement according to the North American Free Trade Agreement (NAFTA) and were entitled to the preferential rate of duty. It was concluded, as a result of our verification, that the (TYPE OF PRODUCTS) imported from (NAME OF EXPORTER/PRODUCER) during the period (TIME PERIOD UNDER REVIEW) met the NAFTA rule of origin requirements. Should you have any questions regarding this matter, you may contact (NAME OF CUSTOMS OFFICER) at (TELEPHONE NUMBER OF CUSTOMS OFFICER).

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APPENDIX H (2)


SAMPLE NOTIFICATION OF VERIFICATION RESULTS TO KNOWN IMPORTERS

GOODS DID NOT MEET NAFTA RULE OF ORIGIN REQUIREMENTS

DATE

CERTIFIED MAIL NAME OF IMPORTER OF RECORD ADDRESS OF IMPORTER OR RECOED

To whom It May Concern: As imporer of record, and further to our letter dated (DATE OF INTIIAL NOTIFICATION TO IMPORTER OF RECORD OF THE REVIEW), please be advised that the verification of origin of (TYPE OF PRODUCTS) imported from (NAME OF EXPORTER/PRODUCER) is now complete. The purpose of this verification was to determine whether the (TYPE OF PRODUCTS) imported into the United States during (TIME PERIOD), met the rule of origin requirement according to the North American Free Trade Agreement (NAFTA) and were entitled to the preferential rate of duty. It was concluded, as a result of our verification, that the (TYPE OF PRODUCTS) imported from (NAME OF EXPORTER/PRODUCER) during the period (TIME PERIOD UNDER REVIEW) did not meet the NAFTA rule of origin requirements. You should receive a Customs Form 29 from the Port Director responsible for your good which provides additional information concerning the determination. Should you have any questions regarding this matter, you may contact (NAME OF CUSTOMS OFFICER) at (TELEPHONE NUMBER OF CUSTOMS OFFICER).


APPENDIX I(1)


(A sample supplier letter for non-automotive parts suppliers)

REGISTERED MAIL

Supplier Name Date Supplier Address Dear Sir/Madam, The United States Customs Service (U.S. Customs) is conducting a verification of the origin of

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provide description of the good which is produced by company name and imported into the United States under the terms of the North American Free Trade Agreement (NAFTA). It would be appreciated if you could assist U.S. Customs by completing the attached supplier confirmation with respect to Part Number and Material Description supplied by your company. The completed supplier confirmation should be mailed to the address stated below or faxed to (xxx) xxx-xxxx.

U.S. Customs Service Mailing Address Attention: Name of Customs Officer The completed supplier confirmation will be used by U.S. Customs only. U.S. Customs shall, in accordance with Article 507 of the NAFTA, protect the confidentiality of all business information submitted in this supplier confirmation. Please complete the supplier confirmation by Due Date. If the supplier confirmation is not received by the due date the value of the part will be deemed by U.S. Customs to be considered non-originating pursuant to Article 511 of the North American Free Trade Agreement and 181.72(d) of the U.S. Customs Regulations. If you have any further questions about the completion of the attached confirmation, please call Name of Customs Officer at Telephone Number.


Attachment: Supplier Confirmation

PROTECTED WHEN COMPLETED

SUPPLIER CONFIRMATION


NOTE: This Supplier Confirmation consists of four sections: Section I - Supplier Information Section II - Production Process Section III - Listing of Materials Section IV - Certification

Please complete all sections. Please note that the information requested is basic and further information may be required in the future.

DEFINITIONS "non-originating material" means a material that does not qualify as originating under the NAFTA; "originating material' means a material that qualifies as originating under the NAFTA; "production" means growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good; "tariff item" refers to any eight-digit number set out in the column "Tariff Item" in the Harmonized System.

SECTION I - SUPPLIER INFORMATION

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Supplier Name Telephone Number ___________________________ _____________________

Address ____________________________ ____________________________ ____________________________

Part Name and Part Number Supplied Tariff Classification (Tariff Item-8 digits) _________________________________ ______________________ _________________________________ ______________________ _________________________________ ______________________

Period Covered _______________

SECTION II- PRODUCTION PROCESS

1. Was this part manufactured or assembled by your company? Yes_____ No______

2. If your company did not manufacture or assemble the Part being confirmed, provide the name and address of the company and contact person from whom it was purchased.

Name of supplier ______________________________ Address ______________________________ ______________________________ ______________________________

Telephone No. ________________________ Contact Person ________________________

3. Please describe the production process if your company manufactured or assembled the above mentioned Part. ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

4. Please provide the address of the plant where the production process has taken place. Address _________________________________________________________ _________________________________________________________ _________________________________________________________ 5a. Was any portion of the production process undertaken outside the United States, Canada, or Mexico? YES__________ NO_____________

5b. If yes, please briefly describe the part of the production process that took place outside the United States, Canada, or Mexico. ______________________________________________________________ ______________________________________________________________ ______________________________________________________________

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______________________________________________________________ ______________________________________________________________

6. Please indicate the period (year/month) of the production for which this information has been reported. ______________________________________________________________ ______________________________________________________________

SECTION III - GENERAL INSTRUCTIONS

(A) List all materials and the respective supplier names and addresses which were used in the production of the part being confirmed. If the material is a non-originating material or a material of unknown origin, list the tariff classification number (to the 6th digit) for that material in the spaces provided.

NOTE 1: Materials purchased from manufacturers or suppliers in the NAFTA territory are not necessarily originating materials (materials claimed to be originating must qualify as originating under the NAFTA Rules of Origin Regulations). Any written representations obtained from suppliers of materials that a material qualifies as an originating material must be kept on file for purposes of verification.

(B) Indicate in the column provided, under the category "originating", "non-originating", or "origin unknown", the unit value of each material determined in accordance with subsection 7(1) of the NAFTA Rules of Origin Regulations.


SECTION III - LISTING OF MATERIALS

SECTION IV-CERTIFICATION

I certify that the information provided in response to this supplier confirmation is true and accurate and I assume the responsibility of proving such representations. I agree to maintain, and present upon request, all records and documentation necessary to support the representations made in response to this confirmation. ________________________________________ Authorized Signature Company Name and Address(Print or Type) ____________________ ____________________________

Name(Print or Type) Title(Print or Type) ________________________________________________________

Date(DD/MM/YR) Telephone No. Facsimile No.

APPENDIX I(2)


(A sample letter for automotive parts supplied to a producer of a light duty automtovie good)

REGISTERED MAIL

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Supplier Name Date Supplier Address Dear Sir/Madam,

TIER 1: The United States Customs Service (U.S. Customs), is conducting a verification of the origin of provide description of the good which is produced by company name and imported to the United States under the terms of the North American Free Trade Agreement (NAFTA). TIER 2: The United States Customs Service (U.S. Customs), is conducting a verification of the origin of provide description of the good (Tier 1 company name which is produced by company name (Tier 1 company name). In accordance with the North American Free Trade Agreement (NAFTA) there are special tracing provisions for the value of non-originating materials (VNM) for the calculation of the Regional Value Content Requirement (RVC) for Light Duty Automotive Goods. Schedule IV (four) of the NAFTA Rules of Origin Regulations contains a listing of traced materials that are considered non-originating if the materials meet the definition of a traced material. (See attached Appendix for the listing). It would be appreciated if you could assist U.S. Customs by completing the applicable Schedules of the supplier confirmation with respect to Part Number and Material Description supplied by your company. If your company imports the material from outside the territory of the United States, Canada, or Mexico, please complete Schedules I and IV. If your company self produces the material within the territory of the United States, Canada, or Mexico, please complete Schedules I and II. Finally if your company purchases the material from a third party within the territory of the United States, Canada, or Mexico, please complete Schedule I and III. The completed supplier confirmation should be mailed to the address stated below or faxed at (xxx) xxx-xxxx. U.S. Customs Service

Mailing Address Name of Customs Officer The completed supplier confirmation will be used by U.S. Customs only. U.S. Customs shall, in accordance with Article 507 of the NAFTA, protect the confidentiality of all business information submitted in this supplier confirmation. Please return the supplier confirmation by Due Date. If the supplier confirmation is not received by the due date the value of Part Number and Material Description will be deemed by U.S. Customs to be considered non-originating pursuant to Article 511 of the North American Free Trade Agreement and 181.72(d) of the U.S. Customs Regulations and subsection 9(7) of the Appendix. If you have any further questions about the completion of the attached confirmation, please call Name of Customs Officer at telephone number. Thank you in advance for your cooperation.


Attachments:

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Appendix - Light Duty Automotive Parts

Schedule I- Supplier Information and Certification Schedule II - Listing of Materials Schedule III - Purchase of Materials within the territory of Canada, the United States or Mexico Schedule IV - Materials Imported from outside the territory of Canada, the United States or Mexico

LIGHT-DUTY AUTOMOTIVE PARTS THAT ARE REQUIRED TO BE TRACED

FOR PURPOSES OF THE NAFTA RULES OF ORIGIN REGULATIONS

Schedule IV of the NAFTA Rules of Origin Regulations

4009 4010.10 4011 4016.93.10 4016.99.30 and 4016.99.55 7007.11 and 7007.21 7009.10 8301.20 8407.31 8407.32 8407.33 8407.34.05, 8407.34.15, and 8407.34.25 8407.34.35, 8407.34.45 and 8407.34.55 8408.20 8409 8413.30 8414.59.30 8414.80.05 8415.81 through 8415.83 8421.39.40 8481.20, 8481.30 and 8481.80 8482.10 through 8482.80 8483.10 through 8483.40 8483.50 8501.10 8501.20 8501.31 8501.32.45 8507.20.40, 8507.30.40, 8507.40.40 and 8507.80.40 8511.30 8511.40 8511.50 8512.20 8512.40 8519.91 8527.21 8527.29 8536.50 8536.90 8537.10.30 8539.10 8539.21

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8544.30 8706 8707 8708.10.30

LIGHT-DUTY AUTOMOTIVE PARTS THAT ARE REQUIRED TO BE TRACED FOR PURPOSES OF THE NAFTA RULES OF ORIGIN REGULATIONS


8708.21 8708.29.20 8708.29.10 8708.29.15 8708.39 8708.40 8708.50 8708.60 8708.70.05, 8708.70.25 and 8708.70.45 8708.80 8708.91 8708.92 8708.93.15 and 8708.93.60 8708.94 8708.99.03, 8708.99.27 and 8708.99.55 8708.99.06, 8708.99.31 and 8708.99.58 8708.99.09, 8708.99.34 and 8708.99.61 8708.99.12, 8708.99.37 and 8708.99.64 8708.99.15, 8708.99.40 and 8708.99.67 8708.99.18, 8708.99.43 and 8708.99.70 8708.99.21, 8708.99.46 and 8708.99.73 8708.99.24, 8708.99.49 and 8708.99.80 9031.80 9032.89 9401.20


SUPPLIER CONFIRMATION


NOTE: This Supplier Confirmation consists of four Schedules:

Schedule I Supplier Information and Certification Schedule II Listing of Materials Schedule III Purchase of Material within the United States, Canada or Mexico Schedule IV Materials Imported from outside the United States, Canada or Mexico. Please complete the applicable sections. Please note that the information requested is basic and further information may be required in the future.

DEFINITIONS

"customs value" means

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(a) in the case of the United States, the value of imported merchandise as determined by the Customs Service in accordance with section 402 of the Tariff Act of 1930, converted, in the event such value is not expressed in United States currency, to United States currency at the rate of exchange determined in accordance with subsection 3(1) of the Regulations; (b) in the case of Canada, value for duty as defined in the Customs Act, except that for purposes of determining that value the reference in section 55 of that Act to "in accordance with the regulations made under the Currency Act" shall be read as a reference to " in accordance with subsection 3(1) of these Regulations", and; (c) in the case of Mexico, the valor en aduana as determined in accordance with the Ley Aduanera, converted, in the event such value is not expressed in Mexican currency, in Mexican currency at the rate of exchange determined in accordance with subsection 3(1) of these Regulations. "non-originating material" means a material that does not qualify as originating under the NAFTA; "originating material" means a material that qualifies as originating under the NAFTA; "production" means growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good; "tariff item" refers to any eight-digit number set out in the column "Tariff Item" in the Harmonized System; "traced material" means a material, produced outside the territories of the NAFTA countries, that is imported from outside the territories of the NAFTA countries and is, when imported, of a tariff provision listed in Schedule IV.


SCHEDULE I - SUPPLIER INFORMATION AND CERTIFICATION

Supplier Name Telephone Number _________________________________ _____________________ Address ____________________________ ____________________________ ____________________________

Part Name and Part Number Supplied Tariff Classification (Tariff Item-8 digits)

__________________________________ ______________________ __________________________________ ______________________ __________________________________ ______________________ Please provide the address of the plant where the production process has taken place. Address ____________________________ ____________________________ ____________________________ ____________________________

Please indicate the period( year/month) of the production for which this information has been reported. ____________________________________________________________________________ ____________________________________________________________________________


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CERTIFICATION

I certify that the information provided in response to this supplier confirmation is true and accurate and I assume the responsibility of proving such representations. I agree to maintain, and present upon request, all records and documentation necessary to support the representations made in response to this confirmation. __________________________ _______________________________________

Authorized Signature Company Name and Address(Print or Type) __________________________ ____________________________

Name(Print or Type) Title(Print or Type) ______________________________________________________

Date(DD/MM/YR) Telephone No. Facsimile No.


SCHEDULE II - LISTING OF MATERIALS

(A) List all materials and the respective supplier names and addresses that are used to produce the above part. Please include the price paid/payable for each of the materials. In the spaces provided list the tariff classification number ( to the 6th digit or 8th digit level) for all materials that have been imported from a non-NAFTA country or for all materials of unknown origin.

Material Name Tariff Classification Supplier Price Paid of Materials Imported Name and Payable * from non-NAFTA country Address or of unknown origin _____________ _______________________ _________ _____________

* If some of the materials used to produce the above part meets the definition of a traced material ,please provide the value of the traced material(customs value plus additions if applicable) in accordance with Schedule IV of this confirmation.


SCHEDULE III - PURCHASE OF MATERIAL WITHIN THE UNITED STATES, CANADA OR MEXICO

If your company did not produce the material being confirmed, please provide the name and address of the company and contact person from whom it was purchased. Name of supplier _________________________ Address _________________________ _________________________ _________________________ _________________________ Telephone No. _________________________ Fax Number _________________________ Contact Person _________________________ Title _________________________


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SCHEDULE IV -MATERIALS IMPORTED FROM OUTSIDE

THE UNITED STATES, CANADA OR MEXICO.

If you have imported the material from outside the United States, Canada or Mexico, please provide the value of the traced material to the point where you have or taken title. Please complete the appropriate section.

Section 1

If you have taken title of the material at the time of importation, the sum of

(i) the customs value of the traced material, ____________ (ii) Add (if not already included in the customs value) the following costs that were incurred in transporting the traced material to the first place at which it was received in territory of the United States, Canada or Mexico: Freight ____________ Insurance ____________ Packing ____________ Other Costs ________________________ Subtotal ____________

(iii) Add (if not already included in the customs value) Duties and taxes paid ____________ Customs brokerage costs ____________

____________

Value of Non-Originating Materials

============


Section 2

If you do not have or did not take title to the material at the time of importation, the sum of

(i) the customs value of the traced material, ___________ (ii) Add (if not already included in the customs value) the following costs that were incurred in transporting the traced material to the place at which it waswhen the producer takes title in the territory of the United States, Canada or Mexico: Freight ___________ Insurance ___________ Packing ___________ Other Costs _____________________ Subtotal ___________

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(iii) Add (if not already included in the customs value) Duties and taxes paid ___________ Customs brokerage costs ______________________ Value of Non-Originating Materials

===========

APPENDIX J

SAMPLE NOTIFICATION OF VERIFICATION RESULTS

TO SUPPLIER OF MATERIALS

DATE

CERTIFIED MAIL

NAME OF SUPPLIER ADDRESS OF SUPPLIER To Whom It May Concern:

Please be advised that the verification of origin of (TYPE OF MATERIALS) that you supply to (NAME OF PRODUCER OF GOODS CLAIMING NAFTA) is now complete. The purpose of this verification was to determine whether the (TYPE OF MATERIALS) supplied to (NAME OF PRODUCER) during (TIME PERIOD), met the rule of origin requirement according to the North American Free Trade Agreement (NAFTA) and qualified as an originating material. It was concluded, as a result of our verification, that the (TYPE OF MATERIALS) supplied to (NAME OF PRODUCER) during the period (TIME PERIOD UNDER REVIEW) met the NAFTA rule of origin requirements. Should you have any questions regarding this matter, you may contact (NAME OF CUSTOMS OFFICER) at (TELEPHONE NUMBER OF CUSTOMS OFFICER).


APPENDIX K


PREPARATION OF AUDIT REPORTS

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SOP RAD1-007-97 dated May 1, 1997, entitled Regulatory Audit Reports is included as Appendix K for reference purposes.

APPENDIX L

VERIFICATION PROGRAM

GOODS WHOLLY OBTAINED OR PRODUCED IN THE TERRITORY


TO ENSURE THAT THE GOOD QUALIFIES AS ORIGINATING BY SATISFYING CRITERION A - GOODS WHOLLY OBTAINED OR PRODUCED IN THE TERRITORY OF ONE OR MORE OF THE PARTIES.

Definitions:

Goods Wholly Obtained or Produced Entirely in the Territory of One or More of the Parties means: (a) a mineral good extracted in the territory of one or more of the NAFTA countries; (b) a vegetable or other good harvested in the territory of one or more of the NAFTA countries; (c) a live animal born and raised in the territory of one or more of the NAFTA countries; (d) a good obtained from hunting, trapping or fishing in the territory of one or more of the NAFTA countries; (e) fish, shellfish, or other marine life taken from the sea by a vessel registered or recorded with a NAFTA country and flying its flag; (f) a good produced on board a factory ship from a good referred to in paragraph (e), where the factory ship is registered or recorded with the same NAFTA country as the vessel that took that good and flies that country's flag; (g) a good taken by a NAFTA country or a person of a NAFTA country from or beneath the seabed outside the territorial waters of that country, where a NAFTA country has the right to exploit that seabed; (h) a good taken from outer space, where the good is obtained by a NAFTA country and is not processed outside the territories of the NAFTA countries;

VERIFICATION PROGRAM - GOODS WHOLLY OBTAINED OR PRODUCED (CONT'D)

(i) waste and scrap derived from: (i) production in the territory of one or more of the NAFTA countries, or (ii) used goods collected in the territory of one or more of the NAFTA countries, where those goods are fit only for the recovery of raw materials; or (j) a good produced in the territory of one or more of the NAFTA countries

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exclusively from a good referred to in any of paragraphs (a) through (i), or from the derivatives of such a good, at any stage of production.


1. Determine if the exporter is also the producer of the good and, if not, determine the producer of the good. 2. Obtain and review information used to prove that the goods are "Goods Wholly Obtained or Produced Entirely in the Territory". 3. Determine which part of the definition of "Goods Wholly Obtained or Produced Entirely in the Territory", as noted above, applies to the producer. 4. Ensure that all of the requirements within the applicable part of the definition are met. 5. Review the Bill of Materials (if any exist), the production process procedures or marketing brochures and determine if all materials have been accounted for. If not, follow-up.

VERIFICATION PROGRAM - GOODS WHOLLY OBTAINED OR PRODUCED (CONT'D)

6. If costs of other producers are included, evaluate if it is feasible that the merchandise could be wholly produced in a NAFTA country. 7. Ensure there are no non-qualifying operations and only acceptable transshipment.(Refer to the verification programs contained in Chapter 5.) 8. Conclude as to whether the goods meet the definition of being wholly obtained or produced entirely in the territory of one or more of the NAFTA countries.

APPENDIX M


GOODS PRODUCED EXCLUSIVELY FROM ORIGINATING MATERIALS


TO ENSURE THAT THE GOOD QUALIFIES AS ORIGINATING BY SATISFYING CRITERION C - "GOODS PRODUCED ENTIRELY IN THE TERRITORY OF ONE OR MORE OF THE NAFTA COUNTRIES EXCLUSIVELY FROM ORIGINATING MATERIALS.


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1. Determine if the exporter is also the producer of the good, and, if not, determine the producer of the good. 2. Obtain and review information used to prove that the goods are "Goods Produced Entirely in the Territory of One or More of the Parties Exclusively From Originating Materials". 3. Request a Bill of Materials (or similar documentation) and compare to the information received in Step 2. for completeness. 4. Request copies of supplier certifications, or similar documentation that supports the claim that the materials are originating, if not already included in the information received in Step 2. 5. Review the certifications for the preference criteria/rule of origin identified by the supplier of the material. Evaluate if the supplier claims are feasible.

GOODS PRODUCED EXCLUSIVELY FROM ORIGINATING MATERIALS CONTINUED; VERIFICATION PROGRAM

6. If supplier certifications are inadequate or not available, consider sending supplier confirmation letters/questionnaires to a sample of suppliers. This sample could include: (a) suppliers with companies in non-NAFTA countries; (b suppliers that are U.S., Mexican or Canadian distributors; (c) suppliers of high value originating materials; and (d) suppliers of materials, that, if determined to be non-originating, would not undergo the applicable tariff classification change as would be required by the specific rule of origin. 7. Insure the production process takes place within the territories of one or more of the NAFTA countries. Is any portion of the production process sub-contracted? 8. Ensure there are no non-qualifying operations and only acceptable transshipment. (Refer to the verification programs contained in Chapter 5.) 9. Conclude as to whether the good meets Criterion C - i.e. the good is produced entirely in the territory exclusively from originating materials.

APPENDIX N


PREFERENCE CRITERION D


TO ENSURE THAT THE GOOD MEETS THE CONDITIONS FOR CLAIMING PREFERENCE CRITERION D, AND TO ENSURE THAT THE GOOD

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QUALIFIES AS ORIGINATING BY SATISFYING A REGIONAL VALUE CONTENT REQUIREMENT.

CRITERIA

Except for a good provided for in Chapters 61 through 63 of the Harmonized System, the good is produced entirely in the territory of one or more of the NAFTA countries but one or more of the non-originating materials used in the production of the good do not undergo an applicable change in tariff classification because: (i) the materials were imported together, whether or not with originating materials, into the territory of a NAFTA country as an unassembled or disassembled good, and were classified as an assembled good pursuant to Rule 2(a) of the General Rules for the Interpretation of the Harmonized System; or (ii) (A) those materials are provided for under the Harmonized System as parts of the good, and (B) the heading for the good provides for both the good and its parts and is not further subdivided into subheadings, or the subheading for the good provides for both the good and its parts

(NOTE: if the good imported from a NAFTA country is classified as a part, then this provision cannot be used);

For (i) or (ii) above, following conditions must be met: - The regional value content of the good, is not less than 60 per cent where the transaction value method is used, or is not less than 50 per cent where the net cost method is used; and - the good satisfies all other applicable requirements of the Regulations. Refer to Subsection 4(4) of the NAFTA Rules of Origin Regulations.

VERIFICATION PROGRAM - PREFERENCE CRITERION D


1. Obtain and review information to prove that the RVC requirement was met. 2. Ensure the tariff classification of the final good and the non-originating materials are accurate (particularly those non- originating materials that do not undergo the tariff classification change). Refer to the verification program on tariff classification contained in Chapter 5 for assistance.) 3. Identify the applicable specific rule of origin and verify that either (i) or (ii) Criterion D requirements) listed above exist. 4. Proceed with the verification program - non-qualifying operations, the verification program - transaction value method or the verification program - net cost method (as applicable), the verification program - transshipment

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APPENDIX O


LIGHT DUTY AUTOMOTIVE GOODS - AVERAGED

VERIFICATION PROGRAM - LIGHT-DUTY AUTOMOTIVE GOODS (AVERAGED)

TABLE OF CONTENTS

? DEFINITIONS

1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISIONS FOR LIGHT-DUTY AUTOMOTIVE GOODS WHERE THE COMPANY HAS ELECTED TO AVERAGE THE COSTS OF THESE GOODS

2. RVC PERCENTAGE REQUIREMENTS FOR LIGHT-DUTY AUTOMOTIVE GOODS 2.1 The Staged RVC Requirement for a Good of a Tariff Provision Listed on Schedule IV 2.2 The Staged RVC Requirement for a Vehicle and a Good of Heading 8407 and 8408 and Subheading 8708.40 2.3 Special RVC Requirements for Light-Duty Vehicles Produced in a New Plant 2.4 Value of Machinery 2.5 Special RVC Requirements for Light-Duty Vehicles Produced in a Refit Plant 2.6 General Summary Procedures

3. MOTOR VEHICLE AVERAGING ELECTION 3.1 Identification of Election to Average 3.2 Identification of the Motor Vehicles Produced by the Motor Vehicle Assembler Which Should be Included in the Election to Average 3.3 Comparison and Reconciliation of the Submission of RVC Information to the Election Filed Under Section 11 - Motor Vehicle Averaging 3.4 Comparison to the Election Filed Under Section 13(4)-Special RVC Requirements for Vehicles Produced in a New or Refitted Plant 3.5 General Summary Procedures

4. AUTOMOTIVE PARTS AVERAGING 4.1 Identification of Election to Average 4.2 Identification of the Goods Included in the Automotive Parts Averaging Election 4.3 Identification of the Motor Vehicle Producer Included in the Automotive Parts Averaging Election 4.4 Identification of the Country(ies) of Export Included in the Automotive Parts Averaging Election

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4.5 Verification of the Period Elected By the Producer 4.6 Comparison and Reconciliation of the Submission of RVC Information 4.7 General Summary Procedures

5. INITIAL ANALYSIS OF THE RVC INFORMATION

6. PLANT TOUR

7. REVIEW OF MANAGEMENT OF INFORMATION SYSTEM

8. NON-QUALIFYING OPERATIONS 8.1 Non-qualifying Production/Assembly Operations 8.2 Non-qualifying Pricing Practices 8.3 Conclusion

9. BILL OF MATERIALS

10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION

11. TARIFF CLASSIFICATION 11.1 General 11.2 Classification of the Finished Goods and Intermediate Materials (IM?s) 11.3 Classification of Materials for Tariff Classification Change Requirement Only 11.4 Classification of all Potential Traced Materials (Materials Of a Tariff Provision Listed in Schedule IV of the Regulations) Used or Incorporated in the Good 12. SOURCE OF MATERIALS 12.1 Tariff Classification Change Analysis 12.2 Source of Materials of a Tariff Provision in Schedule IV for the Purposes of Determining the VNM 12.3 Supplier Confirmations 12.4 General 13. INVENTORY MANAGEMENT SYSTEM (pgs. 55-57) 14. VALUE OF MATERIALS (pgs. 58-68) 14.1 General 14.2 De Minimis 14.3 Value of Materials to be Included in Net Cost 14.4 Value of Non-originating Materials (Traced Materials) 14.5 Conclusion 15. INTERMEDIATE MATERIALS

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16. VALUE OF OTHER COSTS THAN MATERIALS

17. ACCUMULATION 18. CALCULATION OF REGIONAL VALUE CONTENT 19. ORIGIN OF THE GOOD 20. TRANSSHIPMENT


TO ENSURE THAT THE LIGHT-DUTY AUTOMOTIVE GOOD, WHERE AN ELECTION TO AVERAGE HAS BEEN FILED, IS AN ORIGINATING GOOD IN ACCORDANCE WITH THE NAFTA RULES OF ORIGIN REGULATIONS AND CONSIDERING THE SPECIAL RVC CALCULATION REQUIREMENTS INCLUDED IN SECTION 9 (LIGHT-DUTY AUTOMOTIVE GOODS), SECTION 11 (MOTOR VEHICLE AVERAGING), SECTION 12 (LIGHT-DUTY AUTOMOTIVE GOODS, PARTS AVERAGING) AND SECTION 13 (SPECIAL RVC REQUIREMENTS) OF THE NAFTA RULES OF ORIGIN REGULATIONS.

Definitions:

Note to the Definitions: In order to assist in understanding the audit program where ever a word or group of words are used as defined, the word or words will appear in bold print:

Class of motor vehicles means any one of the following categories of motor vehicles:

(a) motor vehicles provided for in any of subheadings 8701.20, tariff items 8702.10.30 and 8702.90.30 (vehicles for transport of 16 or more persons), subheadings 8704.10, 8704.22, 8704.23, 8704.32 and 8704.90 and headings 8705 and 8706, (b) motor vehicles provided for in any subheadings 8701.10 and 8701.30 through 8701.90, (c) motor vehicles provided for in any tariff items 8702.10.60 and 8702.90.60 (vehicles for the transport of 15 or fewer persons) and subheadings 8704.21 and 8704.31, and (d) motor vehicles of any of subheading Nos. 8703.21 through 8703.90.

Complete motor vehicle assembly process means the production of a motor vehicle from separate constituent parts, which parts include the following:

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(a) a structural frame or unibody, (b) body panels, (c) an engine, a transmission and a drive train, (d) brake components, (e) steering and suspension components, (f) seating and internal trim, (g) bumpers and external trim, (h) wheels, and (i) electrical and lighting components.

First prototype means the first motor vehicle that

(a) is produced using tooling and processes intended for the production of motor vehicles offered for sale, and (b) follows the complete motor vehicle assembly process in a manner not specifically designed for testing purposes.

Floor pan of a motor vehicle means a component, comprising a single part or two or more parts joined together, with or without additional stiffening members, that forms the base of a motor vehicle, beginning at the firewall or bulkhead of the motor vehicle and ending

(a) where there is a luggage floor panel in the motor vehicle, at the place where that luggage floor panel begins, and (b) where there is no luggage floor panel in the motor vehicle, at the place where the passenger compartment of the motor vehicle ends.

Light-duty automotive good means a light-duty vehicle or a good of a tariff provision listed in Schedule IV that is subject to a RVC requirement and is for use as original equipment in the production of a light-duty vehicle.

Light-duty vehicle means a motor vehicle provided for in tariff items 8702.10.60 and 8702.90.60 (vehicles for transport of 15 or fewer persons) and subheadings 8703.21 through 8703.90, 8704.21 and 8704.31.

Marque means a trade name used by a marketing division of a motor vehicle assembler that is separate from any other marketing division of that motor vehicle assembler.

Model line means a group of motor vehicles having the same platform or model name.

Model name means the word, group of words, letter, number or similar designation assigned to a motor vehicle by a marketing division of a motor vehicle assembler

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(a) to differentiate the motor vehicle from other motor vehicles that use the same platform design, (b) to associate the motor vehicle with other motor vehicles that use different platform designs, or (c) to denote a platform design.

Motor vehicle assembler means a producer of motor vehicles and any related person with whom, or joint venture in which, the producer participates with respect to the production of motor vehicles.

New building means a new construction to house a complete motor vehicle assembly process, where that construction includes the pouring or construction of a new foundation and floor, the erection of a new frame and roof, and the installation of new plumbing and electrical and other utilities.

Original equipment means a material that is incorporated into a motor vehicle before the first transfer of title or consignment of the motor vehicle to a person who is not a motor vehicle assembler, and that is

(a) a good of a tariff provision listed in Schedule IV, or (b) an automotive component assembly, automotive component, sub-component or listed material.

Plant means a building, or buildings in close proximity but not necessarily contiguous, machinery, apparatus and fixtures that are under the control of a producer and are used in the production of any of the following:

(a) light-duty vehicles and heavy-duty vehicles, (b) goods of a tariff provision listed in Schedule IV, and (c) automotive component assemblies, automotive components, sub-components and listed materials.

Platform means the primary load-bearing structural assembly of a motor vehicle that determines the basic size of the motor vehicle, and is the structural base that supports the driveline and links the suspension components of the motor vehicle for various types of frames, such as the body-on-frame or space-frame, and monocoques.

Refit means a closure of a plant for a period of at least three consecutive months that is for purposes of plant conversion or retooling.


4009 4010.10 4011

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4016.93.10 4016.99.30 and 4016.99.55 7007.11 and 7007.21 7009.10 8301.20 8407.31 8407.32 8407.33 8407.34.05, 8407.34.15, and 8407.34.25 8407.34.35, 8407.34.45 and 8407.34.55 8408.20 8409 8413.30 8414.59.30 8414.80.05 8415.81 through 8415.83 8421.39.40 8481.20, 8481.30 and 8481.80 8482.10 through 8482.80 8483.10 through 8483.40 8483.50 8501.10 8501.20 8501.31 8501.32.45 8507.20.40, 8507.30.40, 8507.40.40 and 8507.80.40 8511.30 8511.40 8511.50 8512.20 8512.40 8519.91 8527.21 8527.29 8536.50 8536.90 8537.10.30 8539.10 8539.21 8544.30 8706 8707 8708.10.30 8708.21 8708.29.20 8708.29.10

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8708.29.15 8708.39 8708.40 8708.50 8708.60 8708.70.05, 8708.70.25 and 8708.70.45 8708.80 8708.91 8708.92 8708.93.15 and 8708.93.60 8708.94 8708.99.03, 8708.99.27 and 8708.99.55 8708.99.06, 8708.99.31 and 8708.99.58 8708.99.09, 8708.99.34 and 8708.99.61 8708.99.12, 8708.99.37 and 8708.99.64 8708.99.15, 8708.99.40 and 8708.99.67 8708.99.18, 8708.99.43 and 8708.99.70 8708.99.21, 8708.99.46 and 8708.99.73 8708.99.24, 8708.99.49 and 8708.99.80 9031.80 9032.89 9401.20

Size category, with respect to a light-duty vehicle, means that the total of the interior volume for passengers and interior volume for luggage is

(a) 85 cubic feet (2.38 m?) or less, (b) more than 85 cubic feet (2.38 m?) but less than 100 cubic feet (2.80 m?), (c) 100 cubic feet (2.80 m?) or more but not more than 110 cubic feet (3.08 m?), (d) more than 110 cubic feet (3.08 m?) but less than 120 cubic feet (3.36 m?), or (e) 120 cubic feet (3.36 m?) or more.

Traced material means a material, produced outside the territories of the NAFTA countries, that is imported from outside the territories of the NAFTA countries and is, when imported, of a tariff provision listed in Schedule IV.

Underbody means the floor pan of a motor vehicle.



To ensure that the good is a light-duty automotive good and the company has elected to average the sum of the net costs incurred and the sum of the values of

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non-originating materials used by the producer in accordance with subsections 11(1), 12(1) or 13(4).


a) Determine whether the good is classified in one of the tariff provisions listed in the definition of a light-duty vehicle and the producer has filed an election to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1) or 13(4) of the Regulations. If so, this verification program is applicable.

b) If the good is: i) of a tariff provision listed in Schedule IV, ii) subject to a RVC requirement, and iii) for use as original equipment in the production of a light-duty vehicle; and

the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsection 12(1) of the Regulations. If so, this verification program is applicable.

c) Conclude on the verification sub-objective.

NOTE: If the good is a light-duty automotive good but the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsection 11(1), 12(1) or 13(4) of the Regulations, use the Light-Duty Automotive Goods (Non-Averaged) verification program.


If the good is a heavy-duty automotive good and the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1), 12(1) or 13(4) of the Regulations, use the Heavy-Duty Automotive Goods (Averaged) verification program.

If the good is a heavy duty automotive good but the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsection 11(1), 12(1) or 13(4) of the Regulations, use the Heavy-Duty Automotive Goods (Non-Averaged) verification program.

If the good is not a light-duty automotive good nor a heavy-duty automotive good, then the general verification programs found in Chapter 5 of the NAFTA audit manual are applicable.

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2. RVC percentage requirements for LIGHT-DUTY AUTOMOTIVE GOODS


To ensure that the appropriate RVC percentage requirement is used by the producer to determine whether the light-duty vehicles or a good of any of heading nos. 84.07 and 84.08 and subheading No. 8708.40, that is for use in a light-duty vehicle qualify as originating as set out in subsections 13(1) or (2) of the NAFTA Rules of Origin Regulations.


Note: If the good cannot be identified below, the special RVC percentage requirements do not apply to it and the requirements of Schedule I are applicable.

2.1 RVC Percentage Requirement for A Good of A Tariff Provision Listed in Schedule IV, that is Subject to a Regional Value Content Requirement and is for Use in a Light-Duty Vehicle, Except for A Good of Any of Heading Nos. 8407 and 8408 and Subheading No. 8708.40 or any of Subheading Nos. 8482.10 through 8482.80, 8483.20 and 8483.30.

a) Determine if the fiscal year of the producer starts before July 2, 1997. If so, the RVC requirement is 50%.

b) Determine if the fiscal year of the producer starts after July 1, 1997 but before July 2, 2001. If so, the RVC requirement is 55%.

c) Determine if the fiscal year of the producer starts after July 1, 2001. If so, the RVC requirement is 60%.

2.2 RVC Percentage Requirements for Light-Duty Vehicles or A Good of Any of Heading Nos. 8407 and 8408 and Subheading No. 8708.40, that is for use in a Light-Duty Vehicle

d) Determine if the fiscal year of the producer starts before July 2, 1997. If so, the RVC requirement is 50%.

e) Determine if the fiscal year of the producer starts after July 1, 1997 but before July 2, 2001. If so, the RVC requirement is 56%.

f) Determine if the fiscal year of the producer starts after July 1, 2001. If so, the RVC requirement is 62.5%.


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2.3 Special RVC Requirements for Light-Duty Vehicles Produced in a New Plant

g) Determine if the plant in which the light-duty vehicles are produced consists of or includes a new building in which the light-duty vehicles are assembled.

h) Determine if the light-duty vehicles produced meet the definition of first prototype.

i) Determine the date of production of the first prototype and whether or not it has been five years since the date on which the first prototype has been produced. If it has been greater than five years after the date on which the first prototype was produced, use the appropriate RVC requirements as identified in verification procedures d) through f).

j) Determine if the light-duty vehicle is of a:

i) class of motor vehicle, ii) marque, iii) size category, or iv) type of underbody, that was not previously produced by the motor vehicle assembler in the territory of any of the NAFTA countries.

2.4 Value of Machinery

k) For the purposes of determining the value of machinery that was never previously used for production, and that is used in the new building or buildings for the purposes of the complete motor vehicle assembly process with respect to that vehicle, obtain the motor vehicle assemblers fixed asset sub ledger and the supporting invoices for the new machinery acquired to produce the motor vehicle.


l) Using the information obtained in verification procedure k) above review the producer's calculation of the value of machinery to ensure that the value of machinery that was never previously used for production, and that is used in the new building(s) for the purposes of the complete motor vehicle assembly process with respect to that motor vehicle, is at least 90% of the value of all machinery used for the purpose of that process.

i) Verify that where the machinery was acquired by the producer of the motor vehicle from another person, the value of the machinery is the cost of that machinery that is recorded on the books of the producer. ii) Verify that where the machinery was used previously by the producer of the

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motor vehicle in the production of another good, the value of machinery is the cost of the machinery that is recorded on the books of the producer minus accumulated depreciation of that machinery that is recorded on those books. iii) Verify that where the machinery was produced by the producer of the motor vehicle, the value of the machinery is the total cost incurred with respect to that machinery, calculated on the basis of the costs that are recorded on the books of the producer.

m) Conclude as to whether all the conditions outlined in verification procedures g) through l) are met. If so, the RVC requirement is not less than 50% for five years after the date on which the first prototype is produced in the plant by the motor vehicle assembler. The RVC requirements outlined in verification procedures d) through f) apply for the periods following this five year time frame.

2.5 Special RVC Requirements for Light-Duty Vehicles Produced in a Refit Plant

n) Determine if the plant in which the light-duty vehicles are produced meets the definition of refit.


o) Determine if the light-duty vehicles produced meet the definition

of first prototype.

p) Determine the date of production of the first prototype and whether or not it has been two years since the date on which the first prototype has been produced. If greater than two years after the date on which the first prototype was produced, use the appropriate RVC requirements for light-duty automotive goods as identified in verification procedures d) through f).

q) Determine if the light-duty motor vehicle is of a:

i) class of motor vehicle, ii) marque, iii) size category, or iv) type of underbody, that was not assembled by the motor vehicle assembler in the plant before the refit.

r) Conclude as to whether the conditions outlined in verification procedures n) through q) are met. If so, the RVC requirement is not less than 50% for two years after the date on which the first prototype is produced in the plant by the motor vehicle assembler. The RVC requirements outlined in verification procedures d) through f) apply for the periods following this two year time frame.

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2.6 General Summary Procedures

s) Conclude on the verification sub-objective.

3. MOTOR VEHICLE AVERAGING ELECTION


To ensure that the producer of light-duty motor vehicles who has filed an election to average has properly determined the goods to be used to determine the sum of the net costs and the sum of the values of non-originating materials (VNM) that are used in the calculation of the regional value content (RVC) as set out in the NAFTA Rules of Origin Regulations.

Note: Some of these procedures require information contained in the classification of the finished goods Section of the 11. TARIFF CLASSIFICATION verification subprogram.


3.1 Identification of election to average

a) Obtain the appropriate Motor Vehicle Averaging Election filed under subsection 11(1) or subsection 13(4) of the NAFTA Rules of Origin Regulations for the period under review as filed with the Customs Administration conducting the verification.

i) Confirm that the election has been accepted within the required time frames. ii) Ensure that the models of motor vehicles identified on the certificate of origin are included in the election to average. iii) Identify the averaging provisions elected by the producer.

3.2 Identification of the motor vehicles produced by the motor vehicle assembler which should be included in the election to average

b) If the category under paragraphs 11(5)(a) or 13(7)(a) of the NAFTA Rules of Origin Regulations, identify

i) the model line of all motor vehicles produced in the plant for which the election is made, ii) the class of motor vehicle for all motor vehicles produced in the plant for which the election is made.


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c) If the category under paragraph 11(5)(b) or paragraph 13(7)(b) of the NAFTA Rules of Origin Regulations is chosen, identify the class of motor vehicle for all motor vehicles produced in the plant for which the election is made. d) If the category under paragraph 11(5)(c) of the NAFTA Rules of Origin Regulations is chosen, identify the model line of all motor vehicles produced in the territory of the NAFTA country.

3.3 Comparison and reconciliation of the submission of RVC information to the election filed under Section 11 - Motor Vehicle Averaging

Ensure that: 1) the category or basis of calculation as stated in the election filed with our customs administration have not been modified in any way in the calculation of the actual RVC; and 2) all vehicles that should be included based on the category and basis of calculation identified in the election, are in fact included in the averaging calculation. (The results of this section will be used as the basis for the remaining verification sub-programs) e) Determine if the averaging category, identified in verification procedures b) , c) or d) used by the motor vehicle assembler to prepare the submission of RVC information is the same as the one on the filed election to average. Identify any differences. f) Determine the motor vehicles whose costs are included in the submission of the RVC information.

Compare the motor vehicles whose costs are being averaged in the submission to the motor vehicles whose costs should be averaged based on the filed election to average.


i) If the category under paragraph 11(5)(a) of the NAFTA Rules of Origin Regulations has been chosen, ensure that:

A) the model line identified on the filed election to average is the same as the model line of the vehicles whose costs are included in the RVC calculation and all vehicles whose costs are included in the RVC calculation are in the same model line and the costs associated with all motor vehicles in that model line are included in the RVC calculation, and B) the class of motor vehicle identified on the filed election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the model line identified in verification procedure f)i)A) is within the same class of motor vehicle and the costs associated with all motor vehicles in that model line in that class of motor vehicle are included in the RVC calculation, and C) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in verification procedure

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f)i)B) is all produced within the same plant and the costs associated with all motor vehicles in that model line of motor vehicle in that class of motor vehicle in that plant are included in the RVC calculation.

ii) If a category under paragraph 11(5)(b) of the NAFTA Rules of Origin Regulations has been chosen, ensure that

A) the class of motor vehicle identified on the filed election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the costs associated with all motor vehicles that are within the same class of motor vehicle are included in the RVC calculation, and


B) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in verification procedure f)ii)A) is produced within the same plant and the costs associated with all motor vehicles in that class of motor vehicle in that plant are included in the RVC calculation.

iii) If the category under paragraph 11(5)(c) of the NAFTA Rules of Origin Regulations has been chosen, ensure that

the model line identified on the filed election to average is the same as the model line of the motor vehicles whose costs are included in the RVC calculation and all motor vehicles whose costs are included in the RVC calculation are in the same model line and the costs associated with all motor vehicles produced in the territory of a NAFTA country in that model line are included in the RVC calculation.

g) Ensure that the basis of calculation actually used by the producer is the same as the one on the election.

i) If the basis under paragraph 11(9)(a) has been elected as identified in verification procedure a), and using the results of verification procedures b), c), or d) as applicable, ensure that all motor vehicles that fall within the category chosen and are produced (for domestic use and for exportation) in the period elected are included in the RVC calculation. ii) If the basis under paragraph 11(9)(b) has been elected as identified in verification procedure a), and using the results of verification procedures b), c), or d), ensure that all those motor vehicles exported to the territory of one or more of the NAFTA countries that fall within the category chosen and are produced in the period elected are included in the RVC calculation.

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h) Ensure that the period identified on the filed election to average is the same as the period used to calculate the RVC. This should be the producer?s fiscal year. How does this compare to the period defined in the Certificate(s) of Origin?


3.4 Comparison to the election filed under subsection 13(4) - Special RVC Requirements for Vehicles Produced in a New or Refit Plant

Ensure that: 1) the category or basis of calculation as stated in the election filed with our customs administration have not been modified in any way in the calculation of the actual RVC; and 2) all vehicles that should be included based on the category and basis of calculation identified in the election are in fact included in the averaging calculation. (The results of this section will be used as the basis for the remaining verification sub-programs )

i) Determine the averaging category, as identified in the NAFTA Rules of Origin Regulations, used by the motor vehicle assembler to prepare the submission of RVC information. Ensure that the category actually averaged in the submission is the same as the one on the filed election to average. j) Determine the motor vehicles whose costs are included in the RVC calculation in the submission.

Compare the motor vehicles whose costs are being averaged in the submission to the motor vehicles whose costs should be averaged based on the filed election to average.

i) If a category under paragraph 13(7)(a) has been chosen, ensure that

A) the model line identified on the filed election to average is the same as the model line of the vehicles whose costs are included in the RVC calculation and all vehicles whose costs are included in the RVC calculation are in the same model line and the costs associated with all motor vehicles in that model line are included in the RVC calculation, and B) the class of motor vehicle identified on the filed election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the model line identified in verification procedure j)i)A) is within the same class of motor vehicle and the costs associated with all motor vehicles in that model line in that class of motor vehicle are included in the RVC calculation, and


C) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in verification procedure

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j)i)B) is all produced within the same plant and the costs associated with all motor vehicles in that model line of motor vehicle in that class of motor vehicle in that plant are included in the RVC calculation.

ii) If a category under paragraph 13(7)(b) has been chosen, ensure

A) the class of motor vehicle identified on the filed election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the costs associated with all motor vehicles that are within the same class of motor vehicle are included in the RVC calculation, and B) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in verification procedure j)ii)A) is produced within the same plant and the costs associated with all motor vehicles in that class of motor vehicle in that plant are included in the RVC calculation. k) Ensure that the basis of calculation actually used by the producer is the same as the one on the election. i) If the basis under paragraph 13(8)(a) has been elected as identified in verification procedure a), and using the results of verification procedures b) or c), as applicable, ensure that all motor vehicles that fall within the category chosen that are produced (for domestic use and for exportation) in the period elected are included in the RVC calculation. ii) If the basis under paragraph 13(8)(b) has been elected as identified in verification procedure a), and using the results of verification procedures b) or c), as applicable, ensure that all those motor vehicles exported to the territory of one or more of the NAFTA countries that fall within the category chosen and are produced in the period elected are included in the RVC calculation.


l) Ensure that the period identified on the filed election to average is the same as the period used to calculate the RVC. Ensure that the period is in accordance with subsection 13(4). How does this compare to the period defined in the Certificate(s) of Origin?


m) Conclude as to whether the averaging provisions defined by the election to average have been applied correctly. n) Prepare adjustments as required.

4. AUTOMOTIVE PARTS AVERAGING


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To ensure that the automotive parts producers who have elected to average their net costs and values of non-originating materials have properly determined the goods to be used to determine the sum of the net costs and the sum of the values of non-originating materials (VNM) that are used in the calculation of the regional value content (RVC) as set out in the NAFTA Rules of Origin Regulations.

Note 1: The following verification sub-program only applies where the company has notified the Customs Administration in writing during the course of the verification of their election to average under section 12 of the NAFTA Rules of Origin Regulations. If the Customs Administration has not been notified in writing during the course of the verification that an election to average under section 12 of the NAFTA Rules of Origin Regulations has been made, the light-duty automotive goods (non-averaged) verification programs are applicable. If the company has elected to average under subsections 11(1) or 13(4) of the NAFTA Rules of Origin Regulations use the 3. MOTOR VEHICLE AVERAGING ELECTION verification sub-program.

Note 2: Some of these procedures require reference to the verification procedures performed in the 11.2 Classification of the Finished Goods section of the 11. TARIFF CLASSIFICATION verification sub-program.


a) Refer to the 2. RVC Percentage Requirements for Light-Duty Automotive Goods in order to ensure that the correct regional value content percentage is being applied.


b) If the good is of a provision listed in Schedule IV of the Regulations, inquire as to whether the producer is electing to calculate the sum of the net costs incurred and the sum of the non-originating materials used by the producer of the goods in accordance with section 12 of the Regulations. If so, this program is applicable, otherwise use the light-duty automotive goods non-averaged verification program (where the goods are of a provision listed on Schedule IV of the Regulations, subject to a regional value-content requirement and are for use as original equipment in the production of a light-duty vehicle).

i) Determine the models of goods by part number included in the automotive parts averaging election. Obtain this information in writing from the company.


ii) Using the information obtained in the 11. TARIFF CLASSIFICATION verification sub-program, ensure that all part numbers of the models identified in

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i) are of the same tariff provision listed in Schedule IV. iii) Compare the part numbers of the models under review to the certificate of origin to ensure that any or all models or part numbers are included in the automotive parts averaging election. iv) Identify the averaging provision (i.e. category and period) elected by the producer. Obtain this information in writing from the company. v) Where the automotive parts producer chooses a one or three month period, determine if the producer has, at the end of the fiscal year of the motor vehicle producer to whom the goods are sold, chosen the fiscal year of that motor vehicle producer.

4.2 Identification of the goods included in the automotive parts averaging election

c) If the category under paragraph 12(4)(a) of the Regulations is chosen by the producer, ensure that the goods are original equipment for use in the production of light-duty vehicles.

d) If the category under 12(4)(b) of the Regulations is chosen, ensure that the goods are original equipment for use in the production of heavy-duty vehicles, and this program is not applicable. Refer to the 4. AUTOMOTIVE PARTS AVERAGING verification sub-program in the HEAVY-DUTY AUTOMOTIVE GOODS (AVERAGED) verification program.

e) If the category under 12(4)(c) of the Regulations is chosen, ensure that the goods are after-market parts, and this program is not applicable. Refer to the applicable verification programs found in Chapter 5 of the audit manual.

f) If the category under 12(4)(d) of the Regulations is chosen, ensure that the goods are original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts.


g) If the category under 12(4)(e) of the Regulations is chosen, ensure that the goods are any of the following:

i) original equipment for use in the production of light-duty vehicles and are sold to one or more motor vehicle producers; or ii) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts and are sold to one or more motor vehicle producers.

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h) If the category under 12(4)(f) of the Regulations is chosen, ensure that the goods are any of the following:

i) original equipment for use in the production of light-duty vehicles and are exported to the territory of one or more of the NAFTA countries;

ii) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after market parts and are exported to the territory of one or more of the NAFTA countries; iii) original equipment for use in the production of light-duty vehicles and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries; or iv) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries. i) If the verification encompasses reviewing all goods of a tariff provision produced by the producer, ensure that all goods are included in an averaging category. Similarly, if the verification encompasses specific goods of the same tariff provision, ensure that only those goods are included in an averaging category.


4.3 Identification of the motor vehicle producer included in the automotive parts averaging election

j) If the category under 12(4)(a) of the Regulations is elected, where the goods are:

i) original equipment for use in the production of light-duty vehicles:

A) Determine the motor vehicle producer(s) included in the averaging election; B) Determine if all motor vehicle producer(s) have the same fiscal year end(s). C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in c) have all been accounted for; k) If the category under 12(4)(d) of the Regulations is elected, where the goods are:

i) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty motor vehicles, or after-market parts:

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A) Determine the motor vehicle producer(s) included in the averaging election; B) Determine if all motor vehicle producer(s) have the same fiscal year end(s). C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in c) have all been accounted for;

l) If the category under 12(4)(e) of the Regulations is elected, where the goods are:

i) original equipment for use in the production of light-duty vehicles and are sold to one or more motor vehicle producers:

A) Determine the motor vehicle producer(s) included in the averaging election; B) Determine if all motor vehicle producer(s) included in the election to average have the same fiscal year end;


C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in c) have all been accounted for; or

ii) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts and are sold to one or more motor vehicle producers:

A) Determine the motor vehicle producer(s) included in the averaging election; B) Determine if all motor vehicle producer(s) included in the election to average have the same fiscal year end; C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in c) have all been accounted for.

m) If the category under 12(4)(f) of the Regulations is elected, where the goods are:

i) original equipment for use in the production of light-duty vehicles and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:

A) Determine the motor vehicle producer(s) included in the averaging election; B) Determine if all motor vehicle producer(s) included in the election to average have the same fiscal year end; C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in c) have all been accounted for; or

ii) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty

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vehicles, or after-market parts and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:

A) Determine the motor vehicle producer(s) included in the averaging election; B) Determine if all motor vehicle producer(s) included in the election to average have the same fiscal year end;


C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in c) have all been accounted for.

4.4 Identification of the country(s) of export included in the automotive parts averaging election

n) If the category under 12(4)(f) of the Regulations is chosen, if the goods are:

i) original equipment for use in the production of light-duty vehicles and are exported to the territory of one or more of the NAFTA countries:

A) Determine the territory of one or more NAFTA countries the goods included in the averaging calculation have been exported to; B) Confirm the amount of goods exported outside the territory of the Party in which the production occurred, to ensure the quantity of goods included in the averaging calculation is correct;

ii) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after market parts and are exported to the territory of one or more of the NAFTA countries:

A) Determine the territory of one or more NAFTA countries the goods included in the averaging calculation have been exported to. B) Confirm the amount of goods exported outside the territory of the Party in which the production occurred, to ensure the quantity of goods included in the averaging calculation is correct;

iii) original equipment for use in the production of light-duty vehicles and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:

A) Determine the territory of one or more NAFTA countries the goods included in the averaging calculation have been exported to.


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B) Confirm the amount of goods exported outside the territory of the Party in which the production occurred, to ensure the quantity of goods included in the averaging calculation is correct;

iv) original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:

A) Determine the territory of one or more NAFTA countries the goods included in the averaging calculation have been exported to. B) Confirm the amount of goods exported outside the territory of the Party in which the production occurred, to ensure the quantity of goods included in the averaging calculation is correct.

4.5 Verification of the period elected by the producer

o) If the category under paragraph 12(4)(a) of the Regulations is chosen, ensure that the period elected is calculated over any month, any consecutive three month period that is evenly divisible into the number of months of the producer's fiscal year remaining at the beginning of the period, or the fiscal year of the motor vehicle producer to whom those goods are sold only if all producer(s) have the same fiscal year end.

i) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. ii) Where the producer chooses a one or three month period, ensure that the same duration is chosen for:

A) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or


B) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold.

p) If the category under paragraph 12(4)(d) of the Regulations is chosen and some of the goods are light-duty automotive goods, ensure that the period elected is calculated over any month, any consecutive three month period, or the fiscal year of the motor vehicle producer to whom those goods are sold only if all producer(s) have the same fiscal year end.

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i) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. ii) Where the producer chooses a one or three month period, ensure that the same duration is chosen for:

A) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or B) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold. q) i) If the category under paragraph 12(4)(e) of the Regulations is chosen and the goods are only original equipment for the use in the production of light-duty vehicles and are sold to one or more motor vehicle producers, ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producer(s) to whom the goods are sold. A) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. B) Where the producer chooses a one or three month period, ensure that the same duration is chosen for:

I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or II) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold. ii) If the category under paragraph 12(4)(e) of the Regulations is chosen and the goods are original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts and are sold to one or more motor vehicle producers ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producer(s) to whom the goods are sold. A) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. B) Where the producer chooses a one or three month period, ensure that the same duration is chosen for: I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or II) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold. r) i) If the category under paragraph 12(4)(f) of the Regulations is chosen and the goods are only original equipment for the use in the production of light-duty vehicles and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated on any month, any consecutive three month period or the fiscal year of the motor vehicle producer(s) to whom the goods are sold. A) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. B) Where the producer chooses a one or three month period, ensure that the same duration is

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chosen for: I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or II) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold. ii) If the category under paragraph 12(4)(f) of the Regulations is chosen and the goods are original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated any month, any consecutive three month period or the fiscal year of the motor vehicle producer(s) to whom the goods are sold. A) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. B) Where the producer chooses a one or three month period, ensure that the same duration is chosen for: I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or II) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold. iii) If the category under paragraph 12(4)(f) of the Regulations is chosen and the goods are only original equipment for the use in the production of light-duty vehicles, are sold to one or more motor vehicle producers and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producer(s) to whom the goods are sold. A) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. B) Where the producer chooses a one or three month period, ensure that the same duration is chosen for: I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or II) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold. iv) If the category under paragraph 12(4)(f) of the Regulations is chosen and the goods are original equipment for use in the production of light-duty vehicles in combination with original equipment for use in the production of heavy-duty vehicles, or after-market parts, are sold to one or more motor vehicle producers and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producer(s) to whom the goods are sold. A) By means of industry reports or enquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold. B) Where the producer chooses a one or three month period, ensure that the same duration is chosen for: I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure b); or II) the remainder of the fiscal year of the automotive parts producer where such producer did not change the period to the fiscal year of the motor vehicle producer to whom those goods are sold.

4.6 Comparison and reconciliation of the submission of RVC information

s) Ensure that the goods and period as identified in the election to average obtained in verification procedure b) has not been modified in any way in the calculation of the actual RVC.

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t) Conclude as to whether the averaging provisions defined by the election to average have been applied correctly. u) Prepare adjustments as required.



To conduct a preliminary review of the submitted RVC information in order to identify risks that require further verification.


a) Obtain from company officials a submission of RVC information for the goods under review. b) Review the costs provided in the submission of RVC information to determine if they are reflective of actual costs (as opposed to estimates that would have been used in the election to average). c) Ensure that all calculations are correct. Ensure that the appropriate RVC percentage requirement has been used by the company. Ensure that the good has met the RVC requirement based on these calculations. d) Ensure that all the non-originating materials (i.e. materials that do not meet their required rule of origin) and materials of unknown origin have met the required tariff classification change portion of the rule of origin. e) Identify any materials listed on Schedule IV that are imported by the company but are declared as originating materials. f) Review the labor and overhead information provided. Identify any excluded costs incorrectly included in the RVC calculation. g) Conduct risk analysis/ratio analysis on the total values for materials, labor and overhead in relation to the RVC requirement. h) Conclude on the areas of concern requiring further review.

6. PLANT TOUR




a) Obtain an organization chart. Ensure all operations and or departments whose costs are included in the total cost calculation for RVC purposes have been reviewed and documented. Document the potential for costs to be included in total cost that should be excluded (i.e. costs not directly related to the production of the motor vehicles subject to averaging, sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs). b) Observe and document the existence of the goods included in the election. i) Confirm the goods to be included in the election to average are manufactured at that production facility. ii) Identify other goods that should be included in the election and goods that are included but should not be.

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iii) Identify any differences that may exist with respect to the tariff classification of the goods under review. c) Where the producer designates an intermediate material, review the assembly process and observe the completed intermediate material (IM). This information will be used in the 15. INTERMEDIATE MATERIAL verification sub-program. d) Observe and document any concerns with regards to any possible non-qualifying operations (i.e. unacceptable production or pricing practice used to circumvent the Rules of Origin) noted during the plant tour. This information will be used in the 8. Non-Qualifying Operations verification sub-program. e) Observe and document the research and development and/or engineering operations. Document any concerns with respect to the potential allocation problems of costs not directly related to the goods included in the averaging calculation. f) Observe and document the warehouse operations (i.e. receiving material inventory, storing material inventory and storing of finished goods). Document any concerns with respect to the tariff classification of materials for which there may be classification differences. Document any concerns with respect to the ownership of materials. Document any concerns with respect to the source of materials (i.e. dual sourcing, markings on materials, fungible materials, etc.) noted during the plant tour, especially those materials listed on Schedule IV of the NAFTA Rules of Origin Regulations. Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the goods included in the averaging calculation. Document any concerns with respect to the shipping of finished goods (i.e. any costs of shipping and packing that may be included in the net cost calculation). Document any concerns with respect to the inventory and turnover of finished goods. g) Observe and document the production/manufacturing operations. Ensure each in-house manufacturing and sub-assembly operations have been documented (i.e. stamping, engine production, axle production, etc.) Document any concerns with respect to the out-sourcing (sub-contracting) of manufacturing/production or sub-assembly operations. Evaluate whether assists may be provided to the out-sourced producers. This information will be used in the 14. VALUE OF MATERIALS verification sub-program. Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the goods included in the averaging calculation. h) Observe and document the financial accounting operations. Ensure the materials ordering, receiving, inventory flow, direct labor costing, indirect material costing and overhead allocation determination are all documented. i) Observe and document the management of information system operations. Inquire as to the type of management reports that are produced (i.e. bills of materials, production reports, labor reports, material stock reports, etc.). This information will be used in the 7. REVIEW OF MANAGEMENT OF INFORMATION SYSTEM verification sub-program.



To ensure the management of information system used to develop the regional value content calculation is reliable and accurate.


a) Obtain the relevant information concerning the management of information system (MIS) gathered through the plant tour. Identify the areas of concern with respect to the MIS. Consider using the "Review of Policies, Procedures and Internal Controls Checklist" (See Appendix F) to assist in identifying concerns.

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b) Obtain and review the policies and procedures manual. Identify the areas of concern with respect to the MIS. c) Obtain the independent auditor's report. Review this report to assess the reliance the auditor's placed on the MIS. d) Interview the personnel responsible for the MIS. Assess their knowledge of Electronic Data Processing (EDP) and the importance the organization places on controls within the MIS. . e) Document the MIS. Use the policies and procedures manual and the interviews with the MIS personnel as a guide. i) Document how the Bill of Materials is created within the system. Document how the following items are entered into the system: A) engineering documents/specifications (including changes to engineering specifications) B) list of materials and suppliers - approved vendor listing C) development of standards for costing purposes (i.e. materials, labor and overhead standards). ii) Include a review of the following: A) how orders for motor vehicles are entered into the system B) what determines production for the period C) how production reports are generated D) how material stock reports (i.e. KAN-BAN) and picking lists are generated E) inventory (i.e. purchase from supplier(s), receipt, transfer to production, work-in-process, finished goods, shipment of finished goods) Document how the actual costs are recorded in the system. Include a review of payments for materials inventory, direct and indirect labor, manufacturing overhead and all other costs included in the total cost calculation. f) Document the controls inherent in the MIS (i.e. the general and application controls). Ensure adequate controls over materials inventory, production, labor, overhead, etc.

i) General Controls

Review information pertaining to the organization controls and standard operating procedures. Review the systems development and documentation controls. This includes: A) systems development methodology; B) programming conventions and procedures; C) technical, management, user and auditor review and approval; D) system testing; E) conversion control (if applicable); F) program change controls; G) system documentation standards -- program documentation, operations documentation, user documentation. Review the systems software controls. This includes: A) handling errors; B) program protection; C) file protection; D) security protection. Document how changes are made (i.e. authorization of changes to the system).


Review the data capture and batch data entry controls. This includes: A) control methodology (exposures resulting from errors and irregularities, management control objectives, system objectives, role of controls in EDP systems) B) audit trail; C) data capture controls; D) data entry controls. Review the on-line entry, processing and output controls. This includes controls to ensure: A) reliable, proper, authorized and valid transaction entry;

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B) unreliable and improper data entry is detected; C) unreliable and improper data is corrected; D) that processing is reliable, proper and authorized; E) that unreliable, improper, and unauthorized processing is detected; F) that unreliable, improper, and unauthorized processing is corrected; G) that errors detected in output are properly corrected and resubmitted to data processing on a timely basis.

8. NON-QUALIFYING OPERATIONS


To ensure that the goods do not qualify as originating because of mere dilution with water or another substance or because of a production or pricing practice designed to circumvent the rules of origin as set out in Chapter 4 of the NAFTA.

Note: A good shall not be considered to be an originating good where there is a preponderance of evidence that the object of a production or pricing practice was to circumvent the Rules of Origin. In regards to unacceptable production practices, circumvention consists of any alteration or process performed on goods for the purpose of circumventing the rule of origin requirements. For example, when the processing or assembling performed in the territory of another Party of the Agreement is reversed or substantially altered after the finished goods have been imported, and such processing or assembly was not performed for any commercial purpose other than to qualify the goods for the NAFTA tariff treatment, then this will be considered circumvention.


8.1 Non-qualifying production/assembly operations

a) During the on-site visit, interview personnel to understand the production / assembly operations of the entire plant(s) where the goods subject to averaging are produced. Document any concerns with respect to non-qualifying production/assembly operations. b) Obtain and review a copy of the bill(s) of materials and any product literature for the goods that are subject to averaging. Document any concerns with respect to non-qualifying production/assembly operations. c) Review the section of the 6. PLANT TOUR verification sub-program related to the non-qualifying operations. Address any concerns noted with respect to non-qualifying production/assembly operations. d) Review documents related to transportation (consider documents obtained in the 20. TRANSSHIPMENT verification sub-program) and document any concerns with respect to the finished goods being altered subsequent to importation. e) Prepare a written evaluation of the non-qualifying production / assembly operation and assess the evidence gathered.

8.2 Non-qualifying pricing practices

f) Identify major adjustments made as a result of the 14. VALUE OF MATERIALS verification sub-program, and document any concerns. g) Review adjustments made to the purchases accounts at the end of the year and the beginning of the next year. Identify any concerns. h) Prepare a written evaluation of the questionable non-qualifying pricing practice(s) and assess the extent of the evidence gathered.

8.3 Conclusion

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i) Conclude on the verification sub-objective.



To ensure that the bill(s) of materials of the goods subject to the averaging provisions are complete and consistent throughout the verification period.


a) Obtain all the bills of materials for the goods that should be included in the averaging calculation (the motor vehicle averaging election for motor vehicles). (Refer to the 3. MOTOR VEHICLE ELECTION TO AVERAGE and 11. TARIFF CLASSIFICATION verification sub-programs.) b) Verify the mathematical accuracy of the BOMs. c) Using the information from the 7. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program, obtain the description of the system for BOM's and any related documentation that is required to complete verification procedure f). If necessary, review the policy and procedures manual for the BOM with respect to the definition of the BOM, use of the BOM, what is reported on the BOM, who and when changes are made to the BOM, etc. d) Compare the models of the bills of materials to the motor vehicle averaging election, if applicable, to ensure they are included in the election. Identify any differences. e) Sort the BOM's into the various models of the final good subject to averaging. Obtain the volume of sales to the United States (and/or Canada or Mexico) for each model in each family. Calculate the % of sales by both volume and dollar value within each model group. Obtain the production reports for each model and compare to the volumes of sales as provided by the company. Document any concerns with respect to goods produced in a different period and being sold/shipped in the period under review. f) To ensure the BOM's are complete, select a sample of bills of materials to: i) compare the BOM to engineering documents/specifications (i.e. compare parts and quantity to be included in the production of the good); ii) compare the part's numbers, descriptions and values to picking lists used to obtain parts for the production from inventory, iii) compare the bills of materials to product literature; iv) review the sourcing of materials for consistency among the bills of materials v) compare the BOM's to BOM's for similar goods (i.e. use professional judgment to ensure all materials on the BOM are incorporated into the good and to ensure there are no missing materials that should be incorporated into the good). Document any differences. Obtain explanations from the client. g) To ensure that the standard costs for materials on the BOM are consistent throughout the year: i) review the company's standard cost accounting policies; ii) inquire of company officials if there have been changes in the production process or the standard costs during the year; iii) compare a sample of the BOM's to others for the same model from a different date during the year. Inquire with company officials if any differences are found. h) Conclude on the verification sub-objective.



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To ensure that the list of materials used in the averaged RVC calculation for net costs and value of non-originating materials is complete and accurate. Note: The 9. BILL OF MATERIALS verification sub-program will have to be completed before proceeding with these verification procedures.


a) Obtain the listing of materials and any additional supporting documentation used by the producer in the RVC calculation for net costs and value of non-originating materials. This listing should contain all the materials used in the production of all the final good subject to the averaging provisions for the period under review. b) Verify the mathematical accuracy of the listing. Compare the totals reported on the listing to the total value of materials included in the net cost calculation and the value of non-originating materials in the submission of RVC information. c) Interview the person(s) responsible for developing this listing. Inquire how the list of materials was developed (i.e. how did the client ensure that only the materials used in the production of the final good subject to the averaging provisions are included on the list). Based on their response to the above, assess their knowledge of the NAFTA, the NAFTA Rules of Origin Regulations and, specifically the motor vehicle averaging provisions, if applicable. d) Match this listing with the general ledger and/or audited financial statements. If non-averaged goods are also produced, ensure the materials used to produce those goods are not included in this list. e) Perform reasonableness tests on the list of materials such as the following: i) using production reports and average costs, recalculate the total of the value of materials included in the averaging calculation; ii) select a sample of materials and recalculate the value of materials using average/standard values. f) Select a sample of bills of materials included in the averaging calculation and perform the following: i) compare the description of a sample of the materials per the BOM to the list to ensure they are listed; ii) using the production reports, ensure the quantity of materials on the list of materials is appropriate. g) Select a sample of materials from the list of materials included in the averaging calculation and perform the following: i) compare the description per the list of materials to the BOM to ensure they are used in the goods to be averaged; ii) using production reports, ensure the quantity on the list is appropriate for the materials used in the goods to be averaged. h) Identify any accessories, spare parts and tools, packaging materials and containers for retail sale and packing materials and containers for shipment to be disregarded for evaluating the tariff classification change requirement. This information will be used in the 11. TARIFF CLASSIFICATION verification sub-program. Provide the information concerning packing materials and containers for shipment to the person responsible for the 16. Value of Other Costs Than Materials and 14. Value of Materials verification sub-program. i) Conclude on the verification sub-objective.

11. TARIFF CLASSIFICATION

VERIFICATION SUB-OBJECTIVES

To ensure that the finished good is properly classified under the Harmonized System (H.S.) of tariff classification, and to ensure the correct rule of origin is applied. To classify all materials which would not meet the necessary tariff classification change as required by the specific rule of origin (Schedule I of the NAFTA Rules of Origin Regulations)

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applicable to the good if they were non-originating materials. To classify all potential traced materials (materials of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations) used or incorporated in the good in order to establish the value of non-originating materials per Section 9 of the Regulations.


11.1 General

a) Interview the person(s) responsible for tariff classification to establish how the classifications of the good and materials were determined. Obtain any rulings that the company had received from other Customs Administrations. b) Document the potential for fungible materials while performing the procedures in this verification sub-program. c) Obtain information from the company pertaining to the deminimus calculation when the company has applied the deminimus provisions to qualify the goods. To evaluate deminimus, refer to the verification procedures outlined in Chapter 5 of this audit manual. d) For use in the 12. SOURCE OF MATERIALS verification sub-program, note the source of materials, if you come across this information while performing the procedures in this verification program.

11.2 Classification of the finished good and intermediate materials (IMs)

e) Obtain and review documentation on the goods and IM's, e.g., bills of materials, public brochures, engineering specifications, invoices, bills of lading, owner's manual, catalogues, and verify if it is consistent with the tariff classifications provided for the goods under review.

Review the export documents for the Harmonized System (HS) number for the goods under review.

f) Obtain from the 6. PLANT TOUR verification sub-program information with respect to the production of the goods or the intermediate materials and physically inspect the goods during a plant tour to aid in confirming the correct classification number and rule of origin of the finished goods and IMs. g) Identify the classification declared by the company in the RVC information, on the election to average (if applicable) and on the NAFTA Certificate of Origin. h) Identify the applicable rule of origin for the goods and IMs. i) Ensure that the goods are included in the class of motor vehicles as elected by the producer (if applicable). j) Ensure that the goods are in the same tariff provision listed in Schedule IV as elected by the producer (if applicable). k) Prepare a conclusion on the tariff classification for the goods and IMs under review.

11.3 Classification of materials for tariff classification change requirement only

To be completed where the non-originating materials included in the goods under review are required to undergo a tariff classification change. l) Analyze the rule of origin identified in verification procedure g) of this verification sub-program to determine the tariff classification of the materials that would not meet the required tariff classification change if they were non-originating materials. m) Obtain an accurate description of the materials used in the production of the goods, by physical examination, reviewing supplier parts catalogue, purchase orders, engineering documents and/or supplier contracts. Document any self-produced materials designated in accordance with subsection 4(8) of the NAFTA Rules of Origin Regulations.

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n) For only the goods being exported to the country performing the verification, classify all materials except those identified as accessories, spare parts and tools; packaging materials and container for retail sale and packing materials and containers for shipment (obtain both the list of materials to classify and the identification of the exceptions from the 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION verification sub-program) to the level required for tariff change requirement. o) Identify those materials which would not meet the tariff change requirement if they were non-originating.

11.4 Classification of all potential traced materials (materials of a tariff provision listed in Schedule IV of the Regulations) used or incorporated in the good

p) Using the list developed in the 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION, (and any information concerning the potential traced material content of intermediate materials, if applicable, from the 15. INTERMEDIATE MATERIAL verification sub-program) obtain an accurate description of the materials by physical examination, reviewing supplier parts catalogues, engineering documents and/or supplier contracts (some of this reference material may have been gathered in verification procedure l) of this verification sub-program). Identify:

i) those materials that are of a tariff provision listed in Schedule IV, but do not contain any Schedule IV sub-materials; and ii) those materials that are of a tariff provision listed in Schedule IV, which may also contain sub-materials that are of a tariff provision listed in Schedule IV. For those materials identified,

A) identify the sub-materials by examining the BOM for the sub-materials, the suppliers parts catalogues and/or physical examination; B) classify the sub-materials; and, C) identify the sub-materials that are of a tariff provision listed in Schedule IV. iii) those materials that are NOT of a tariff provision listed in Schedule IV, but which may contain sub-materials that are of a tariff provision listed in Schedule IV. For those materials identified,

A) for the materials identified, identify the sub-materials by examining the bills of materials, supplier parts catalogues, engineering documents, supplier contracts, and/or by physical examination; B) classify the sub-materials; and, C) identify the sub-materials that are of a tariff provision listed in Schedule IV. q) Repeat verification procedures o)i) through iii) as necessary to identify any sub-materials, used or incorporated into the materials, that are of a tariff provision listed in Schedule IV. r) Prepare a working paper to document all the identified materials, used or incorporated into the goods subject to the averaging calculation at any level of production, that are of a tariff provision listed in Schedule IV. Also, when applicable, group sub-materials by the material that incorporates the sub-materials.

12. SOURCE OF MATERIALS


To determine and verify:

--the origin of all materials which would not meet the necessary tariff classification change as required by the specific rule of origin (Schedule I of the Regulations) if the materials were non-originating; and

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--the source of all materials or sub-materials of a tariff provision listed in Schedule IV of the Regulations, used or incorporated in the good in order to establish the value of non-originating materials (Section 9 of the Regulations) especially the ones claimed as originating materials by the producer or his supplier.


12.1 Tariff Classification Change Analysis

a) Obtain the list of the materials which would not meet the tariff classification change required by the specific rule of origin from the CLASSIFICATION OF MATERIALS FOR TARIFF CHANGE REQUIREMENT ONLY section of the 16. TARIFF CLASSIFICATION verification sub-program. b) Confirm the origin of these materials by reviewing the Certificate of Origin or the supplier certification obtained by the producer or by reviewing the purchase order, invoice and the receiving document. c) Physically inspect these materials to verify markings or any other indications which might indicate that the materials are non-originating. d) Assess if the 7% De Minimis rule can be applied if there are non-originating materials that do not meet the required tariff classification change (see verification procedure f) in the 14. VALUE OF MATERIALS verification sub-program).

e) Evaluate the need to send supplier confirmations for the purposes of the origin of materials for the tariff change requirement. f) Conclude as to whether the tariff classification change requirement has been satisfied.

12.2 Source of materials of a tariff provision in Schedule IV for the purposes of determining the VNM

g) Obtain the complete list of all potential traced materials (i.e., materials and submaterials of a tariff provision listed in Schedule IV) from the CLASSIFICATION OF ALL POTENTIAL TRACED MATERIALS USED OR INCORPORATED IN THE GOOD section of the 11. TARIFF CLASSIFICATION verification sub-program.

h) Using the list obtained in verification procedure g) select a sample of materials and sub-materials which the exporter has claimed as originating (including those materials which may contain sub-materials) and perform the following:

i) verify if the source of the above materials could be valid, by looking at the Industry Profile documentation, industry information and other submissions for similar goods (i.e. could these materials be imported); ii) interview company officials responsible for the origin of materials as found in the submission of RVC information. Ask what procedures they used to verify the source of the materials. Document strengths and weaknesses of the manner in which the company assigned origin to the materials; iii) if the company has received supplier certifications to verify the source of the materials, review them and determine if they are adequate (if not adequate these items may be considered high risk items for confirmation purposes).

i) Obtain information from the exporter's policy and procedures manuals and complete a plant tour to assist in identifying the source of materials. Physically inspect the materials to identify markings or any other indications of whether or not the materials may be imported. Coordinate this work with that in verification procedure m)ii). While conducting the plant tour and through enquiry of management, identify any parts of the production process that may be sub-contracted to another company.

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j) Review the concerns identified in the 6. PLANT TOUR verification sub-program. k) Obtain a list of suppliers for all materials on the list obtained in verification procedure g). For the originating materials identified in verification procedure h), determine the suppliers and perform the following: i) determine whether any of the suppliers have companies in a non-NAFTA country, or if the suppliers are U.S., Canadian or Mexican distributors (these suppliers will be considered high-risk items for confirmation purposes); ii) inquire of company officials if there were any supplier changes during the period under review or any materials that are sourced from more than one supplier. The Approved Vendor List or the history of the engineering specifications may provide evidence of supplier changes; iii) determine whether there are any fungible materials. Examine the parts and supplier lists, the Approved Vendor List and inquire as to whether the same material is sourced from both a supplier from a NAFTA country and from a non-NAFTA country and if they source parts from distributors. (This information will be used in the 13. INVENTORY MANAGEMENT SYSTEM verification sub-program.)

l) Using the 11. TARIFF CLASSIFICATION verification sub-program identify: 1) any materials of a tariff provision listed on Schedule IV that had been designated as originating but were in fact imported from outside the NAFTA territory or 2) any materials that are not of a tariff provision on Schedule IV that are considered non-originating but were in fact imported from outside the NAFTA territory, i.e. information from supplier catalogues and markings during the plant tour m) Select a sample of originating materials from the list obtained in verification procedure g) and perform the following: i) scan the purchase invoice, any attached shipping documents, and bank endorsement stamp on the canceled check to determine whether they support the exporter's claim for the source (and value) of the material; ii) select materials from this sample to verify markings and coordinate this work with that performed in verification procedure j); iii) follow up on any contradictory observations; and iv) prepare a working paper to control this process and to document the results.

n) Using the list obtained in verification procedure g), select a sample of materials not claimed as originating by the producer and determine if: i) the materials are imported directly into the NAFTA territory by the producer, or ii) the materials are imported into the territory by someone other than the producer, or iii) the producer chose to identify the material as non-originating per 9)9)e) of the Regulations

If the material is imported into the territory by someone other than the producer, obtain supplier statements for these materials. This information will be used in the 14. VALUE OF MATERIALS verification sub-program. o) Compare any supplier statements or certificates of origin obtained through the verification procedures identified above to the list of materials. p) Evaluate the need to expand sampling procedures based on the results of the testing performed above. q) Assess if the origin or the traced material content of any of the materials needs to be confirmed with respect to the materials listed on Schedule IV. r) Conclude as to whether the materials listed on Schedule IV, including the materials (and sub-materials) that may incorporate sub-materials listed on Schedule IV, are originating, imported or non-originating but not-imported (as determined by the Customs officers).

12.3 Supplier Confirmations

s) Judgementally select suppliers from whom supplier confirmations will be obtained: to confirm the origin of materials listed on Schedule IV claimed to be originating; or to confirm the origin of materials that have potential traced materials in them and claimed by the company or its

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supplier to be originating (the value of the traced materials may also be the subject of this confirmation); or to confirm the origin of materials that if found to be non-originating would not meet the tariff change requirements in Schedule I and that have been claimed as being originating by the company. i) send confirmations to high risk suppliers who are distributors, or those who are known to import parts from outside the territory, or where the reliability of the suppliers certifications on file with the exporter/producer are questionable and for high dollar value materials; ii) find information on the suppliers in the exporter/producer correspondence files and purchase records, i.e. addresses, contact person, phone numbers, etc; iii) ensure that confirmations are sent out to all suppliers of a material if there is more than one supplier of a material or if suppliers were changed during the period under review; iv) follow up with the supplier to obtain a completed confirmation, this may be telephone within a predetermined time frame to ensure that all the completed confirmations are received;

Note: Confirmation for which there is no response or insufficient information will result in the material being considered non-originating for tariff change purposes, and will be included in VNM for the RVC calculation. v) review the confirmations once they are received from the suppliers and compare the information on the confirmations with the information on the certificates filed with the exporter and/or producer; vi) determine if supplier confirmation letters should be sent to the suppliers of the suppliers of the exporter and/or producer, because there are materials which require further verification (either for origin or VNM purposes); vii) after reviewing the supplier confirmation, consideration should be given to conducting a restricted supplier verification at the suppliers' premises based on the evidence gathered to date. However, such visits will have to be approved prior to making any arrangements; viii) prepare a working paper to control the confirmation process and to document the results; and ix) prepare a letter to each supplier subject to the confirmation process, notifying them of whether or not the material was found to be originating.

12.4 General

t) Ensure that all verification adjustments required as a result of the sourcing verification procedures have been recorded.



To determine if an applicable inventory management method is in place when fungible materials (physically separated or commingled) are used in the production of a good, or when fungible goods are physically combined or mixed in inventory, potentially to identify the origin of a specific shipment of the goods. In terms of fungible materials used in the production of light-duty automotive goods, an inventory management method must identify originating versus non-originating materials for the purposes of the tariff classification change requirement. Also, for the purposes of the RVC requirement, an inventory management method must, for materials that are on Schedule IV, identify not imported versus imported materials, and for all materials that have more than one supplier, identify the different traced sub-material values. If an acceptable inventory management method does not exist, for the purposes of the tariff classification change requirement, all fungible materials will be considered to be non-originating, and, for the purposes of the RVC requirement, the total value of all fungible materials identified as a risk above will be included in the calculation of VNM. Note that the existence of fungible materials does not automatically require that this verification

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program be applied, as the exporter/producer may choose to treat, for the purposes of the tariff change requirement, all fungible materials as non-originating, and, for the purposes of the RVC requirement, the total value of all fungible materials as part of VNM.


a) Using the information from the 12. SOURCE OF MATERIALS verification sub-program, obtain a listing of identified fungible materials. b) Determine the impact on the origin of the goods under review should the inventory management system be found to be not acceptable. When fungible materials exist, evaluate the impact in terms of the tariff classification change requirement (consider the use of the de minimis provision) by reviewing the information obtained in the 11. TARIFF CLASSIFICATION verification sub-program, as well as in terms of the regional value content requirement (considering Schedule IV and materials that may contain traced sub-materials) by reviewing the information obtained in the 14. VALUE OF MATERIALS and the 18. CALCULATION OF THE REGIONAL VALUE CONTENT verification sub-programs. If the impact is significant, proceed with the evaluation of the inventory management system. c) Determine which of the following inventory management systems outlined in the NAFTA Regulations - Schedule X the company used for the fungible materials (goods):

Specific Identification FIFO LIFO Average Method d) Document the inventory management system from the beginning to end (i.e. purchasing, receiving, storage of materials, removal of materials from storage into production of goods, storage of goods and removal of goods from storage for shipment of goods). e) If Specific Identification was used, ensure that fungible materials (goods) were physically segregated, or ensure the existence of an origin identifier. f) If FIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable, first received were considered to be the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn. g) If LIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable, last received was considered to the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn. h) If the average method was used, ensure that the ratio was calculated and applied correctly. i) Ensure whichever method that was chosen, including the averaging period chosen in the case of the average method, that it was used from the time it was chosen to the end of the fiscal year. Has the system changed since the inception of NAFTA? j) Ensure that the company correctly determined the materials, identified by origin or by supplier, as applicable, in its opening inventory by: i) identifying, in the books of the producer, the latest receipts of fungible materials that add up to the amount of fungible materials in opening inventory at the time an inventory method is chosen; ii) reviewing the origin or supplier of the materials (goods), as applicable, that make up those receipts; iii) determining those fungible materials (goods) to be the fungible materials (goods) in opening inventory, identified by origin or supplier, as applicable. k) Review the inventory management system by performing compliance tests of a sample of purchase transactions. The sample should include transactions involving materials (goods) that were fungible materials (goods) at the inception of the NAFTA and materials (goods) that were identified as fungible since the inception (i.e. change in supplier). l) Is the inventory management system tested periodically? Obtain a description of periodic testing and evaluate it's effectiveness.

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m) Test a sample of fungible material (good) inventories by identifying the origin of opening inventory, adding receipts/adjustments of materials (goods) and deducting withdrawals/adjustments and compare your results to the company's records. (Can test a variety of periods, materials (goods) and production processes.) n) Conclude on whether: i) the inventory management system used by the Company meets all the requirements of Schedule X of the Regulations (i.e. the inventory management system is acceptable); or ii) the inventory management system used by the company requires improvement to meet the requirements of Schedule X of the Regulations - document the weaknesses of the system - document the impact on the origin of the goods under review; or iii) the inventory management system does not meet the requirements of Schedule X and the company can/cannot construct the necessary inventory system - document the impact on the origin of the goods under review.



To ensure that the value of originating and non-originating materials has been calculated in accordance with NAFTA.


14.1 General

a) Gather any information relevant to the value of materials identified in the 10. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program. Assess the internal controls in place to preserve the quality and accuracy of the data available by reviewing policy and procedures manuals with respect to the purchase of materials, internal auditor's reports, setting of standards and identification of variances and by performing a walk through of the purchasing and receiving function and documenting the flow of information by tracing material requisitioning, ordering, receiving and reporting, returns, accounting, and cash disbursement. b) From discussions with the company staff, find out who is responsible for determining the values for the materials and how the materials are valued. Is the same valuation method used for all the materials, i.e., do they use a different method for determining the value of non-originating materials than the value of originating materials? Are materials valued differently for NC and VNM purposes? c) Review the calculations prepared by the company including any supporting documentation and supplier certifications and statements obtained by the producer. Supplier certifications and statements should state whether the material is originating or non-originating, either with traced materials, or, with a value of traced materials, or, with a zero value of traced materials. Determine if the procedure used to value materials for both NC and VNM purposes is in accordance with the Regulations. i) Identify all assumptions made by the company. ii) Identify all cost types included in the calculations (freight, insurance, packing and other costs incurred in transporting, such as duties and taxes and brokers costs, including in-house broker costs). Apply the appropriate verification procedures to the costs being examined (examine invoices, calculations, standard costs, etc...). iii) Identify the accounts from which the information was extracted. iv) Determine if the values of materials are the same currency as the currency of the country in which the person who provided the supplier statement is located. See Section 3 of the Regulations. v) Identify areas for further review.

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d) Identify all related suppliers and determine if the purchase price was affected by the relationship and if an adjustment will be required.

i) Identify and review accounts or any documents that may pertain to material transfers and/or transfer payments from the producer to the supplier to identify any possible assists. ii) If materials are dual sourced, compare the purchase prices of the related and non-related companies, e.g. obtain price list from the producer listing suppliers, prices and materials. iii) Review correspondence between the producer and the related suppliers. Is there a possibility of the relationship affecting the value used? Refer to Section 7, Section 9 or Schedule VIII, as applicable, for the method of determining the correct value.

e) Inquire as to how price and usage variances are accounted for. Analyze if these variances (actual and standard cost) are significant and adjust the value of the materials in the RVC calculation, if necessary.

14.2 Deminimis

f) Except for goods of tariff item number 8415.81 through 8415.83, if there are non-originating materials that do not meet the required tariff classification change, verify if the value of these materials determined in accordance with Section 7 of the Regulations is less than or equal to 7% of the transaction value (or total cost of the good, if the transaction value is unacceptable), to see if the de minimis rule can be applied. (see verification procedure d) in the 12. SOURCE OF MATERIALS verification sub-program).

14.3 Value of materials to be included in net cost

g) Verify that all materials included in the net cost calculation are valued in accordance with Section 7 of the Regulations. NOTE: the value of materials calculated in accordance with NAFTA includes the following regardless of whether the applicable value is the customs value of the material or the transaction value with respect to the transaction in which the producer acquired the material:

i) freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer; ii) duties and taxes paid or payable with respect to the materials in the territory of one or more of the NAFTA countries, unless they were refunded or waived; iii) customs brokerage fees (including in-house services); iv) waste and spoilage resulting from the use of the material in the production (minus the value of reusable scrap);

When the value is the transaction value, the following may also be added:

i) commissions, except buying commissions; ii) elements (assists) supplied to the seller by the producer (materials; tools, dies, molds and other indirect materials; engineering, development, artwork, design work, and plans and sketches performed outside the country in which the producer is located) iii) royalties; iv) subsequent proceeds that accrue to the seller.

The value of materials to be included in net cost also includes accessories, spare parts, tools, packaging materials and containers for retail sale.

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The value of intermediate materials, if applicable, should be obtained from the information obtained in the 15. INTERMEDIATE MATERIAL verification sub-program.

h) Review the values of materials reported in the submission of RVC information and assess if these amounts seem reasonable by comparison with the RVC information of a similar good.

i) Inquire into the results of the 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION verification sub-program, and take into consideration while conducting the value of materials verification procedures.

j) Judgementally select a sample of high risk materials for value of materials purposes. (Consider obtaining sufficient audit coverage).

(High risk for value purposes would be fungible materials or those non-traced materials that if found to be traced, or contain traced materials would make the good non-qualifying for RVC purposes. It could also be materials that are overvalued and correctly identified as non-traced or materials that are undervalued and correctly identified as traced, therefore creating an overstatement of the RVC percentage.).

i) determine the actual price paid by the exporter/producer by tracing to the purchase invoice, the attached shipping documents and the bank endorsement stamp on the canceled check; ii) calculate the difference between the actual and standard cost and compare with the price variance or variance from standard claimed by the exporter/producer; follow-up on any substantial differences; and iii) trace the total invoice amount to the appropriate ledgers and sub-ledgers to verify that purchases have been recorded correctly in the exporter's/producer's books and records.

k) Verify that the value of all materials, calculated in accordance with Section 7 of the Regulations, are included in the net cost of the goods. Ensure that the value of traced (non-originating) materials, determined in accordance with Section 9 of the Regulations, as set out below, are not also added in the calculation of the net cost of the goods, as they would be double counted. Also, ensure intermediate materials are included only once.

l) Prepare a W/P to ensure that all adjustments required for materials as a result of value of materials verification procedures have been recorded.

m) Conclude as to whether the value of materials is correct and consistent throughout the verification period.

14.4 Value of non-originating materials (traced materials)

n) Obtain the list of traced materials and sub-materials (i.e. imported materials of a tariff provision listed in Schedule IV) developed in the 12. SOURCE OF MATERIALS verification sub-program, and the list, and value, of the traced materials contained in the intermediate material, if applicable, from the 15. INTERMEDIATE MATERIALS verification sub-program. o) Judgementally select a sample of high risk traced materials (high risk in terms of VNM includes traced materials, as well as non-traced materials that contain traced materials (except those imported materials that are not on Schedule IV, even if they contain traced materials))and determine, by, for example, reviewing commercial invoices, and customs invoices, and by applying the relevant valuation methods: (Consider materiality in terms of closeness to RVC requirement)

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i) Where the producer imported the traced material and took title at time of importation the value should be the sum of

A) the customs value of the traced material, and where not included in the customs value, any costs identified in B) and C) below: B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the first place at which it was received in the territory of a NAFTA country, and C) duties and taxes paid or payable with respect to the material in the territory of one of more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable, and customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries.

ii) Where the producer imported the traced material from outside the territories of the NAFTA countries and does not have or take title to it at the time of importation, the value should be the sum of

A) the customs value of the traced material, and where not included in the customs value, any costs identified in B) and C) below: B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the place at which it was when the producer took title in the territory of a NAFTA country, and C) duties and taxes paid or payable with respect to the material in the territory of one or more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable, and customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries.

iii) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and that person has or takes title to the material at the time of importation, if the producer has a statement that is signed by the person from whom the producer acquired the traced material, whether in the form in which it was imported into the territory of a NAFTA country or incorporated into another material, and states all the following values, the value of the traced material should be

A) the customs value of the traced material, and where not included in the customs value, any costs detailed in B) and C) below: B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the first place at which it was received in the territory of a NAFTA country, and

C) duties and taxes paid or payable with respect to the material in the territory of one of more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable, and customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries.

iv) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and that person does not have or take title to the material at the time of importation, if the producer has a statement that is signed by the person from whom the producer acquired the traced material, whether in the form in which it was imported into the territory of a NAFTA country or incorporated into another material, and states all the following values, the value of the traced material should be

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A) the customs value of the traced material, and where not included in the customs value, any costs detailed in B) and C) below:

B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the place at which it was located when the first person in the territory of a NAFTA country took title, and



v) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and the producer acquires the traced material or a material that incorporates the traced material from a person in the territory of a NAFTA country who has title to it, if the producer has a statement that is signed by the person from whom the producer acquired the traced material or the material that incorporates it, and states all the following values, the value of the traced material or the material that incorporates it should be

A) the value determined in accordance with Schedule VIII (transaction value or value determined with an alternative method), with respect to a transaction that occurs after the customs value of the traced material was determined, and where not included in that value,

B) taxes, other than duties paid on an importation of a material from a NAFTA country, paid or payable with respect to the material in the territory of one of more of the NAFTA countries, other than taxes that are waived, refunded, refundable or otherwise recoverable, including credit against tax paid or payable.

vi) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries, and the producer acquires a material that incorporates the traced material and the acquired material was produced in the territory of a NAFTA country and is subject to a regional value-content requirement, if the producer has a statement that is signed by the person from whom the producer acquired the material, and states that the acquired material is an originating material, and also states the regional value content of the material, the value of the material should be:

an amount equal to VM x (1 - RVC) where

VM is the value of the acquired material, determined in accordance with Subsection 9(5), with respect to the transaction in which the producer acquired the material,

and

RVC is the regional value content of the acquired material, expressed as a decimal.


vii) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries, and the producer acquires a material that incorporates the traced material and the acquired material was produced in the territory of a NAFTA

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country and is subject to a regional value-content requirement, if the producer has a statement that is signed by the person from whom the producer acquired the material, and states that the acquired material is an originating material but does not state any value with respect to the traced material, the value of the material should be

an amount equal to VM x (1 - RVCR) where

VM is the value of the acquired material, determined in accordance with Subsection 9(5), with respect to the transaction in which the producer acquired the material,

and

RVCR is the regional value-content requirement for the acquired material, expressed as a decimal.

viii) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and the producer acquires a material that incorporates that traced material, that was produced in the territory of a NAFTA country, and for which an amount was determined with the formula VM x (1-RVC) or VM x (1 - RVCR) (in accordance with vi) or vii) respectively above), if the producer of the good has a statement signed by the person from whom the producer acquired the material that states such an amount, the value of the material should be the amount determined with the formula

VM x (1-RVC) or VM x (1 - RVCR) as the case may be.

Explanation: The producer receives a statement that states one amount as the value of the material. That amount is determined by the supplier of the material in accordance with the provisions of paragraph 9(2)(f) or 9(2)(g), as the case may be. That amount is the one the producer will use as the value of the material.


ix) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and the producer does not have a statement described in any of paragraphs 9(2)(c) to (h), the value of the traced material or any material that incorporates it is determined in accordance with Subsection 9(5) with respect to the transaction in which the producer acquires the traced material or any material that incorporates it.

p) Determine whether all costs incurred in transporting materials have been identified and correctly reported (i.e. freight, insurance, packing, etc.).

i) Test the method used by the company when identifying these costs, by selecting a sample of transactions involving purchases of material from the territory of the NAFTA countries and those from outside the territory of the NAFTA countries.

ii) Identify any assumptions made by the company. Test these assumptions to ensure that they are valid (i.e. if the company is using a standard cost system ensure that they follow the correct procedures for updating or revising the standard cost values).

iii) Prepare adjustments as required as a results of this testing. (keeping in mind materiality and risk)

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q) Determine whether duty, taxes and brokerage fees with respect to the purchase and importation of materials have been identified and correctly reported, making adjustments as required. (keeping in mind materiality and risk)

r) Ensure that VNM is adjusted for any variances that affect traced materials values.

s) Verify that values for all the traced materials are included in the Value of Non-originating Materials (VNM) calculation.

t) If the company included other non-originating materials (other than traced materials) in VNM, verify that the values of these materials are calculated in accordance with Subsection 9(5) of the Regulations. Ensure that these materials do not contain traced materials already included in VNM.


u) Prepare W/P's to support all traced materials. Ensure that

sufficient and appropriate evidence has been obtained to support

the conclusions made.

14.5 Conclusion

v) Conclude on the verification sub-objective.



The objective of this verification sub-program is to review any self-produced materials including self-produced materials and containers, and self-produced accessories, spare parts and tools, designated as an intermediate material by the producer. If intermediate materials are designated by the company, and are found to qualify, the value of the intermediate material is considered an originating material for RVC calculation purposes. However, intermediate materials in light-duty automotive goods are still subject to the tracing provisions set out in Section 9 of the NAFTA Rules of Origin Regulations.

Note: For the purposes of calculating the RVC of the good, the producer of the good may designate as an intermediate material any self-produced material that is used in the production of the good, provided that where an intermediate material is subject to a RVC requirement, no other self-produced material that is subject to a RVC requirement and is incorporated into that designated self-produced material is also designated by the producer as an intermediate material. Also, intermediate materials are goods in their own right, and must therefore meet the rule of origin applicable to an intermediate material.


a) Document all intermediate material designations made by the company.

b) Inquire of the company officials as to how the value of the intermediate material was calculated. Are all costs reasonably allocated to the intermediate material?

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c) Ensure that material, labor, overhead costs, etc. related to the intermediate material are not double counted in the respective costs related to the final goods.

d) Is the intermediate material a light-duty vehicle, or a good of a tariff provision listed on Schedule IV of the Regulations, that is subject to a RVC requirement and is for use as original equipment in the production of a light-duty vehicle?


If so, complete the 9. BILL OF MATERIALS, 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION, 11. TARIFF CLASSIFICATION, 12. SOURCE OF MATERIALS, 14. VALUE OF MATERIALS, 16. VALUE OF OTHER COSTS THAN MATERIALS, and 18. CALCULATION OF THE REGIONAL VALUE CONTENT REQUIREMENT sub-programs of the light-duty automotive goods (averaged or non-averaged, as applicable) verification programs specifically oriented towards the intermediate material. Any traced materials contained in the intermediate material and their value should be noted. This information will be used in the 14. VALUE OF MATERIALS verification sub-program for the purposes of adding into the value of non-originating materials (i.e. traced materials) of the final good.

If not, evaluate the originating status of the intermediate material using the non-automotive verification programs contained in Chapter 5 of the audit manual. This could involve a test of the tariff classification change or both a tariff classification change and a regional value content requirement (using the net cost method for determining the regional value content). While conducting these tests, note any materials that are potentially traced materials. This information will be used in the 11. TARIFF CLASSIFICATION verification sub-program.

e) If more than one intermediate material has been identified, ensure that, where the intermediate material is subject to a regional value content requirement, no other self-produced material subject to a regional value content requirement is used in the production of that intermediate material.

f) Conclude as to whether the intermediate material is an originating material (and its traced material content, if applicable).

g) If an intermediate material is determined to be originating, calculate the total cost in accordance with subsection 7(6) and subsections 2(6) through 2(9) of the Regulations (i.e. all product, period and other costs, less the costs identified in verification procedure c) of the 16. VALUE OF OTHER COSTS THAN MATERIALS verification sub-program). This information will be used in the 14. VALUE OF MATERIALS verification sub-program.



To verify that the other costs (labor, overhead, excluded costs, and other costs) included in the regional value content (RVC) calculation are accounted for in accordance with the NAFTA Rules of Origin Regulations.


a) Trace the detail of the net cost reported in the submission of RVC information to the exporter / producer's working schedule. Trace these working schedules to the books and records.

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b) Identify the potential for sales promotion, marketing and after-sales service costs, royalty, shipping and packing costs and non-allowable interest costs being included in the net cost of the good. Consider whether these costs are attributable to the good, or to qualifying intermediate materials.

c) Ensure by scanning the detail in support of the net cost values in the submission of RVC information that period costs, product costs, and other costs incurred in the territory of one or more of the Parties are included in the net cost figure. By breaking down the overhead and general and administrative figures, ensure that the net cost does not include:

i) corporate or personal taxes on income;

ii) capital gains taxes, dividends, or other accounts that should be classified as assets or reductions to income accounts;

iii) profits that are earned by the producer of the good, regardless of whether they are retained or paid out to other persons as dividends;

iv) gains related to currency conversion that are related to the production of the good (losses are added back into the net cost calculation) ;

v) costs of a service provided by a producer of a good to another person where the service is not related to the good;

vi) gains or losses resulting from the disposition of a discontinued operation;

vii) cumulative effects of accounting changes reported in accordance with a specific requirement of the applicable Generally Accepted Accounting Principles;

viii) gains or losses resulting from the sale of a capital asset of the producer.


d) Review the amounts of labor and overhead included in the RVC calculation. Tie these amounts into the financial statements. Are these costs reasonably allocated to the good under review?

e) Evaluate the method(s) used to allocate common expenses to the product under review and assess whether the methods used are consistent with the recommendations in Schedule VII of the NAFTA Rules of Origin Regulations.

f) Obtain copies of agreements related to sales promotions and marketing. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation.

g) Obtain copies of contracts related to shipping costs. Review the terms of the contracts and ensure that they were properly taken into account in the net cost calculation.

h) Refer to the 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION verification sub-program to identify any materials considered to be packing materials and containers for shipment purposes. Ensure that the value for packing materials is not included in the calculation of the net cost of the good.

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i) Obtain copies of royalty agreements, technical assistance agreements, and other similar documents. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation.

j) Obtain copies of loan agreements. Review the terms of these agreements, particularly the interest rates charged and ensure that any non-allowable interest costs have been properly taken into account in the net cost calculation.

k) Review the chart of accounts and the trial balance to identify those accounts included in net cost which fall within the elements of excluded costs and conduct the following :

i) select a sample of costs and trace to supporting commercial documentation, paying particular attention to journal voucher type entries; and

ii) where it is determined that these costs should not be included in net cost, ensure the reversal is only for the amount originally allocated.


l) Review the chart of accounts and trial balance to identify accounts which appear to be included costs but that the company has ignored in the net cost calculation. List these accounts for further testing to supporting documentation and discussion with company personnel.

m) When the light-duty automotive goods are motor vehicles which are produced in a new plant, obtain the value of machinery from the 2. RVC REQUIREMENTS FOR LIGHT-DUTY AUTOMOTIVE GOODS verification sub- program, verification procedure l).

n) Prepare a working paper to adjust the net cost figure in the submission of RVC information for any excluded, or not allowable costs not deducted by the exporter/producer. (Remember that excluded costs attributable to a qualifying intermediate material remain in the calculation for the net cost of the good.)

o) Conclude on the verification sub-objective.

17. ACCUMULATION


To ensure that the exporter/producer that chose to accumulate the production of one (or more) of his suppliers did so in accordance with Section 14 of the NAFTA Rules of Origin Regulations.

General

For purposes of determining whether a good is an originating good, an exporter or producer of a good may choose to accumulate the production of one or more producers, in the territory of one or more of the NAFTA countries, of materials that are incorporated into that good so that the production of the materials shall be considered to have been performed by that exporter or producer, provided that:

- all non-originating materials used in the production of the good undergo an applicable tariff classification change, and the good satisfies any applicable RVC requirement, entirely in the territory of one or more of the Parties; and

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- the good satisfies all other rules of origin requirements.

Requirements

- In order to accumulate the production of a material,

i) where the good is subject to an RVC requirement, the producer of the good must have a certification as described below that is signed by the producer of the material, and

ii) where an applicable change in tariff classification is applied to determine whether the good is an originating good, the producer of the good must have a statement signed by the producer of the material that states the tariff classification of all non-originating materials used by that producer in the production of that material and that the production of the material took place entirely in the territory of one or more of the NAFTA countries;

- a producer of a good who chooses to accumulate is not required to accumulate the production of all materials that are incorporated into the good;

- any information contained in the certification that concerns the value of materials or costs shall be in the same currency as the currency of the country in which the person who provided the statement is located.

17. ACCUMULATION

Statement needed

Non-averaging of costs from accumulated production

Where a good is subject to a RVC requirement and an exporter or producer of the good has a statement signed by a producer of a material that is used in the production of the good that:

a) states the net cost incurred and the value of non-originating materials used by the producer of the material in the production of that material;

i) the net cost incurred by the producer of the good with respect to the material shall be the net cost incurred by the producer of the material plus, where not included in the net cost incurred by the producer of the material the costs referred to in paragraphs 7(1)(c) through (e) of the Uniform Regulations (ie. freight, insurance, packing, transport to location of producer, duties and taxes, customs brokerage fees); and

ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of non-originating materials used by the producer of the material

or

b) states any amount, other than an amount that includes any of the value of non-originating materials, that is part of the net cost incurred by the producer of the material in the production of that material,

i) the net cost incurred by the producer of the good with respect to the material shall be the value of the material determined in accordance with subsection 7(1) of the Uniform Regulations (this is covered in the Value of Materials section of the verification program), and

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ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of the material, determined in accordance with subsection 7(1), minus the amount stated in the statement.

17. ACCUMULATION

Averaging of costs from accumulated production

Where an exporter or producer of a good does not have a statement as provided in (a) or (b) above, but does have a statement signed by a producer of a material that is used in the production of the good that

c) states that sum of the net costs incurred and the sum of the values of non-originating materials used by the producer of the material in the production of that material and identical materials or similar materials, or any combination thereof, produced in a single plant by the producer of the material over a month or any consecutive three, six or twelve month period that falls within the fiscal year of the producer of the good, divided by the number of units of materials with respect to which the statement is made,

i) the net cost incurred by the producer of the good with respect to the material shall be the sum of the net costs incurred by the producer of the material with respect to that material and the identical materials or similar materials, divided by the number of units of materials with respect to which the statement is made, plus, where not included in the net costs incurred by the producer of the material, the costs referred to in paragraphs 7(1)(c) through (e) of the Regulations, and

ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the sum of the values of non-originating materials used by the producer of the material with respect to that material and the identical materials or similar materials divided by the number of units of materials with respect to which the statement is made;

or

d) states any amount, other than an amount that includes any of the values of non-originating materials, that is part of the sum of the net costs incurred by the producer of the material in the production of that material and identical materials or similar materials, or any combination thereof, produced in a single plant by the producer of the material over a month, or any consecutive three, six or twelve month period that falls within the fiscal year of the producer of the good, divided by the number of units of materials with respect to which the statement is made,

i) the net cost incurred by the producer of the good with respect to the material shall be the value of the material, determined in accordance with subsection 7(1), and


17. ACCUMULATION


a) Determine that only the net cost method has been used to calculate the RVC requirement where the producer has chosen to use accumulation.

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b) Review the information received from the producer, that has accumulated the production, to ensure that it is mathematically correct and ensure that it has been correctly included in the RVC calculation.

In that regard, ensure that the period of time over which the information provided by the supplier was calculated, falls within the fiscal year of the light-duty automotive goods producer.

c) Evaluate the quality of the certifications and ensure that they contain all of the required information as stated above.

When accumulated costs are averaged, ensure that the statement includes the periods referred to in subsection 14(3) of the NAFTA Rules of Origin Regulations, and verify that it falls within the fiscal year of the light-duty automotive goods producer.

d) Ensure that the profit component of the material being accumulated is not included in the net cost information by examining the supplier information and by comparing the price paid by the producer to the cost information provided by the supplier, if possible.

e) Use the following verification sub-programs (only the applicable verification procedures) in order to evaluate the information received: 11. TARIFF CLASSIFICATION, 12. SOURCE OF MATERIALS, 13. INVENTORY MANAGEMENT SYSTEM, 14. VALUE OF MATERIALS, 15. INTERMEDIATE MATERIALS, and 18. CALCULATION OF REGIONAL VALUE CONTENT.

NOTE: Consideration should be given to the use of supplier confirmations and visits to the supplier to verify the authenticity of the information reported to the exporter / producer.

18. CALCULATION OF THE REGIONAL VALUE CONTENT (RVC)


To determine whether the good satisfies the NAFTA regional value content requirement.


a) Obtain the value of all materials to be included in the net cost of the good and the value of non-originating materials identified in the 14. VALUE OF MATERIALS verification sub-program.

b) Add to the value of all materials to be included in the net cost, the value of other costs from the 16. VALUE OF OTHER COSTS THAN MATERIALS verification sub- program to arrive at the net cost of the good.

c) Subtract the value of all non-originating materials from the net cost of the good.

d) Divide the difference by the net cost of the good.

e) Multiply the result obtained in verification procedure d) by 100.

f) Conclude on the verification sub-objective.

19. ORIGIN OF THE GOOD


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To determine which of the goods subject to verification are originating goods under the NAFTA Rules of Origin Regulations.


a) Determine whether the goods subject to verification originate under the NAFTA by documenting whether the tariff classification change and RVC requirements in the specific rule of origin have been met. Refer to the 12. SOURCE OF MATERIALS and 18. CALCULATION OF THE REGIONAL VALUE CONTENT verification sub-programs. Prepare a working paper to document which goods originate and which do not originate under the NAFTA.

b) Conclude on the verification sub-objective.

20. TRANSSHIPMENT


To verify that the originating good, by reason of having undergone production that satisfies the requirements of section 4 of the NAFTA Rules of Origin Regulations, (1) is not withdrawn from customs control outside the territories of the NAFTA countries; and (2) does not undergo further production or any other operation outside the territories of the Parties, other than unloading, reloading, or any other operation necessary to preserve it in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur dioxide or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the good that are spoiled or damaged and present a danger to the remaining units of the good or to transport the good to the territory of the Party.


a) Obtain and review copies of the invoices, bills of lading or waybills for the goods subject to verification for a sample period. Document the shipping route and all points of shipment and transshipment prior to the importation of the goods. Determine if the goods have been conveyed directly on a through bill of lading from the exporter to a consignee. Consider gathering information from the importer.

b) If the goods have not been shipped directly on a through bill of lading, they may be transshipped through an intermediate country, provided that:

i) the goods remain under Customs transit control in the intermediate country; and

ii) the goods undergo no operations in the intermediary country other than the unloading, reloading, or operations necessary to preserve the goods in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the good that are spoiled, or damaged and present a danger to the remaining units of the good or any other operation necessary to transport the good to a NAFTA country.

20. TRANSSHIPMENT

In order to substantiate the above, request documentation from the exporter and/or importer. Documents include, but shall not be limited to: 1) customs receipts and release documents; 2) exporter/ producer shipment/production records; 3) list of serial numbers or lot numbers of the

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goods; 4) temporary import and corresponding export documentation; 5) research material explaining the non-NAFTA customs operations and procedures.

c) Determine whether any of the goods shipped were not produced by the producer. Consider the potential for fungible goods. If fungible goods are found, refer to the 13. INVENTORY MANAGEMENT SYSTEM verification sub-program.

From the transshipment information requested in verification procedure b) of this sub-program, consider requesting that the exporter/producer develop a working paper which shows a reconciliation of shipments of goods exported by the exporter/producer and imported into the territory of the other NAFTA Party, taking into account their quantities and values.

d) Conclude on the verification sub-objective.

APPENDIX P


LIGHT DUTY AUTOMOTIVE GOODS - NON-AVERAGED

VERIFICATION PROGRAM - LIGHT-DUTY AUTOMOTIVE GOODS (NON-AVERAGED)

TABLE OF CONTENTS

DEFINITIONS (Pgs. 1-5)

1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISIONS FOR NON-AVERAGED LIGHT-DUTY AUTOMOTIVE GOODS (pgs.6-7)

2. RVC PERCENTAGE REQUIREMENTS FOR LIGHT-DUTY AUTOMOTIVE GOODS 2.1 The Staged RVC Requirement for a Good of a Tariff Provision Listed in Schedule IV 2.2 The Staged RVC Requirement for a Vehicle and a Good of Headings 8407 and 8408 and Subheading 8708.40 2.3 Special RVC Requirements for Light-Duty Vehicles Produced in a New Plant 2.4 Value of Machinery 2.5 Special RVC Requirements for Light-Duty Vehicles Produced in a Refit Plant 2.6 General Summary Procedures


4. PLANT TOUR


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6. NON-QUALIFYING OPERATIONS 6.1 Non-qualifying Production/Assembly Operations 6.2 Non-qualifying Pricing Practices 6.3 Conclusion


8. TARIFF CLASSIFICATION 8.1 General 8.2 Classification of the Finished Goods and Intermediate Materials (IMs) 8.3 Classification of Materials for Tariff Classification Change Requirement Only 8.4 Classification of all Potential Traced Materials (Materials Of a Tariff Provision Listed in Schedule IV of the Regulations) Used or Incorporated in the Good

9. SOURCE OF MATERIALS 9.1 Tariff Classification Change Analysis 9.2 Source of Materials of a Tariff Provision in Schedule IV for the Purposes of Determin ing the VNM 9.3 Supplier Confirmations 9.4 General


11. VALUE OF MATERIALS 11.1 General 11.2 De Minimis 11.3 Value of Materials to be Included in Net Cost 11.4 Value of Non-originating Materials (Traced Materials) 11.5 Conclusion



14. ACCUMULATION

15. CALCULATION OF REGIONAL VALUE CONTENT


17. TRANSSHIPMENT


TO ENSURE THAT THE LIGHT-DUTY AUTOMOTIVE GOOD, WHERE THERE HAS NOT BEEN AN ELECTION TO AVERAGE, IS AN ORIGINATING GOOD IN

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ACCORDANCE WITH THE NAFTA RULES OF ORIGIN REGULATIONS AND CONSIDERING THE SPECIAL RVC CALCULATION REQUIREMENTS INCLUDED IN SECTION 9 (LIGHT-DUTY AUTOMOTIVE GOODS) AND

SECTION 13 (SPECIAL RVC REQUIREMENTS) OF THE NAFTA RULES OF ORIGIN REGULATIONS.

Definitions:

Note to the Definitions: In order to assist in understanding the audit program where ever a word or group of words are used as defined, the word or words will appear in bold print:

"Class of motor vehicle(s)" means any one of the following categories of motor vehicles:

a) motor vehicles provided for in any of subheading 8701.20, tariff items 8702.10.30 and 8702.90.30 (except for the transport of 16 or more persons), subheadings 8704.10, 8704.22, 8704.23, 8704.32 and 8704.90 and headings 8705 and 8706,

b) motor vehicles provided for in any of subheadings 8701.10 and 8701.30 through 8701.90,

c) motor vehicles provided for in any of Tariff Items 8702.10.60 and 8702.90.60 (vehicles for transport of 15 or fewer persons) and subheadings 8704.21 and 8704.31, and

d) motor vehicles provided for in any of Subheadings 8703.21 through 8703.90.

"Complete motor vehicle assembly process" means the production of a motor vehicle from separate constituent parts, which parts include the following:

(a) a structural frame or unibody,

(b) body panels,

(c) an engine, a transmission and a drive train,

(d) brake components,

(e) steering and suspension components,

(f) seating and internal trim,

(g) bumpers and external trim,

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(h) wheels, and

(i) electrical and lighting components.

"First prototype" means the first motor vehicle that

(a) is produced using tooling and processes intended for the production of motor vehicles to be offered for sale, and

(b) follows the complete motor vehicle assembly process in a manner not specifically designed for testing purposes.

"Floor pan of a motor vehicle" means a component, comprising a single part or two or more parts joined together, with or without additional stiffening members, that forms the base of a motor vehicle, beginning at the firewall or bulkhead of the motor vehicle and ending

(a) where there is a luggage floor panel in the motor vehicle, at the place where that luggage floor panel begins, and

(b) where there is no luggage floor panel in the motor vehicle, at the place where the passenger compartment of the motor vehicle ends.

"Light-duty automotive good" means a light-duty vehicle or a good of a tariff provision listed in Schedule IV that is subject to a regional value-content requirement and is for use as original equipment in the production of a light-duty vehicle.

"Light-duty vehicle" means a motor vehicle provided for in any of tariff items 8702.10.60 and 8702.90.60 ( vehicles for the transport of 15 or fewer persons) and subheadings 8703.21 through 8703.90, 8704.21 and 8704.31.

"Marque" means a trade name used by a marketing division of a motor vehicle assembler that is separate from any other marketing division of that motor vehicle assembler.

"Motor vehicle assembler" means a producer of motor vehicles and any related person with whom, or joint venture in which, the producer participates with respect to the production of motor vehicles.

"New building" means a new construction to house a complete motor vehicle assembly process, where that construction includes the pouring or construction of a new foundation and floor, the erection of a new frame and roof, and the installation of new plumbing and electrical and other utilities.

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"Original equipment" means a material that is incorporated into a motor vehicle before the first transfer of title or consignment of the motor vehicle to a person who is not a motor vehicle assembler, and that is

(a) a good of a tariff provision listed in Schedule IV

(b) an automotive component assembly, automotive component, sub- component or listed material

"Plant" means a building, or buildings in close proximity but not necessarily contiguous, machinery, apparatus and fixtures that are under the control of a producer and are used in the production of any of the following:

(a) light-duty vehicles and heavy-duty vehicles,

(b) goods of a tariff provision listed in Schedule IV, and

(c) automotive component assemblies, automotive components, sub-components and listed materials.

"Refit" means a closure of a plant for a period of at least three consecutive months that is for purposes of plant conversion or retooling.

"Schedule IV of the NAFTA Rules of Origin Regulations"

4009 4010.10 4011 4016.93.10 4016.99.30 and 4016.99.55 7007.11 and 7007.21 7009.10 8301.20 8407.31 8407.32 8407.33 8407.34.05, 8407.34.15, and 8407.34.25 8407.34.35, 8407.34.45 and 8407.34.55 8408.20 8409 8413.30 8414.59.30 8414.80.05 8415.81 through 8415.83 8421.39.40 8481.20, 8481.30 and 8481.80

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8482.10 through 8482.80 8483.10 through 8483.40 8483.50 8501.10 8501.20 8501.31 8501.32.45 8507.20.40, 8507.30.40, 8507.40.40 and 8507.80.40 8511.30 8511.40 8511.50 8512.20 8512.40 8519.91 8527.21 8527.29 8536.50 8536.90 8537.10.30 8539.10 8539.21 8544.30 8706 8707 8708.10.30 8708.21 8708.29.20 8708.29.10 8708.29.15 8708.39 8708.40 8708.50 8708.60 8708.70.05, 8708.70.25 and 8708.70.45 8708.80 8708.91 8708.92 8708.93.15 and 8708.93.60 8708.94 8708.99.03, 8708.99.27 and 8708.99.55 8708.99.06, 8708.99.31 and 8708.99.58 8708.99.09, 8708.99.34 and 8708.99.61 8708.99.12, 8708.99.37 and 8708.99.64 8708.99.15, 8708.99.40 and 8708.99.67 8708.99.18, 8708.99.43 and 8708.99.70 8708.99.21, 8708.99.46 and 8708.99.73

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8708.99.24, 8708.99.49 and 8708.99.80 9031.80 9032.89 9401.20

"Size category", with respect to a light-duty vehicle, means that the total of the interior volume for passengers and the interior volume for luggage is

(a) 85 cubic feet (2.38 m?) or less,

(b) more that 85 cubic feet (2.38 m?) but less than 100 cubic feet (2.80 m?),

(c) 100 cubic feet (2.80 m?) or more but not more than 110 cubic feet (3.08 m?),

(d) more than 110 cubic feet (3.08 m?) but less than 120 cubic feet (3.36 m?), or

(e) 120 cubic feet (3.36 m?)or more.

"Traced material" means a material, produced outside the territories of the NAFTA countries, that is imported from outside the territories of the NAFTA countries and is, when imported, of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations.

"Underbody" means the floor pan of a motor vehicle.

1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISIONS FOR NON AVERAGED LIGHT-DUTY AUTOMOTIVE GOODS


To ensure that the good is a light-duty automotive good.


a) Using the definition of a light-duty vehicle, determine whether the good is classified in one of the tariff provisions listed in the definition of a light-duty vehicle. Also verify that the producer has not filed an election to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1) or 13(4) of the Regulations. If so, this verification program is applicable.

b) If the good is

i) a good of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations,

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ii) subject to a RVC requirement, and

iii) for use as original equipment in the production of a light-duty vehicle.

and the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsection 12(1) of the Regulations.


NOTE: If the good is a light-duty automotive good but the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1), 12(1) or 13(4) of the Regulations, use the Light-Duty Automotive Goods (Averaged) verification program.

If the good is a heavy duty automotive good, but the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1), 12(1) or 13(4) of the Regulations, use the Heavy-Duty Automotive Goods (Non-Averaged) verification program.

If the good is a heavy-duty automotive good and the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1), 12(1) or 13(4) of the Regulations, use the Heavy-Duty Automotive Goods (Averaged) verification program.

If the good is not a light-duty automotive good nor a heavy-duty automotive good, then the general verification programs found in Chapter 5 of the NAFTA audit manual are applicable.



To ensure that the appropriate RVC percentage requirement is used by the producer to determine whether the light-duty vehicle or a good of any of headings 8407 and 8408 and subheading 8708.40, that is for use in a light-duty vehicle qualify as originating as set out in subsections 13(1) or (2) of the NAFTA Rules of Origin Regulations.


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2.1 RVC Percentage Requirement for a Good of A Tariff Provision Listed in Schedule IV, that is Subject to a Regional Value Content Requirement and is for Use in a Light-Duty Vehicle, Except for A Good of Any of Heading Nos 8407 and 8408 and Subheading No. 8708.40 or Any of Subheading Nos. 8482.10 through 8482.80, 8483.20 and 8483.30.

a) Determine if the fiscal year of the producer starts before July 2, 1997. If so, the RVC requirement is 50%.

b) Determine if the fiscal year of the producer starts after July 1, 1997 but before July 2, 2001. If so, the RVC requirement is 55%.

c) Determine if the fiscal year of the producer starts after July 1, 2001. If so, the RVC requirement is 60%.

2.2 RVC Percentage Requirements for a Light-Duty Vehicle or A Good of Any of Heading Nos. 8407 and 8408 and Subheading No. 8708.40, that is for use in a Light-Duty Vehicle

d) Determine if the fiscal year of the producer starts before July 2, 1997. If so, the RVC requirement is 50%.

e) Determine if the fiscal year of the producer starts after July 1, 1997 but before July 2, 2001. If so, the RVC requirement is 56%.


f) Determine if the fiscal year of the producer starts after July 1, 2001. If so, the RVC requirement is 62.5%.

2.3 Special RVC Requirements for a Light-Duty Vehicle Produced in a New Plant

g) Determine if the plant in which the light-duty vehicle is produced consists of or includes a new building in which the light-duty vehicle is assembled.

h) Determine if the light-duty vehicle produced meets the definition of first prototype.

i) Determine the date of production of the first prototype and whether or not it has been five years since the date on which the first prototype has been produced. If it has been greater than five years after the date on which the first prototype was

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produced, use the appropriate RVC requirements as identified in verification procedures d) through f).

j) Determine if the light-duty vehicle is of a:

i) class of motor vehicle,

ii) marque,

iii) size category, or

iv) type of underbody,

that was not previously produced by the motor vehicle assembler in the territory of any of the NAFTA countries.


k) For the purposes of determining the value of machinery that was never previously used for production, and that is used in the new building or buildings for the purposes of the complete motor vehicle assembly process with respect to that vehicle, obtain the motor vehicle assemblers fixed asset sub ledger and the supporting invoices for the new machinery acquired to produce the motor vehicle.

l) Using the information obtained in verification procedure k) above review the producer's calculation of the value of machinery to ensure that the value of machinery that was never previously used for production, and that is used in the new building(s) for the purposes of the complete motor vehicle assembly process with respect to that motor vehicle, is at least 90% of the value of all machinery used for the purpose of that process.

i) Verify that where the machinery was acquired by the producer of the motor vehicle from another person, the value of the machinery is the cost of that machinery that is recorded on the books of the producer.

ii) Verify that where the machinery was used previously by the producer of the motor vehicle in the production of another good, the value of machinery is the cost of the machinery that is recorded on the books of the producer minus accumulated depreciation of that machinery that is recorded on those books.

iii) Verify that where the machinery was produced by the producer of the motor vehicle, the value of the machinery is the total cost incurred with respect to that machinery, calculated on the basis of the costs that are recorded on the books of the producer.

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m) Conclude as to whether all the conditions outlined in verification procedures g) through l) are met. If so, the RVC requirement is not less than 50% for five years after the date on which the first prototype is produced in the plant by the motor vehicle assembler. The RVC requirements outlined in verification procedures d) through f) apply for the periods following this five year time frame.

2.5. Special RVC Requirements for a Light-Duty Vehicle Produced in a Refit Plant

n) Determine if the plant in which the light-duty vehicle are produced meets the definition of refit.

o) Determine if the light-duty vehicle produced meet the definition of first prototype.

p) Determine the date of production of the first prototype and whether or not it has been two years since the date on which the first prototype has been produced. If greater than two years after the date on which the first prototype was produced, use the appropriate RVC requirements for light-duty automotive goods as identified in verification procedures d) through f).

q) Determine if the light-duty vehicle is of a:

i) class of motor vehicle,

ii) marque,

iii) size category, or

iv) type of underbody,

that was not assembled by the motor vehicle assembler in the plant before the refit.

r) Conclude as to whether the conditions outlined in verification procedures n) through q) are met. If so, the RVC requirement is not less than 50% for two years after the date on which the first prototype is produced in the plant by the motor vehicle assembler. The RVC requirements outlined in verification procedures d) through f) apply for the periods following this two year time frame.


s)Conclude on the verification sub-objective


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a) Obtain from company officials a submission of RVC information for the good under review.

b) Review the costs provided in the submission of RVC information to determine if they are reflective of actual costs per unit (as opposed to estimates).

c) Ensure that all calculations are correct. Ensure that the appropriate RVC percentage requirement has been used by the company. Ensure that the good has met the RVC requirement based on these calculations.

d) Ensure that all the non-originating materials (i.e. materials that do not meet their required rule of origin) and materials of unknown origin have met the required tariff classification change portion of the rule of origin.

e) Identify any materials listed on Schedule IV of the NAFTA Rules of Origin Regulations that are imported by the company but are declared as originating materials.

f) Review the labor and overhead information provided. Identify any excluded costs incorrectly included in the RVC calculation. Ensure that all costs allocated to the good subject to the verification are in fact actual costs incurred in the production of the good on the date of its production.

g) Conduct risk analysis/ratio analysis on the total values for materials, labor and overhead in relation to the RVC requirement.

h) Conclude on the areas of concern requiring further review.

4. PLANT TOUR




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a) Obtain an organization chart. Ensure all operations and/or departments whose costs are included in the total cost calculation for RVC purposes have been reviewed and documented.

Document the potential for costs to be included in total cost that should be excluded (i.e. costs not directly related to the production of the good subject to the verification, sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs, and non-allowable interest costs).

Ensure that averaged costs over a period of time and allocated to the good subject to the verification are not included.

b) Observe and document the existence of the good.

i) Confirm that the good is manufactured at that production facility.


c) Where the producer designates an intermediate material, review the assembly process and observe the completed intermediate material (IM). This information will be used in the 12. INTERMEDIATE MATERIALS DESIGNATION verification sub-program.

d) Observe and document any concerns with regards to any possible non-qualifying operations (i.e. unacceptable production or pricing practice used to circumvent the Rules of Origin) noted during the plant tour.

e) Observe and document the research and development and/or engineering operations.

Document any concerns with respect to the potential allocation problems of costs not directly related to the good under review.



ii) Document any concerns with respect to the ownership of materials.

iii) Document any concerns with respect to the source of materials (i.e. dual sourcing, markings on materials, fungible materials, etc.) noted during the plant tour, especially those materials listed on Schedule IV of the NAFTA Rules of Origin Regulations.

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iv) Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the good under review.

v) Document any concerns with respect to the shipping of the finished good (i.e. any costs of shipping and packing that may be included in the net cost calculation).

g) Observe and document the production/manufacturing operations. Ensure each in-house manufacturing and sub-assembly operations have been documented (i.e. stamping, engine production, axle production, etc.)

4. PLANT TOUR

Document any concerns with respect to the out-sourcing (sub-contracting) of manufacturing/production or sub-assembly operations. Evaluate whether assists may be provided to the out-sourced producers. This information will be used in the 11. VALUE OF MATERIALS verification sub-program.

Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the good under review.


i) Observe and document the management of information system. Inquire as to the type of management reports that are produced (i.e. bills of materials, production reports, labor reports, material stock reports, etc.). This information will be used in the 5. REVIEW OF MANAGEMENT OF INFORMATION SYSTEM verification sub-program.



To ensure the management of information system used to develop the regional value content calculation is reliable and accurate.


a) Obtain the relevant information concerning the management of information system (MIS) gathered through the plant tour. Identify the areas of concern with respect to the MIS. Consider using the "Review of Policies, Procedures and Internal Controls Checklist" (See Appendix F) to assist in identifying concerns.

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c) Obtain the independent auditor's report. Review this report to assess the reliance the auditor's placed on the MIS.

d) Interview the personnel responsible for the MIS. Assess their knowledge of Electronic Data Processing (EDP) and the importance the organization places on controls within the MIS. Determine whether the MIS is capable of producing accounting information on a per unit basis.





C) development of standards for costing purposes (i.e. materials, labor and overhead standards).


ii) Include a review of the following to identify the costs attributable to a particular unit:

A) how orders for motor vehicles are entered into the system

B) how production reports are generated

C) how material stock reports (i.e. KAN-BAN) and picking lists are generated

D) inventory (i.e. purchase from supplier(s), receipt, transfer to production {inventory management method such as LIFO, FIFO, average, etc.}, work-in-process, finished goods, shipment of finished goods)

iii) Document how the actual costs are recorded in the system. Include a review of payments for materials inventory, direct and indirect labor, manufacturing overhead and all other costs included in the total cost calculation for the unit under review.

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i) General Controls

Review information pertaining to the organization controls and standard operating procedures.

Review the systems development and documentation controls. This includes:




D) system testing;






A) handling errors;

B) program protection;

C) file protection;

D) security protection.




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B) audit trail;







D) that processing is reliable, proper and authorized;

E) that unreliable, improper, and unauthorized processing is detected;

F) that unreliable, improper, and unauthorized processing is corrected;

G) that errors detected in output are properly corrected and resubmitted to data processing on a timely basis.


g) Since no election to average was filed by the producer of the good, the auditor must make sure that the RVC calculation applicable to the good, or any other information that served as a basis for the calculation, do not include any averaging of costs incurred by the producer of the good, because of the fact that the RVC must be calculated in accordance with Article 402(3) of the NAFTA, and not in accordance with Section 11 of the Regulations.



To ensure that the good does not qualify as originating because of mere dilution with water or another substance or because of a production or pricing practice designed to circumvent the rules of origin as set out in Chapter 4 of the NAFTA.

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Note: A good shall not be considered to be an originating good where there is a "preponderance of evidence" that the object of a production or pricing practice was to circumvent the Rules of Origin. In regards to unacceptable production practices, circumvention consists of any alteration or process performed on goods for the purpose of circumventing the rule of origin requirements. For example, when the processing or assembling performed in the territory of another Party of the Agreement is reversed or substantially altered after the goods have been imported into Canada, and such processing or assembly was not performed for any commercial purpose other than to qualify the good for the NAFTA tariff treatment, then this will be considered circumvention.


6.1 Non-qualifying production/assembly operations

a) During the on-site visit, interview personnel to understand the production/assembly operations. Document any concerns that need to be confirmed during the plant tour.

b) Obtain and review a copy of the bill of materials and any product literature for the good under review. Document any concerns with respect to non-qualifying production/assembly operations.

c) Review the section of the 4. PLANT TOUR verification sub-program related to non-qualifying operations. Address any concerns noted with respect to the non-qualifying production/assembly operations.

d) Review documents related to transportation (consider documents obtained in the 17. TRANSSHIPMENT verification sub-program) and document any concerns with respect to the finished good being altered subsequent to importation.

e) Prepare a written evaluation of the non-qualifying production/assembly operation and assess the evidence gathered.


f) Identify major adjustments made as a result of the11. VALUE OF MATERIALS verification sub-rogram, and document any concerns.

g) Review adjustments made to the purchase accounts. Identify any concerns.

h) Prepare a written evaluation of the questionable non-qualifying pricing practice(s) and assess the extent of the evidence gathered.

6.3 Conclusion

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To ensure that the bill of materials (BOM) of the good under review is complete and accurate.


a) Obtain the BOM and any additional supporting documentation for the good under review used by the producer to prepare the submission of RVC information. (Refer to the 8. TARIFF CLASSIFICATION verification sub-program.)

b) Verify the mathematical accuracy of the BOM.

c) Compare the values of the materials and the materials themselves (inventory part # and name) on the BOM and the other supporting documentation to totals reported in the submission of RVC information. If information concerning the origin of the materials or sourcing of the materials is on the BOM and the supporting documentation, also compare this information to the origin of the materials declared in the submission of RVC information.

d) Using the information from the 6. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program, obtain the description of the system for the BOM and any related documentation that is required to complete verification procedure f). If necessary, review the policy and procedures manual for the BOM with respect to the definition of the BOM, use of the BOM, what is reported on the BOM, who and when changes are made to the BOM, etc.

e) To ensure that the BOM is complete:

i) compare the BOM to engineering documents/specifications (i.e. compare parts and quantity to be included in the production);

ii) compare the part numbers, descriptions, and values to picking lists used to obtain parts for the production from inventory (ensure this matches the inventory management method as described in the MIS review);

iii) compare the BOM to product literature;

iv) review the sourcing of materials for consistency on the BOM;

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v) compare the BOM to a BOM for a similar good (i.e. use professional judgment to ensure all materials on theBOM are incorporated into the good and to ensure there are non missing materials that should be incorporated into the good). Document any differences. Obtain explanations from the producer.

f) Review the company's standard cost accounting policies, if standard costs were used. If so, ensure that the standard cost of the good has been adjusted to the actual cost of production of the good on a per unit basis.

g) Identify any accessories, spare parts and tools, packaging materials and containers for retail sale and packing materials and containers for shipment to be disregarded for evaluating the tariff classification change requirement. Provide this information to the person responsible for the 8. TARIFF CLASSIFICATION verification sub-program. Provide the information concerning packing materials and containers for shipment to the person responsible for the 13. VALUE OF OTHER COSTS THAN MATERIALS and 11. VALUE OF MATERIALS verification sub-program.

h) Conclude on the verification sub-objective.



To ensure that the finished good is properly classified under the Harmonized System (H.S.) of tariff classification, and to ensure the correct rule of origin is applied.

To identify all materials which would not meet the necessary tariff classification change as required by the specific rule of origin (Schedule I of the NAFTA Rules of Origin Regulations) applicable to the good if they were non-originating materials.

To classify all potential traced materials (materials of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations) used or incorporated in the good in order to establish the value of non originating materials as per Section 9 of the Regulations.


8.1 General

a) Interview the person(s) responsible for tariff classification to establish how the classifications of the good and materials were determined. Obtain any rulings that the company received from other Customs Administrations.

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b) Document the potential for fungible materials while performing the procedures in this verification sub-program.

c) Obtain information from the company pertaining to the de minimis calculation when the company has applied the de minimis provision to qualify the good. To evaluate de minimis, refer to the verification procedures in Chapter 5 of this audit manual.

d) For use in the 9. SOURCE OF MATERIALS verification sub-program, note the source of materials, if you come across this information while performing the procedures in this verification sub-program.

8.2 Classification of the finished good and intermediate materials (IMs)

e) Obtain and review documentation on the good and IMs, e.g., bill of materials, owner's manual, public brochures, engineering specifications, catalogues, invoices, bill of lading, and verify if the information is consistent with the tariff classification of the good under review. Review the export documents for the Harmonized System (H.S.) number for the good under review.

f) Obtain from the 4. PLANT TOUR verification program, information with respect to the production of the good or the intermediate materials and physically inspect the good during a plant tour to aid in confirming the correct classification number and rule of origin of the finished good and IMs.

g) Identify the classification declared by the company in the RVC information and on the NAFTA Certificate of Origin.

h) Identify the applicable rule of origin for the good and the IMs.

i) Prepare a conclusion on the tariff classification for the good under review and the IMs.

8.3 Classification of Materials for Tariff Classification Change Requirement Only

To be completed where the non-originating materials included in the good and IMs under review are required to undergo a tariff classification change.

j) Analyze the rule of origin identified in verification procedure h) to determine the tariff classification of the materials that would not meet the required tariff classification change if they were non-originating materials.

k) Obtain an accurate description of the materials used in the production of the good under review, by physical examination, reviewing supplier parts catalogue, purchase orders, engineering documents and/or supplier contracts. Document

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any self-produced materials designated in accordance with subsection 4(8) of the NAFTA Rules of Origin Regulations.

l) Classify all materials, except those identified as accessories, spare parts and tools; packaging materials and containers for retail sale and packing materials and containers for shipment (obtain this information from the 7. BILL OF MATERIALS verification sub-program), to the level required for the tariff classification change requirement.

m) Identify those materials which would not meet the tariff classification change requirement if they were non-originating.

8.4 Classification of all potential traced materials (materials of a tariff provision listed in Schedule IV of the Regulations) used or incorporated in the good

n) Using the BOM of the good under review, (and any information concerning the potential traced material content of intermediate materials, if applicable, from the 12. INTERMEDIATE MATERIALS DESIGNATION verification sub-program) obtain an accurate description of the materials by physical examination, reviewing supplier parts catalogues, engineering documents and/or supplier contracts (some of this reference material may have been gathered in verification procedure j) of this verification sub-program). Identify:

i) those materials that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations, but do not contain any Schedule IV of the NAFTA Rules of Origin Regulations sub-materials

ii) those materials that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations, which may also contain sub-materials that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations. For those materials identified;

A) identify the sub-materials by examining the BOM for the sub-materials, the supplier parts catalogues, and/or by physical examination;

B) classify the sub-materials; and,

C) identify the sub-materials that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations.

iii) those materials that are NOT of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations, but which may contain sub-materials that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations. For those materials identified;

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A) identify the sub-materials by examining the BOM, the supplier parts catalogues, engineering documents, supplier contacts, and/or by physical examination;

B) classify the sub-materials; and,

C) identify the sub-materials that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations.

o) Repeat the steps in m)i) through m)iii), as necessary, to identify any sub-materials, used or incorporated into the materials, that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations.

p) Prepare a working paper to document all the identified materials, used or incorporated into the good at any level of production, that are of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations. Also, when applicable, group the sub-materials by the material that incorporates the sub-material.




- the origin of all materials which would not meet the necessary tariff classification change as required by the specific rule of origin (Schedule I of the Regulations) if the materials were non-originating; and

- the source of all materials or sub-materials of a tariff provision listed in Schedule IV of the Regulations, used or incorporated in the good in order to establish the value of non-originating materials (Section 9 of the Regulations) especially the ones claimed as originating materials by the producer or his supplier.



a) Obtain the list of the materials which would not meet the tariff classification change required by the specific rule of origin from the Classification of materials for tariff classification change requirement only section of the 8. TARIFF CLASSIFICATION verification sub-program.

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b) Confirm the origin of these materials by reviewing the Certificate of Origin or supplier certification obtained by the producer or by reviewing the purchase order, invoice and the receiving document.

c) Physically inspect these materials to verify markings or any other indications which might indicate that the materials are non-originating.

d) Assess if the 7% De Minimis rule can be applied if there are non-originating materials that do not meet the required tariff classification change (see verification procedure f) in the 11. VALUE OF MATERIALS verification sub-program.

e) Evaluate the need to send supplier confirmations for the purposes of the origin of materials for the tariff classification change requirement.

f) Conclude as to whether the tariff classification change requirement has been satisfied.

9.2 Source of materials of a tariff provision in Schedule IV of the NAFTA Rules of Origin Regulations for the purposes of determining the VNM

g) Obtain the complete list of all potential traced materials (i.e., materials and sub-materials of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations) from the CLASSIFICATION OF ALL POTENTIAL TRACED MATERIALS USED OR INCORPORATED IN THE GOOD section of the 8. TARIFF CLASSIFICATION verification sub-program.

h) From the list obtained in verification procedure g) select a sample of materials and sub-materials which the exporter has claimed as originating (including those materials which may contain sub-materials) and perform the following:

i) verify if the source of the above materials could be valid, by looking at the Industry Profile documentation, industry information and other submissions for similar goods (i.e. could these materials be imported);

ii) interview company officials responsible for the origin of materials as found in the submission of RVC information. Ask what procedures they used to verify the source of the materials. Document strengths and weaknesses of the manner in which the company assigned origin to the materials;

iii) if the company has received supplier certifications to verify the source of the materials, review them and determine if they are adequate (if not adequate these items may be considered high risk items for confirmation purposes).

i) Obtain information from the exporter's policy and procedures manuals and complete a plant tour to assist in identifying the source of materials. Physically

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inspect the materials to identify markings or any other indications of whether or not the materials may be imported. Coordinate this work with that in verification procedure m)ii). While conducting the plant tour and through enquiry of management, identify any parts of the production process that may be sub-contracted to another company.

j) Review the concerns identified in the 4. PLANT TOUR verification sub-program.

k) Obtain a list of suppliers for all materials on the list obtained in verification procedure g). For the originating materials identified in verification procedure h), determine the suppliers and perform the following:

i) determine whether any of the suppliers have companies in a non-NAFTA country, or if the suppliers are U.S., Canadian or Mexican distributors (these suppliers will be considered high-risk items for confirmation purposes);

ii) inquire of company officials if there were any supplier changes or any materials that are sourced from more than one supplier. The Approved Vendor List or the history of the engineering specifications may provide evidence of supplier changes;

iii) determine whether there are any fungible materials. Examine the parts and supplier lists, the Approved Vendor List and inquire as to whether the same material is sourced from both a supplier from a NAFTA country and from a non-NAFTA country and if they source parts from distributors. (This information will be used in the 10. INVENTORY MANAGEMENT SYSTEM verification sub-program.)

l) Using the 8. TARIFF CLASSIFICATION verification sub-program identify 1) any materials of a tariff provision listed on Schedule IV of the NAFTA Rules of Origin Regulations that had been designated as originating but were in fact imported from outside the NAFTA territory or 2) any materials that are not of a tariff provision on Schedule IV of the NAFTA Rules of Origin Regulations that are considered non-originating but were in fact imported from outside the NAFTA territory, i.e. information from supplier catalogues and markings during the plant tour.

m) Select a sample of originating materials from the list obtained in verification procedure g) and perform the following:

i) scan the purchase invoice (for the material used in the good under review), any attached shipping documents, and bank endorsement stamp on the canceled check to determine whether they support the exporter's claim for the source (and value) of the material;

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ii) select materials from this sample to verify markings and coordinate this work with that performed in verification procedure i);

iii) follow up on any contradictory observations; and

iv) prepare a working paper to control this process and to document the results.

n) Using the list obtained in verification procedure g), select a sample of materials not claimed as originating by the producer and determine if:

i) the materials are imported directly into the NAFTA territory by the producer, or

ii) the materials are imported into the territory by someone other than the producer, or

iii) the producer chose to identify the material as non-originating per 9)9)e) of the Regulations If the material is imported into the territory by someone other than the producer, obtain supplier statements for these materials. This information will be used in the 11. VALUE OF MATERIALS verification sub-program.

o) Compare any supplier statements or certificates of origin obtained through the verification procedures identified above to the bill of materials.

p) Evaluate the need to expand sampling procedures based on the results of the testing performed above.

q) Assess if the origin or the traced material content of any of the materials needs to be confirmed with respect to the materials listed on Schedule IV of the NAFTA Rules of Origin Regulations.

r) Conclude as to whether the materials listed on Schedule IV of the NAFTA Rules of Origin Regulations, including the materials (and sub-materials) that may incorporate sub-materials listed on Schedule IV of the NAFTA Rules of Origin Regulations, are originating, imported or non-originating but not-imported (as determined by the Customs officers).


s) Judgementally select suppliers from whom supplier confirmations will be obtained: to confirm the origin of materials listed on Schedule IV of the NAFTA Rules of Origin Regulations claimed to be originating; or to confirm the origin of materials that have potential traced materials in them and claimed by the company or its supplier to be originating (the value of the traced materials may also be subject to this confirmation); or to confirm the origin of materials that if found to be non-originating would not meet the tariff change requirements in Schedule I and that have been claimed as being originating by the company.

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i) send confirmations to high risk suppliers who are distributors, or those who are known to import parts from outside the territory, or where the reliability of the suppliers certifications on file with the exporter/producer are questionable and for high dollar value materials;

ii) find information on the suppliers in the exporter/producer correspondence files and purchase records, i.e. addresses, contact person, phone numbers, etc;

iii) ensure that confirmations are sent out to all suppliers if there is more than one supplier of a material or if suppliers were changed during the period under review;

iv) follow up with the supplier to obtain a completed confirmation , this may be telephone within a predetermined time frame to ensure that all the completed confirmation are received;

Note: Confirmations for which there is no response or insufficient information will result in the material being considered non-originating for tariff change purposes, and will be included in VNM for the RVC calculation.

v) review the confirmations once they are received from the suppliers and compare the information on the confirmations with the information on the certificates filed with the exporter/producer;

vi) determine if supplier confirmation letters should be sent to the suppliers of the suppliers of the exporter and/or producer, because there are materials which require further verification (either for origin or VNM purposes);

vii) after reviewing the supplier confirmation, consideration should be given to conducting a restricted supplier verification at the supplier's premises based on the evidence gathered to date. However, such visits will have to be approved prior to making any arrangements;

viii) prepare a working paper to control the confirmation process and to document the results;

ix) prepare a letter to each supplier subject to the confirmation process, notifying them of whether or not the material was found to be originating.

9.4 General



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To determine if an applicable inventory management method is in place when fungible materials (physically separated or commingled) are used in the production of a good, or when fungible goods are physically combined or mixed in inventory, potentially to identify the origin of a specific good.

In terms of fungible materials used in the production of light-duty automotive goods, an inventory management method must identify originating versus non-originating materials for the purposes of the tariff classification change requirement. Also, for the purposes of the RVC requirement, an inventory management method must, for materials that are on Schedule IV of the NAFTA Rules of Origin Regulations, identify not imported versus imported materials, and for all materials that have more than one supplier, identify the different traced sub-material values.

If an acceptable inventory management method does not exist, for the purposes of the tariff classification change requirement, all fungible materials will be considered to be non-originating, and, for the purposes of the RVC requirement, the total value of all fungible materials identified as a risk above will be included in the calculation of VNM.

Note that the existence of fungible materials does not automatically require that this verification program be applied, as the exporter/producer may choose to treat, for the purposes of the tariff classification change requirement, all fungible materials as non-originating, and, for the purposes of the RVC requirement, the total value of all fungible materials as part of VNM.


a) Obtain from the 9. SOURCE OF MATERIALS verification sub-program, a listing of identified fungible materials.

b) Determine the impact on the origin of the good under review should the inventory management system be found to be not acceptable. When fungible materials exist, evaluate the impact in terms of the tariff classification change requirement (consider the use of the de minimis provision) by reviewing the information obtained in the 8. TARIFF CLASSIFICATION verification sub-program, as well as in terms of the regional value content requirement (considering Schedule IV of the NAFTA Rules of Origin Regulations and materials that may contain traced sub-materials) by reviewing the information obtained in the 11. VALUE OF MATERIALS verification sub-program and the 15. CALCULATION OF THE REGIONAL VALUE

CONTENT verification sub-programs. If the impact is significant,proceed with the evaluation of the inventory management system.

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c) Determine which of the following inventory management systems outlined in the NAFTA Regulations - Schedule X the company used for the fungible materials (goods):

Specific Identification

FIFO

LIFO

Average Method

d) Document the inventory management system from the beginning to end (i.e. purchasing, receiving, storage of materials, removal of materials from storage into production of a good, storage of a good and removal of the good from storage for shipment of the good).

e) If Specific Identification was used, ensure that fungible materials (goods) were physically segregated, or ensure the existence of an origin identifier.

f) If FIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable, first received were considered to be the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn.

g) If LIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable, last received was considered to the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn.

h) If the average method was used, ensure that the ratio was calculated and applied correctly.

i) Ensure whichever method that was chosen, that it was used from the time it was chosen to the end of the fiscal year. Has the system changed since the inception of NAFTA?

j) Ensure that the company correctly determined the materials, identified by origin or by supplier, as applicable, in its opening inventory by:

i) identifying, in the books of the producer, the latest receipts of fungible materials that add up to the amount of fungible materials in opening inventory at the time an inventory method is chosen;

ii) reviewing the origin or supplier of the materials (goods), as applicable, that make up those receipts;

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iii) determining those fungible materials (goods) to be the fungible materials (goods) in opening inventory, identified by origin or supplier, as applicable.

k) Review the inventory management system by performing compliance tests of a sample of purchase transactions. The sample should include transactions involving materials (goods) that were fungible materials (goods) at the inception of the NAFTA and materials (goods) that were identified as fungible since the inception (i.e. change in supplier).

l) Is the inventory management system tested periodically? Obtain a description of periodic testing and evaluate it's effectiveness.

m) Test a sample of fungible material (good) inventories by identifying the origin of opening inventory, adding receipts/adjustments of materials (goods) and deducting withdrawals/adjustments and compare your results to the company's records.

n) Conclude on whether:

i) the inventory management system used by the Company meets all the requirements of Schedule X of the Regulations (i.e. the inventory management system is acceptable); or

ii) the inventory management system used by the company requires improvement to meet the requirements of Schedule X of the Regulations - document the weaknesses of the system - document the impact on the origin of the good under review; or

iii) the inventory management system does not meet the requirements of Schedule X and the company can/cannot construct the necessary inventory system - document the impact on the origin of the good under review.



To ensure that the value of originating and non-originating materials has been calculated in accordance with NAFTA.


11.1 General

a) Gather any information relevant to the value of materials identified in the 5. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program. Assess the internal controls in place to preserve the quality and

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accuracy of the data available by reviewing policy and procedures manuals with respect to the purchase of materials, internal auditor's reports, setting of standards and identification of variances and by performing a walk through of the purchasing and receiving function and documenting the flow of information by tracing material requisitioning, ordering, receiving and reporting, returns, accounting, and cash disbursement.

b) From discussions with the company staff, find out who is responsible for determining the values for the materials and how the materials are valued. Is the same valuation method used for all the materials, i.e., do they use a different method for determining the value of non-originating materials than the value of originating materials? Are materials valued differently for NC and VNM purposes?

c) Review the calculations prepared by the company including any supporting documentation and supplier certifications and statements obtained by the producer. Supplier certifications and statements should state whether the material is originating or non-originating, either with traced materials, or, with a value of traced materials, or, with a zero value of traced materials. Determine if the procedure used to value materials for both NC and VNM purposes is in accordance with the Regulations.

i) Identify all assumptions made by the company.

ii) Identify all cost types included in the calculations (freight, insurance, packing and other costs incurred in transporting, such as duties and taxes and brokers costs, including in-house broker costs). Apply the appropriate verification procedures to the costs being examined (examine invoices, calculations, standard costs, etc...).

iii) Identify the accounts from which the information was extracted.

iv) Determine if the values of materials are the same currency as the currency of the country in which the person who provided the supplier statement is located. See Section 3 of the Regulations.

v) Identify areas for further review.

d) Identify all related suppliers and determine if the purchase price was affected by the relationship and if an adjustment will be required.

i) Identify and review accounts or any documents that may pertain to material transfers and/or transfer payments from the producer to the supplier to identify any possible assists.

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ii) If materials are dual sourced, compare the purchase prices of the related and non-related companies, e.g. obtain price list from the producer listing suppliers, prices and materials.

iii) Review correspondence between the producer and the related suppliers. Is there a possibility of the relationship affecting the value used? Refer to Section 7, Section 9 or Schedule VIII, as applicable, for the method of determining the correct value.

e) Inquire as to how price and usage variances are accounted for. Analyze if these variances (actual and standard cost) are significant and adjust the value of the materials in the RVC calculation, if necessary.

11.2 Deminimis

f) Except for goods of tariff item number 8415.81 through 8415.83, if there are non-originating materials that do not meet the required tariff classification change, verify if the value of these materials determined in accordance with section 7 of the Regulations is less than or equal to 7% of the transaction value (or total cost of the good, if the transaction value is unacceptable), to see if the de minimis rule can be applied. (see verification procedure d) in the 9. SOURCE OF MATERIALS verification sub-program).

11.3 Value of materials to be included in net cost

g) Verify that all materials that are included in the net cost calculation are valued in accordance with section 7 of the Regulations. NOTE: the value of materials calculated in accordance with NAFTA includes the following regardless of whether the applicable value is the customs value of the material or the transaction value with respect to the transaction in which the producer acquired the material:

i) Freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer;

ii) duties and taxes paid or payable with respect to the materials in the territory of one or more of the NAFTA countries, unless they were refunded or waived;

iii) customs brokerage fees (including in-house services);

iv) waste and spoilage resulting from the use of the material in the production (minus the value of reusable scrap);

When the value is the transaction value, the following may also be added:

i) commissions, except buying commissions;

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ii) elements (assists) supplied to the seller by the producer (materials; tools, dies, molds and other indirect materials; engineering, development, artwork, design work, and plans and sketches performed outside the country in which the producer is located)

iii) royalties;

iv) subsequent proceeds that accrue to the seller. The value of materials to be included in net cost also includes accessories, spare parts, tools, packaging materials and containers for retail sale. The value of intermediate materials, if applicable, should be obtained from the information obtained in the 12. INTERMEDIATE MATERIALS DESIGNATION verification sub-program.

h) Review the values of materials reported in the submission of RVC information and assess if these amounts seem reasonable by comparison with the RVC information of a similar good.

i) Inquire into the results of the 7. BILL OF MATERIALS verification sub-program, and take these results into consideration while conducting the value of materials verification procedures.

j) Judgementally select a sample of high risk materials for value of materials purposes. (Consider obtaining sufficient audit coverage). (Note: High risk for value purposes would be fungible materials or those non-traced materials that if found to be traced, or contain traced materials would make the good non-qualifying for RVC purposes. It could also be materials that are overvalued and correctly identified as non-traced or materials that are undervalued and correctly identified as traced, therefore creating an overstatement of the RVC percentage.).

i) determine the actual price paid by the exporter/producer by tracing to the purchase invoice, the attached shipping documents and the bank endorsement stamp on the canceled check;

ii) calculate the difference between the actual and standard cost and compare with the price variance or variance from standard claimed by the exporter/producer; follow-up on any substantial differences; and

iii) trace the total invoice amount to the appropriate ledgers and sub-ledgers to verify that purchases have been recorded correctly in the exporter's/producer's books and records.

k) Verify that the value of all materials, calculated in accordance with section 7 of the Regulations, are included in the net cost of the goods. Ensure that the value of traced (non-originating) materials, determined in accordance with section 9 of the Regulations, as set out below, are not also added in the calculation of the

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net cost of the goods, as they would be double counted. Also, ensure intermediate materials are included only once.

l) Prepare a working paper to ensure that all adjustments required for materials as a result of value of materials verification procedures have been recorded.

m) Conclude as to whether the value of materials is correct.

11.4 Value of non-originating materials (traced materials)

n) Obtain the list of traced materials and sub-materials (i.e. imported materials of a tariff provision listed in Schedule IV of the NAFTA Rules of Origin Regulations) developed in the 9. SOURCE OF MATERIALS verification sub-program, and the list, and value, of the traced materials contained in the intermediate material, if applicable, from the 12. INTERMEDIATE MATERIALS DESIGNATION verification sub-program.

o) Judgementally select a sample of high risk traced materials (high risk in terms of VNM includes traced materials, as well as non-traced materials that contain traced materials (except those imported materials that are not on Schedule IV of the NAFTA Rules of Origin Regulations, even if they contain traced materials))and determine, by, for example, reviewing commercial invoices, and customs invoices, and by applying the relevant valuation methods: (Consider materiality in terms of closeness to RVC requirement)

i) Where the producer imported the traced material and took title at time of importation the value should be the sum of

A) the customs value of the traced material, and where not included in the customs value, any costs identified in B) and C) below:

B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the first place at which it was received in the territory of a NAFTA country, and

C) duties and taxes paid or payable with respect to the material in the territory of one of more of the NAFTA countries, other than duties and taxes that are waived refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable, and customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries.

ii) Where the producer imported the traced material from outside the territories of the NAFTA countries and does not have or take title to it at the time of importation, the value should be the sum of

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A) the customs value of the traced material, and where not included in the customs value, any costs identified in B) and C) below:

B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the place at which it was when the producer took title in the territory of a NAFTA country, and

C) duties and taxes paid or payable with respect to the material in the territory of one or more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable, and customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries.

iii) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and that person has or takes title to the material at the time of importation, if the producer has a statement that is signed by the person from whom the producer acquired the traced material, whether in the form in which it was imported into the territory of a NAFTA country or incorporated into another material, and states all the following values, the value of the traced material should be


B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the first place at which it was received in the territory of a NAFTA country, and


iv) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and that person does not have or take title to the material at the time of importation, if the producer has a statement that is signed by the person from whom the producer acquired the traced material, whether in the form in which it was imported into the territory of a NAFTA country or incorporated into another material, and states all the following values, the value of the traced material should be:


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B) freight, insurance, packing and other costs that were incurred in transporting the traced material to the place at which it was located when the first person in the territory of a NAFTA country took title, and


v) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and the producer acquires the traced material or a material that incorporates the traced material from a person in the territory of a NAFTA country who has title to it, if the producer has a statement that is signed by the person from whom the producer acquired the traced material or the material that incorporates it, and states all the following values, the value of the traced material or the material that incorporates it should be

A) the value determined in accordance with Schedule VIII (transaction value or value determined with an alternative method), with respect to a transaction that occurs after the customs value of the traced material was determined, and where not included in that value,

B) taxes, other than duties paid on an importation of a material from a NAFTA country, paid or payable with respect to the material in the territory of one of more of the NAFTA countries, other than taxes that are waived, refunded, refundable or otherwise recoverable, including credit against tax paid or payable.

vi) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries, and the producer acquires a material that incorporates the traced material and the acquired material was produced in the territory of a NAFTA country and is subject to a regional value-content requirement, if the producer has a statement that is signed by the person from whom the producer acquired the material, and states that the acquired material is an originating material, and also states the regional content of the material, the value of the material should be: an amount equal to VM x (1 - RVCR) where

VM is the value of the acquired material, determined in accordance with Subsection 9(5), with respect to the transaction in which the producer acquired the material, and RVCR is the regional value-content requirement for the acquired material, expressed as a decimal.

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vii) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries, and the producer acquires a material that incorporates the traced material and the acquired material was produced in the territory of a NAFTA country and is subject to a regional value-content requirement, if the producer has a statement that is signed by the person from whom the producer acquired the material, and states that the acquired material is an originating material but does not state any value with respect to the traced material, the value of the material should be:

an amount equal to VM x (1 - RVCR) where

VM is the value of the acquired material, determined in accordance with Subsection 9(5), with respect to the transaction in which the producer acquired the material, and RVCR is the regional value-content requirement for the acquired material, expressed as a decimal.

viii) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and the producer acquires a material that incorporates that traced material, that was produced in the territory of a NAFTA country, and for which an amount was determined with the formula

VM x (1 - RVCR) (in accordance with vi) or vii

respectively above), if the producer of the good has a statement signed by the person from whom the producer acquired the material that states such an amount determined with the formula VM x (1 - RVCR), the value of the material should be the amount determined with the formula

VM x (1 - RVC) or (1 - RVCR) as the case may be.

Explanation: The producer receives a statement that states one amount as the value of the material. That amount is determined by the supplier of the material in accordance with the provisions of paragraph 9(2)(f) or 9(2)(g), as the case may be. That amount is the one the producer will use as the value of the material.

ix) Where a person other than the producer imports the traced material from outside the territories of the NAFTA countries and the producer does not have a statement described in any of paragraphs 9(2)(c) to (h), the value of the traced material or any material that incorporates it is determined in accordance with Subsection 9(5) with respect to the transaction in which the producer acquires the traced material or any material that incorporates it.

p) Determine whether all costs incurred in transporting materials have been identified and correctly reported (i.e. freight, insurance, packing, etc.).

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i) Test the method used by the company when identifying these costs, by selecting a sample of materials on the BOM that are purchased from within the territory of the NAFTA countries and those from outside the territory of the NAFTA countries.


iii) Trace the materials to the purchase invoice and determine the amount of transportation costs associated with those materials. If the transportation costs are not included in the purchase price, trace the costs to the invoices for all costs incurred in transporting the materials.

iv) Prepare adjustments as required as a results of this testing. (keeping in mind materiality and risk)

q) Determine whether duty, taxes and brokerage fees with respect to the purchase and importation of materials have been identified and correctly reported, making adjustments as required. (keeping in mind materiality and risk)

r) Ensure that VNM is adjusted for any variances that affect traced materials values.

s) Verify that values for all the traced materials are included in the Value of Non-originating Materials (VNM) calculation.

t) If the company included other non-originating materials (other than traced materials) in VNM, verify that the values of these materials are calculated in accordance with subsection 9(5) of the Regulations. Ensure that these materials do not contain traced materials already included in VNM.

u) Prepare working papers to support all traced materials. Ensure that sufficient and appropriate evidence has been obtained to support the conclusions made.

11.5 Conclusion

v) Conclude on the verification sub-objective.

12. INTERMEDIATE MATERIALS DESIGNATION


The objective of this verification sub-program is to review any self-produced materials including self-produced materials and containers, and self-produced

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accessories, spare parts and tools, designated as an intermediate material by the producer. If intermediate materials are designated by the company, and are found to qualify, the value of the intermediate material is considered an originating material for RVC calculation purposes. However, intermediate materials in light-duty automotive goods are still subject to the tracing provisions set out in Section 9 of the NAFTA Rules of Origin Regulations.

Note: For the purposes of calculating the RVC of the good, the producer of the good may designate as an intermediate material any self-produced material that is used in the production of the good, provided that where an intermediate material is subject to a RVC requirement, no other self-produced material that is subject to a RVC requirement and is incorporated into that designated self-produced material is also designated by the producer as an intermediate material. Also, intermediate materials are goods in their own right, and must therefore meet the rule of origin applicable to an intermediate material.


a) Document all intermediate material designations made by the company.

b) Inquire of the company officials as to how the value of the intermediate material(s) was calculated. Are all costs reasonably allocated to the intermediate material?

c) Ensure that material, labor, overhead costs, etc. related to the intermediate material are not double counted in the respective costs related to the final good.

d) Is the intermediate material a light-duty vehicle, or a good of a tariff provision listed on Schedule IV of the Regulations, that is subject to a RVC requirement and is for use as original equipment in the production of a light-duty vehicle?

If so, complete the 7. BILL OF MATERIALS, 8. TARIFF CLASSIFICATION, 9. SOURCE OF MATERIALS, 11. VALUE OF MATERIALS, 13. VALUE OF OTHER COSTS THAN MATERIALS, and 15. CALCULATION OF THE REGIONAL VALUE CONTENT REQUIREMENT sub-programs of the light-duty automotive verification (averaged or non-averaged, as applicable) programs, specifically oriented towards the intermediate materials. Any traced materials contained in the intermediate material and their value should be noted. This information will be used in the VALUE OF MATERIALS for the purposes of adding into the value of non-originating materials (i.e. traced materials) of the final good.

If not, evaluate the originating status of the intermediate material using the non-automotive verification programs contained in Chapter 5 of the manual. This could involve a test of the tariff classification change or both a tariff classification change and a regional value content requirement (using the net cost method for determining the regional value content). While conducting these tests, note any

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materials that are potentially traced materials. This information will be used in the 8. TARIFF CLASSIFICATION verification sub-program.

e) If more than one intermediate material has been identified, ensure that, where the intermediate material is subject to a regional value-content requirement, no other self-produced material subject to a regional value-content requirement is used in the production of that intermediate material.

f) Conclude as to whether the intermediate material is an originating material (and its traced material content, if applicable).

g) If an intermediate material is determined to be originating, calculate the total cost in accordance with subsection 7(6) and subsections

2(6) through 2(9) of the Regulations (i.e. all product, period and other costs, less the costs identified in verification procedure c) of the 13. VALUE OF OTHER COSTS THAN MATERIALS verification sub-program). This information will be used in the 11. VALUE OF MATERIALS verification sub-program.



To verify that the other costs (labor, overhead, excluded costs, and other costs) included in the regional value content (RVC) calculation are only attributable to the good under review.


a) Trace the detail of the net cost reported in the submission of RVC information to the exporter / producer's working schedule. Trace these working schedules to the books and records.

b) Identify the potential for sales promotion, marketing and after-sales service costs, royalty, shipping and packing costs and non-allowable interest costs being included in the net cost of the good. Consider whether these costs are attributable to the good, or to qualifying intermediate materials.

c) Ensure by scanning the detail in support of the net cost values in the submission of RVC information that period costs, product costs, and other costs incurred in the territory of one or more of the Parties are included in the net cost figure. By breaking down the overhead and general and administrative figures, ensure that the net cost does not include:


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iv) gains related to currency conversion that are related to the production of the good (losses are added back into the net cost calculation) ;



vii) cumulative effects of accounting changes reported in accordance with a specific requirement of the applicable Generally Accepted Accounting Principles;


d) Review the amounts of labor, overhead and general and administrative expenses included in the RVC calculation. Trace these labor, overhead and general and administrative costs to the supporting documentation for the good under review. Ensure none of these costs include excluded costs.

e) Obtain copies of agreements related to sales promotions and marketing. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation.

f) Obtain copies of contracts related to shipping costs. Review the terms of the contracts and ensure that they were properly taken into account in the net cost calculation.

g) Refer to the verification sub-program to identify any materials considered to be packing materials and containers for shipment purposes. Ensure that the value for packing materials is not included in the calculation of the net cost of the good.

h) Obtain copies of royalty agreements, technical assistance agreements, and other similar documents. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation.

i) Obtain copies of loan agreements. Review the terms of these agreements, particularly the interest rates charged and ensure that any non-allowable interest costs have been properly taken into account in the net cost calculation.

j) Review the chart of accounts and trial balance to identify accounts which appear to be included costs but that the company has ignored in the net cost

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calculation. List these accounts for further testing to supporting documentation and discussion with company personnel.

k) When the light-duty automotive goods are motor vehicles which are produced in a new plant, obtain the value of machinery from the 2. RVC REQUIREMENTS FOR LIGHT-DUTY AUTOMOTIVE GOODS verification sub-program, verification procedure l).

l) Prepare a working paper to adjust the net cost figure in the submission of RVC information for any excluded, or not allowable costs not deducted by the exporter/producer. (Remember that excluded costs attributable to a qualifying intermediate material remain in the calculation for the net cost of the good.)

m) Conclude on the verification sub-objective.

14. ACCUMULATION



General

For purposes of determining whether a good is an originating good, an exporter or producer of a good may choose to accumulate the production of one or more producers, in the territory of one or more of the NAFTA countries, of materials that are incorporated into that good so that the production of the materials shall be considered to have been performed by that exporter or producer, provided that:

- all non-originating materials used in the production of the good undergo an applicable tariff classification change, and the good satisfies any applicable RVC requirement, entirely in the territory of one or more of the Parties; and - the good satisfies all other rules of origin requirements.

Requirements

- In order to accumulate the production of a material,


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ii) where an applicable change in tariff classification is applied to determine whether the good is an originating good, the producer of the good must have a statement signed by the producer of the material that states the tariff classification of all non-originating materials used by that producer in the production of that material and that the production of the material took place entirely in the territory of one or more of the NAFTA countries;

- a producer of a good who chooses to accumulate is not required to accumulate the production of all materials that are incorporated into the good;

- any information contained in the certification that concerns the value of materials or costs shall be in the same currency as the currency of the country in which the person who provided the statement is located.

Statement needed

Non-averaging of costs from accumulated production



i) the net cost incurred by the producer of the good with respect to the material shall be the net cost incurred by the producer of the material plus, where not included in the net cost incurred by the producer of the material the costs referred to in paragraphs 7(1)(c) through (e) of the Regulations (i.e. freight, insurance, packing, transport to location of producer, duties and taxes, customs brokerage fees); and

ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of non-originating materials used by the producer of the material;

or


i) the net cost incurred by the producer of the good with respect to the material shall be the value of the material determined in accordance with subsection 7(1) of the Regulations (this is covered in the 11. VALUE OF MATERIALS verification sub-program), and

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Where an exporter or producer of a good does not have a statement as provided in (a) or (b) above, but does have a statement signed by a producer of the material that is used in the production of the good that


i) the net cost incurred by the producer of the good wit respect to the material shall be the sum of the net costs incurred by the producer of the material with respect to that material and the identical materials or similar materials, divided by the number of units of materials with respect to which the statement is made, plus, where not included i the net costs incurred by the producer of the material, the costs referred to in paragraphs 7(1)c) through (e) of the Regulations, an d

ii) the value of non-originating materials used by the producer of the good with respect to eh material shall be the sum of the values of non-originating materials used by the producer of the material with respect to that material and the identical materials or similar materials divided by the number of units of material with respect to which the statement is made;

or



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d) Ensure that the profit component of the material being accumulated is not included in the net cost information by examining the supplier information and by comparing the price paid by the producer to the cost information provided by the supplier.

e) Use the following verification sub-programs (only the applicable verification procedures) in order to evaluate the information received: 8. TARIFF CLASSIFICATION, 9. SOURCE OF MATERIALS, 10. INVENTORY MANAGEMENT SYSTEM, 11. VALUE OF MATERIALS, 12. INTERMEDIATE MATERIALS DESIGNATION, and 15. CALCULATION OF THE REGIONAL VALUE CONTENT.

NOTE: Consideration should be given to the use of supplier confirmations and visits to the supplier to verify the authenticity of the information reported to the exporter / producer.

15. CALCULATION OF THE REGIONAL VALUE CONTENT (RVC)


To determine whether the good satisfies the NAFTA regional value content requirement.


a) Obtain the value of all materials to be included in the net cost of the good and the value of non-originating materials identified in the 11. VALUE OF MATERIALS verification sub-program.

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b) Add to the value of all materials to be included in the net cost, the value of other costs from the 13. VALUE OF OTHER COSTS THAN MATERIALS verification sub- program to arrive at the net cost of the good.

c) Subtract the value of all non-originating materials from the net cost of the good.

d) Divide the difference by the net cost of the good.

e) Multiply the result obtained in verification procedure d) by 100.

f) Conclude on the verification sub-objective.



To determine the origin of the good under review using the NAFTA Rules of Origin Regulations.


a) Determine whether the good subject to verification originates under the NAFTA by documenting whether the tariff classification change and RVC requirements in the specific rule of origin have been met. Refer to the 9. SOURCE OF MATERIALS and 15. CALCULATION OF THE REGIONAL VALUE CONTENT verification sub-programs. Prepare a working paper documenting if the good originates under the NAFTA.

b) Conclude on the verification sub-objective.

17. TRANSSHIPMENT


To verify that the originating good, by reason of having undergone production that satisfies the requirements of section 4 of the NAFTA Rules of Origin Regulations, (1) is not withdrawn from customs control outside the territories of the NAFTA countries; and (2) does not undergo further production or any other operation outside the territories of the Parties, other than unloading, reloading, or any other operation necessary to preserve it in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur dioxide or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the good that are spoiled or damaged and present a danger to the remaining units of the good or to transport the good to the territory of the Party.

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a) Obtain and review the copy of the invoice, bill of lading or waybill for the goods subject to verification. Document the shipping route and all points of shipment and transshipment prior to the importation of the good. Determine if the good has been conveyed directly on a through bill of lading from the exporter to a consignee. Consider gathering information from the importer.

b) If the good has not been shipped directly on a through bill of lading, it may have been transshipped through an intermediate country, provided that:

i) the good remained under Customs transit control in the intermediate country; and

ii) the good underwent no operations in the intermediary country other than the unloading, reloading, or operations necessary to preserve the good under review in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the other goods that are shipped with the good under review which are spoiled, or damaged and present a danger to good under review or any other operation necessary to transport the good to a NAFTA country.

c) Determine whether the good shipped was not produce by the producer. Consider the potential for fungible goods. If fungible goods are found, refer to the 10. INVENTORY MANAGEMENT SYSTEM verification sub-program. From the transshipment information requested in verification procedure b) of this sub-program, consider requesting that the exporter/producer develop a working paper which shows a reconciliation of shipments of goods exported by the exporter/ producer and imported into the territory of the other NAFTA Party, taking into account their quantities and values.

d) Conclude on the verification sub-objective.

APPENDIX Q


HEAVY DUTY AUTOMOTIVE GOODS - AVERAGED

TABLE OF CONTENTS

HEAVY-DUTY AUTOMOTIVE VERIFICATION PROGRAM (AVERAGED)

(Sub-programs 1 through 20)

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• DEFINITION OF TERMS

1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISIONS FOR HEAVY-DUTY AUTOMOTIVE GOODS WHERE THE COMPANY HAS ELECTED TO AVERAGE THE COSTS OF THESE GOODS

2. RVC PERCENTAGE REQUIREMENTS FOR HEAVY-DUTY AUTOMOTIVE GOODS 2.1 Staged RVC Requirement for a Good of a Tariff Provision Listed in Schedule IV 2.2 Staged RVC Requirements for a Heavy-Duty Vehicles and Heavy-Duty Components 2.3 Special RVC Requirements for Heavy-Duty Vehicles Produced in a New Plant 2.4 Value of Machinery 2.5. Special RVC Requirements for Heavy Duty Vehicles Produced in a Refit Plant 2.6 General Summary Procedures

3. MOTOR VEHICLE AVERAGING ELECTION 3.1. Identification of Election to Average 3.2. Identification of the Motor Vehicles Produced by the Motor Vehicle Assembler which should be included in the Election to Average 3.3. Comparison and Reconciliation of the RVC Information to the Election Filed

Under Section 11 of the NAFTA-Rules of Origin Regulations, Motor Vehicle Averaging 3.4. Comparison to the Election Filed Under Section 13(4)-Special RVC Requirements for Vehicles Produced in a New or Refit Plant 3.5. General Summary Procedures

4. AUTOMOTIVE PARTS AVERAGING 4.1 Identification of Election to Average 4.2 Identification of the Goods Included in the Automotive Parts Averaging Election 4.3 Identification of the Motor Vehicle Producer Included in the Automotive Parts Averaging Election 4.4 Identification of the Country(ies) of Export Included in the Automotive Parts Averaging Election 4.5 Verification of the Period Elected by the Producer 4.6 Comparison and Reconciliation of the Submission of RVC Information 4.7 General Summary Procedures



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7. PLANT TOUR

8. INTERMEDIATE MATERIALS DESIGNATION 8.1. Review of the IM Designation for Compliance With Paragraph 10(9)(a) 8.2. HS Classification of the IM 8.3. Tariff Classification Change Requirements for the IM 8.4. Review of the RVC Requirements of the IM


10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS FROM THE RVC CALCULATION

11. TARIFF CLASSIFICATION 11.1 General Introductory Procedures 11.2. Classification of the Finished Goods and Intermediate Materials (IMs) 11.3 Classification of Materials for Tariff Classification Requirement Only 11.4. Identification of Materials Used or Incorporated in the Good for VNM Purposes

12. SOURCE OF MATERIALS 12.1 Tariff Classification Change Analysis 12.2 Source of Materials for the Purpose of Determining the VNM 12.3 Supplier Confirmations 12.4. General Summary Procedure


14. VALUE OF MATERIALS 14.1 General Valuation Procedures 14.2 Application of the De Minimis Rule 14.3. Value of Materials to be Included in Net Cost 14.4 Value of Non-originating Materials 14.5 Review of Supplier VNM Statements 14.6 Comparing the Verified VNM With the Producers Figures

15. VALUE OF COSTS OTHER THAN MATERIALS

16. ACCUMULATION

17. CALCULATION OF THE RVC


19. NON-QUALIFYING OPERATIONS 19.1 Non-qualifying Production/Assembly Operations

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19.2 Non-qualifying Pricing Practices 19.3 Conclusion on Non-qualifying Operations

20. TRANSSHIPMENT


TO ENSURE THAT THE HEAVY-DUTY AUTOMOTIVE GOOD, WHERE AN ELECTION TO AVERAGE HAS BEEN FILED, IS AN ORIGINATING GOOD IN ACCORDANCE WITH THE NAFTA RULES OF ORIGIN REGULATIONS AND CONSIDERING THE SPECIAL RVC CALCULATION REQUIREMENTS INCLUDED IN SECTION 10 (HEAVY-DUTY AUTOMOTIVE GOODS), SECTION 11 (MOTOR VEHICLE AVERAGING), SECTION 12 (HEAVY-DUTY AUTOMOTIVE PARTS AVERAGING) AND SECTION 13 (SPECIAL RVC REQUIREMENTS) OF THE NAFTA UNIFORM REGULATIONS.

DEFINITIONS

Note to the Definitions: In order to assist in understanding the audit program wherever a word or group of words are used as defined, the word or words will appear in bold print :

"Automotive Component" means a good that is referred to in Column I of an item of Schedule V.

"Automotive Component Assembly(ies)" means a good other than a heavy-duty vehicle that incorporates an automotive component.


a) motor vehicles of any of Subheading 8701.20, Tariff Items 8702.10.30 and 8702.90.30 (except for the transport of 16 or more persons), subheadings 8704.10, 8704.22, 8704.23, 8704.32 and 8704.90 and Headings 8705 and 8706,

b) motor vehicles provided for in any of Subheadings 8701.10 and 8701.30 through 8701.90,

c) motor vehicles provided for in any of Tariff Items 8702.10.60 and 8702.90.60 (vehicles for transport of 15 or fewer persons) and Subheadings 8704.21 and 8704.31, and

d) motor vehicles provided for in any of Subheadings 8703.21 through 8703.90.

"Complete motor vehicle assembly process" means the production of a motor vehicle from separate constituent parts, which parts include the following:

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a) a structural frame or unibody,

b) body panels,

c) an engine, a transmission and a drive train,

d) brake components,

e) steering and suspension components,

f) seating and internal trim,

g) bumpers and external trim,

h) wheels, and

i) electrical and lighting components.

"First prototype" means the first motor vehicle that

a) is produced using tooling and processes intended for the production of motor vehicles offered for sale, and

b) follows the complete motor vehicle assembly process in a manner not specifically designed for testing purposes.


a) where there is a luggage floor panel in the motor vehicle, at the place where that luggage floor panel begins, and

b) where there is no luggage floor panel in the motor vehicle, at the place where the passenger compartment of the motor vehicle ends.

"Heavy-duty automotive good(s)" means a heavy-duty vehicle or a heavy-duty component.

"Heavy-duty component(s)" means an Automotive Component or automotive component assembly that is for use as original equipment in the production of a heavy-duty vehicle.

"Heavy-duty vehicle(s)" means a motor vehicle provided for in any of Heading 8701, Tariff Items 8702.10.30 and 8702.90.30 (vehicles for the transport of 16 or

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more persons), and Subheadings 8704.10, 8704.22, 8704.23, 8704.32 and 8704.90 and heading 8705, and 8706.

"Listed material(s)" means a good that is referred to in column II of an item of Schedule V.


"Model line" means a group of motor vehicles having the same platform or model name .

"Model name" means the word, group of words, letter, number or similar designation assigned to a motor vehicle by a marketing division of a motor vehicle assembler

(a) to differentiate the motor vehicle from other motor vehicles that use the same platform design,

(b) to associate the motor vehicle with other motor vehicles that use different platform designs, or

(c) to denote a platform design.




a) a good of a tariff provision listed in Schedule IV, or

b) an automotive component assembly, automotive component, sub-component or listed material.


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a) light-duty vehicles and heavy-duty vehicles,

b) goods of a tariff provision listed in Schedule IV, and

c) automotive component assemblies, automotive components, sub-components, and listed materials.

"Platform" means the primary load-bearing structural assembly of a motor vehicle that determines the basic size of the motor vehicle, and is the structural base that supports the driveline and links the suspension components of the motor vehicle for various types of frames, such as the body-on-frame or space-frame, and monocoques.

"Refit" means a closure of a plant for a period of at least three consecutive months that is for purposes of plant conversion or retooling.

Schedule V of the NAFTA Rules of Origin Regulations

Item Column I Column II

Automotive Components Listed Materials

1. For engines provided for incast blocks, cast heads, fuel nozzles, fuel injector pumps, heading 8407 or 8408glow plugs, turbochargers, superchargers, electronic engine controls, intake manifolds, exhaust manifolds, intake valves, exhaust valves, crankshafts, camshafts, alternators, starters, air cleaner assemblies, pistons, connecting rods and assemblies made therefrom, rotor assemblies for rotary engines, flywheels (for manual transmissions), flexplates ( for automatic transmissions), oil pans, oil pumps, pressure regulators, water pumps, crankshaft gears, camshaft gears, radiator assemblies, charge-air coolers.

2 For Gear boxes (transmissions)(a) for manual transmissions: transmission cases and provided for in subheadingclutch housings; clutches; internal shifting mechanisms; 8708.40gear sets, synchronizers and shafts; and

(b) for torque convertor type transmissions: transmission cases and convertor housings; torque convertor assemblies;gear sets and clutches; electronic transmission controls.

"Size Category" , with respect to a light-duty vehicle, means that the total of the interior volume for passengers and the interior volume for luggage is

(a) 85 cubic feet (2.38 m3 ) or less,

(b) more than 85 cubic feet (2.38 m3 ) but less than 100 cubic feet (2.80 m3 ),

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(c) 100 cubic feet (2.80 m3 ) or more but not more than 110 cubic feet (3.08 m3 ),

(d) more than 110 cubic feet (3.08 m3) but less than 120 cubic feet (3.36 m3), or

(e) 120 cubic feet (3.36 m3) or more.

"Sub-component" means a good that comprises a listed material and one or more other materials or listed materials.


1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISIONS FOR HEAVY-DUTY AUTOMOTIVE GOODS WHERE THE COMPANY HAS ELECTED TO AVERAGE THE COSTS OF THESE GOODS


To ensure that the good is a heavy-duty automotive good and the company has elected to average the sum of the net costs incurred and the sum of the values of non-originating materials used by the producer in accordance with Subsections 11(1), 12(1) or 13(4) of the Regulations.

VERIFICATION PROCEDURES .

a) Using the definition of a heavy-duty vehicle, determine whether the good is classified in one of the tariff provisions listed in the definition of a heavy-duty vehicle and the producer has filed an election to average the sum of the net costs incurred and the values of non-originating materials in accordance with Subsections 11(1) or 13(4) of the Regulations. If so, this verification program is applicable.

b) If the good is:

i) an Automotive Component or Automotive Component Assembly,

ii) for use as original equipment in the production of a heavy-duty vehicle; and

iii) the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with Subsection 12(1) of the Regulations. If so, this verification program is applicable.


NOTE: If the good is a heavy duty automotive good but the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with Subsection 11(1), 12(1) or 13(4) of the

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Regulations, complete the Heavy-Duty Automotive Goods (Non-Averaged) verification program.

If the good is a light-duty automotive good and the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1), 12(1) or 13(4) of the Regulations, use the Light Duty Automotive Goods (Averaged) verification program.

1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISION FOR HEAVY-DUTY AUTOMOTIVE GOODS WHERE THE COMPANY HAS ELECTED TO AVERAGE THE COSTS OF THESE GOODS

If the good is a light duty automotive good but the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsection 11(1), 12(1), or 13(4) of the Regulations, use the Light-Duty Automotive Goods (Non-Averaged) verification program.

If the good is not a heavy duty automotive good nor a light duty automotive good, then the general verification programs found in Chapter 5 of the NAFTA Audit (Verification) Manual are applicable.

2. RVC PERCENTAGE REQUIREMENTS FOR HEAVY-DUTY AUTOMOTIVE GOODS


To ensure that the applicable minimum Regional Value Content (RVC) percentage requirement is used by the producer to determine whether the heavy-duty vehicles and heavy-duty components qualify as originating under the NAFTA.



2.1 RVC Percentage Requirement for a Good of a Tariff Provision Listed in Schedule IV, that is Subject to a Regional Value Content Requirement and is for use in a Heavy-Duty Vehicle, Except for a Good of any of Heading Nos. 8407 and 8408 and Subheading No. 8708.40 or any of Subheading Nos. 8482.10 through 8482.80, 8483.20 and 8483.30.

a) Determine if the fiscal year of the producer started before July 2, 1997. If so, the RVC requirement is 50%.

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b) Determine if the fiscal year of the producer started after July 1, 1997, but before July 2, 2001. If so, the RVC requirement is 55%.

c) Determine if the fiscal year of the producer started after July 1, 2001. If so, the RVC requirement is 60%.

2.2 Staged Heavy Duty Vehicles and Heavy Duty Components RVC Requirement

Regional Value Content (RVC) Percentage Requirements for light-duty vehicles, or a good provided for in any of heading 8407 and 8408 and subheading 8708.40, that is for use in a heavy-duty vehicle.

d) Determine if the fiscal year of the producer started before 2. RVC PERCENTAGE REQUIREMENTS FOR HEAVY-DUTY AUTOMOTIVE GOODS July 2, 1997. If so, the RVC requirement is 50%.

e) Determine if the fiscal year of the producer started after July 1, 1997, but before July 2, 2001. If so, the RVC requirement is 56%.

f) Determine if the fiscal year of the producer started after July 1, 2001. If so, the RVC requirement is 62.5%.

2.3 Special RVC Requirements for Heavy-Duty Vehicles Produced in a New Plant

g) Determine if the plant in which the heavy-duty vehicles are produced consists of, or includes, a new building in which the heavy-duty vehicles are assembled.

h) Determine if the heavy-duty vehicles produced meet the definition of first prototype .

i) Determine the date of production of the first prototype and whether or not it has been five years since the date on which the first prototype has been produced. If greater than five years after the date on which the first prototype was produced, use the appropriate RVC requirements as identified in Verification Procedures a) through c).

j) Determine if the heavy-duty vehicle is of a:

i) class of motor vehicle, or

ii) marque ,

that was not previously produced by the motor vehicle assembler in the territory of any of the NAFTA countries.

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k) For purposes of determining the value of machinery that was never previously used for production, and that is used in the new building (s) for the purposes of the complete motor vehicle assembly process with respect to that vehicle, obtain the motor vehicle assembler's fixed asset sub-ledger and the supporting invoices for the new machinery acquired to produce the motor vehicle.

l) Using the information obtained in verification procedure h) above review the producer's calculation of the value of machinery to ensure that the value of machinery that was never previously used for production, and that is used in the new building(s) for the purposes of the complete motor vehicle assembly process with respect to that motor vehicle, is at least 90% of the value of all machinery used for the purposes of that process.

i) Where the machinery was acquired by the producer of the motor vehicle from another person, the value of the machinery is the cost of that machinery that is recorded on the books of the producer.

ii) Where the machinery was used previously by the producer of the motor vehicle in the production of another good, the value of machinery is the cost of the machinery that is recorded on the books of the producer minus accumulated depreciation of that machinery that is recorded on those books.

iii) Where the machinery was produced by the producer of the motor vehicle, the value of the machinery is the total cost incurred with respect to that machinery, calculated on the basis of the costs that are recorded on the books of the producer.

m) Conclude as to whether all the conditions outlined in verification procedures g) through l) are met. If so, the RVC requirement is not less than 50% for five years after the date on which the first prototype is produced in the plant by the motor vehicle assembler . The RVC requirements outlined in verification procedure 2.1 apply for the periods following five years after the date on which the first prototype is produced.

2.5 Special RVC Requirements for Heavy-Duty Vehicles Produced in a Refit Plant

n) Determine if the plant which the heavy-duty vehicles are produced meets the definition of refit.

o) Determine if the heavy-duty vehicles produced in the refit plant meet the definition of first prototype.

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p) Determine the date of production of the first prototype and whether or not it has been two years since the date on which the first prototype has been produced. If greater than two years after the date on which the first prototype was produced, use the appropriate RVC requirements for heavy-duty automotive goods as identified in Verification procedure 2.2.

q) Determine if the heavy-duty motor vehicle is of a:

i) class of motor vehicles, or

ii) marque, that was not assembled by the motor vehicle assembler in the plant before the refit.

r) Conclude as to whether the conditions outlined in verification procedures n) through q) are met. If met, the RVC requirement is not less that 50% for two years after the date on which the first prototype is produced in the plant by the motor vehicle assembler . The RVC requirements outlined in Verification procedure 2.1 apply for the period following two years beginning with the date on hich the first prototype is produced.

s) Prepare any adjustments, as required.


t) Conclude on the verification sub-objective



To ensure that the producer of the heavy-duty motor vehicles who has filed an election to average has properly determined the goods to be used to determine the sum of the net costs and the sum of the Value of Non-originating Materials (VNM) that are used in the calculation of the Regional Value Content (RVC) as set out in the NAFTA Rules of Origin Regulations.

Note: Some of these procedures require reference to the Verification Procedures found in 11.2 of the 11. TARIFF CLASSIFICATION verification sub-program.



a) Obtain the appropriate Motor Vehicle Averaging Election filed under Subsection 11(1) or 13(4) of the NAFTA Rules of Origin Regulations for the

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period under review from the Customs officer responsible for maintaining the Motor Vehicle Averaging Elections.

i) Confirm that the election has been accepted within the required time frames.

ii) Ensure that the models of motor vehicles identified on the certificate of origin are included in the election to average.

iii) Identify the averaging provisions elected by the producer. 3.2 Identification of the motor vehicles produced by the motor vehicle assembler which should be included in the election to average

b) If the category of motor vehicles for averaging is made under Paragraphs 11(5)(a), or 13(7)(a) of the NAFTA Rules of Origin Regulations, identify the same model line of all motor vehicles in the same class of motor vehicle produced in the same plant for which the election is made.

i) the model line of all motor vehicles produced in the plant for which the election is made,

ii) the class of motor vehicle for all motor vehicles produced in the plant for which the election is made.

c) If the category of motor vehicles for averaging is made under Paragraph 11(5)(b) or 13(7)(b) of the NAFTA Rules of Origin Regulations, identify the same class of motor vehicles produced in the same plant for which the election is made.

d) If the category under Paragraph 11(5)(c) of the NAFTA Rules of Origin Regulations is chosen, identify the model line of all motor vehicles produced in the territory of the NAFTA country.

3.3. Comparison and Reconciliation of the RVC Information to the Election Filed Under Section 11 of the NAFTA - Rules of Origin Regulations; Motor VehicleAveraging

Ensure that: 1) the category basis of calculation as stated inthe election to average filed with the customs administration has not been modified in any way in the calculation of the actual Regional Value Content (RVC); and 2) all vehicles that should be included based on the category and basis of calculation identified in the election, are in fact included in the averaging calculation (These results will be used as the basis for the remaining verification sub-programs).

e) Determine if the averaging category, identified in verification procedures b), c), or d) used by the motor vehicle assembler to prepare the submission of RVC

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information, is the same as the one on the filed election to average. Identify any differences.

f) Determine the motor vehicles whose costs are included in the submission of the RVC information. Compare the motor vehicles whose costs are being averaged to the motor vehicles whose costs should be averaged on the filed election to average.

i.) If the category under Paragraph 11(5)(a) of the NAFTA Rules of Origin Regulations has been chosen, ensure that:

A) the model line identified on the filed election to average is the same as the model line of the vehicles whose costs are included in the RVC calculation and all vehicles whose costs are included in the RVC calculation are in the same model line and the costs associated with all motor vehicles in that model line are included in the RVC calculation, and

B) the class of motor vehicle identified on the filed an election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the model line identified in verification procedure f) i) A) is within the same class of motor vehicle and the costs associated with all motor vehicles in that model line in that class of motor vehicle are included in the RVC calculation, and

C) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in verification procedure f) i) B) is all produced within the same plant and the costs associated with all motor vehicles in that model line of motor vehicle in that class of motor vehicle in that plant are included in the RVC calculation.

ii) If a category under paragraph 11(5)(b) of the NAFTA Rules of Origin Regulations has been chosen, ensure that

A) the class of motor vehicle identified on the filed election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the costs associated with all motor vehicles that are within the same class of motor vehicle are included in the RVC calculation, and,

B) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in verification procedure f)ii)A) is produced within the same plant and the costs associated with all motor vehicles in that class of motor vehicle in that plant are included in the RVC calculation.

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iii) If the category under Subsection 11(5)(c) of the NAFTA Rules of Origin Regulations has been chosen, ensure that the model line identified on the filed election to average is the same as the model line of the motor vehicles whose costs are included in the RVC calculation and all motor vehicles whose costs are included in the RVC calculation are in the same model line and the costs associated with all motor vehicles produced in the territory of a NAFTA country in that model line are included in the RVC calculation.

g) Ensure that the basis of calculation actually used by the producer is the same as the one on the election.

i) If the basis under paragraph 11(9)(a) has been elected (as identified in verification procedure a)), and using the results of verification procedures b), c), or d) as applicable, ensure that all motor vehicles that fall within the category chosen and are produced (for domestic use and for exportation) in the period elected are included in the RVC calculation.

ii) If the basis under paragraph 11(9)(b) has been elected (as identified in verification procedure a)), and using the results of verification procedures b), c), or d), ensure that all those motor vehicles exported to the territory of one or more of the NAFTA countries that fall within the category chosen and are produced in the period elected are included in the RVC calculation.

h) Ensure that the period identified on the filed election to average is the same as the period used to calculate the RVC. This should be the producer's fiscal year. How does this compare to the period defined in the Certificate(s) of Origin?

3.4 Comparison to the Election Filed Under Subsection 13(4) - Special RVC Requirements for Vehicles Produced in a New or Refit Plant

Ensure that: 1) the category or basis of calculation as stated in the election filed with our customs administration has not been modified in any way in the calculation of the actual RVC; and 2) all vehicles that should be included based on the category and basis of calculation identified in the election to average, are in fact included in the averaging calculation. (These results will be used as the basis for the remaining verification sub-programs)

i) Determine the averaging category, as identified in the NAFTA Rules of Origin Regulations, used by the motor vehicle assembler to prepare the submission of RVC information. Ensure that the category actually averaged in the submission is the same as the one on the filed election to average.

j) Determine the motor vehicles whose costs are included in the RVC calculation in the submission.Compare the motor vehicles whose costs are being averaged in the submission to the motor vehicles whose costs should be averaged based on the filed election to average.

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i) If a category under Paragraph 13(7)(a) has been chosen, ensure that:

A) the model line identified on the filed election to average is the same as the model line of the vehicles whose costs are included in the RVC calculation and all vehicles whose costs are included in the RVC calculation are in the same model line and the costs associated with all motor vehicles in that model line are included in the RVC calculation, and

B) the class of motor vehicle identified on the filed election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the model line identified in Verification procedure

j) i) A) is within the same class of motor vehicle and the costs associated with all motor vehicles in that model line in that class of motor vehicle are included in the RVC calculation, and

C) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in Verification procedure j) i) B) is all produced within the same plant and the costs associated with all motor vehicles in that model line of motor vehicle in that class of motor vehicle in the same plant are included in the RVC calculation.

ii) If a category under Paragraph 13(7)(b) has been chosen, ensure that :

A) the class of motor vehicle identified on the filed election to average is the same as the class of motor vehicles whose costs are included in the RVC calculation and the costs associated with all motor vehicles that are within the same class of motor vehicle are included in the RVC calculation, and

B) the plant identified on the filed election to average is the same as the plant which produces the motor vehicles whose costs are included in the RVC calculation and the class of motor vehicle identified in Verification procedure j)ii)A) is produced within the same plant and the costs associated with all motor vehicles in that class of motor vehicle in that plant are included in the RVC calculation.

k) Ensure that the basis of calculation actually used by the producer is the same as the one on the election.

i) If the Paragraph 13(8)(a) basis of calculation has been elected as identified in verification procedure a), and using the results of the verification procedures b) or c), as applicable, ensure that all motor vehicles that fall within the category chosen that are produced (for domestic use and for exportation) in the period elected are included in the RVC calculation.

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ii) If the Paragraph 13(8)(b) basis of calculation has been elected, as identified in verification procedure a), and using the results of the verification procedures b) or c), as applicable, ensure that all those motor vehicles exported to the territory of one or more of the NAFTA countries that fall within the category chosen that are produced in the period elected, are included in the RVC calculation.

l) Ensure that the period identified on the filed election to average is the same as the period used to calculate the RVC. Ensure that the period is in accordance with Subsection 13(4). How does this compare to the period defined in the Certificate(s) of Origin?

3.5. General Summary Procedures

m) Conclude as to whether the averaging provisions defined by the election to average have been applied correctly.

n) Prepare adjustments as required.



To ensure that the automotive parts producers who have elected to average their net costs and values of non-originating materials have properly determined the goods to be used to determine the sum of the net costs and the sum of the values of non-originating materials (VNM) that are used in the calculation of the Regional Value Content (RVC) as set out in the NAFTA Rules of Origin Regulations.

Note 1: The following verification sub-program only applies where the company has notified the Customs Administration in writing during the course of the verification of their election to average under section 12 of the NAFTA Rules of Origin Regulations. If the Customs Administration has not been notified in writing during the course of the verification that an election to average under section 12 of the NAFTA Rules of Origin Regulations has been made, the heavy-duty automotive goods (non-averaged) verification program is applicable. If the company has elected to average under subsections 11(1) or 13(4) of the NAFTA Rules of Origin Regulations use the 3. MOTOR VEHICLE AVERAGING ELECTION verification sub-program.

Note 2: Some of the these procedures require reference to the verification procedures performed in the 11.2 classification of the Finished Goods verification subobjective of the 11. TARIFF CLASSIFICATION verification sub-program.


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a) If the good is of a provision listed as an automotive component assembly or a heavy-duty component inquire as to whether the producer is electing to calculate the sum of the net costs incurred and the sum of the non-originating materials used by the producer of the goods in accordance with section 12 of the Regulations. If so, this program is applicable, otherwise use the heavy-duty automotive goods non-averaged verification program.

i) Determine the models of goods by part number included in the automotive parts averaging elections. Obtain this information in writing from the company.

ii) Using the information obtained in the 11. TARIFF CLASSIFICATION verification sub-program, ensure that all part numbers of the models identified in i) are of the same tariff provision. In addition, all averaged goods must have the same specific noun description for the automotive components assembly, automotive component, sub-component, or listed materials being averaged.

iii) Compare part numbers of the models of goods under review to the certificate of origin to ensure that any or all models or part numbers are included in t he automotive parts averaging election.

iv) Identify the averaging provision (i.e. category and period) elected by the producer. Obtain this information in writing from the company.

v) Where the automotive parts producer chooses a one or three month period, determine if the producer has, at the end of the fiscal year of the motor vehicle producer to whom the goods are sold, chose the fiscal year of that motor vehicle producer.

4.2 Identification of the goods included in the automotive parts averaging election

b) If the category under paragraph 12(4)(a) of the Regulations is chosen by the producer, original equipment for use in the production of light-duty vehicles, this program is not applicable. Refer to the 4. AUTOMOTIVE PARTS AVERAGING verification sub-program in the LIGHT-DUTY AUTOMOTIVE GOODS (AVERAGED) verification program.

c) If the category under 12(4)(b) of the Regulations is chosen, ensure that the goods are original equipment for use in the production of heavy-duty vehicles.

d) If the category under 12(4)(c) of the Regulations is chosen, goods are after-market parts, this program is not applicable. Refer to the applicable verification programs found in Chapter 5 of the verification manual.

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e) If the category under 12(4)(d) of the Regulations is chosen, ensure that the goods are original equipment for use in the production of a heavy-duty vehicle in combination with after-market parts.

f) If the category under 12(4)(e) of the Regulations is chosen, ensure that the goods are any of the following:

i) original equipment for use in the production of heavy-duty vehicles and are sold to one or more motor vehicle producers; or

ii) original equipment for use in the production of heavy-duty vehicles in combination with after-market parts and are sold to one or more motor vehicle producer.

g) If the category under 12(4)(f) of the Regulations is chosen, ensure that the goods are any of the following:

i) original equipment for use in the production of heavy-duty vehicles and are exported to the territory of one or more of the NAFTA countries;

ii) original equipment for use in the production of heavy-duty vehicles in combination with after market parts and are exported to the territory of one or more of the NAFTA countries;

iii) original equipment for use in the production of heavy-duty vehicles and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries; pr

iv) original equipment for use in the production of heavy-duty vehicles in combination with after-market parts and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries.

h) If the verification encompasses reviewing all goods of a tariff provision produced by the producer, ensure that all goods are included in an averaging category. Similarly, if the verification encompasses specific good of the same tariff provisions, ensure that only those goods are included in the averaging category.

4.3 Identification of the motor vehicles producer included in the automotive parts averaging election

i) If the category under 12(4)(b) of the Regulations is elected, where the goods are:

i) original equipment for use in the production of heavy-duty vehicles:

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A) Determine the motor vehicle producer(s) included in the averaging election;

B) Determine if all motor vehicle producer(s) have the same fiscal year end(s);

C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in b) have all been accounted for.

j) If the category under 12(4)(d) of the Regulations is elected, where the goods are:

i) original equipment for use in the production of heavy-duty vehicles in combination with after-market parts:


B) Determine if all motor vehicle producer(s) have the same fiscal year end(s):

C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in b) have all been accounted for.

k) If the category under 12(4)(e) of the Regulations is elected, where the goods are:

i) original equipment for use in the production of heavy duty vehicles and are sold to one or more motor vehicle producers :


B) Determine if all motor vehicle producer(s) included in the election to average have the same fiscal year end(s);

C) Confirm the sales of the parts to the producer(s) to ensure the goods identified in b) have all be accounted for: or

ii) original equipment for use in the production of heavy-duty vehicles in combination with after-market parts and are sold to one or more motor vehicle producers:


A) Determine the motor vehicle producer(s) included in the election to average ;


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C) Confirm the sales of the parts to the produce(s) to ensure he goods identified in b) have all been accounted for ; or

l) If the category under 12(4)(f) of the Regulations is elected, here the goods are:

i) original equipment for use in the production of heavy-duty vehicles and re sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:

A) Determine the motor vehicle producer(s) included it the averaging election;

B) Determine if all motor vehicle producers) included in the election to average have the same fiscal year end(s);

C) Confirm that sales of the parts to the producer(s) to ensure the goods identified in b) have all been accounted for: or

ii) original equipment for use in the production of heavy-duty vehicles in combination with after-market parts and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:



C) confirm the sales of the parts to the producer(s) to ensure the goods identified in b) have all been accounted for.

4.4 Identification of the country(ies) of export included in the automotive parts averaging election

m) If the category under 12(4)(f) of the NAFTA Rules of Origin Regulations is chosen, if the goods are:

i) original equipment for use in the production of heavy-duty vehicles and are exported to the territory of one or more of the NAFTA countries.


B) Confirm the amount of goods exported outside the territory of the Party in which the production occurred, to ensure the quantity of goods included in the averaging calculation is correct.

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ii) original equipment for use in the production of heavy-duty vehicles in combination with after market parts and are exported to the territory of one or more of the NAFTA countries.


B) Confirm the amount of goods exported outside the territory of the Party in which the production occurred, to ensure the quantity of goods included in the averaging calculation is correct:

iii) original equipment for use in the production of heavy-duty vehicles and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:



iv) original equipment for use in the production of heavy-duty vehicles in combination with after-market parts and are sold to one or more motor vehicle producers and are exported to the territory of one or more of the NAFTA countries:

A) Determine the territory of one or more NAFTA countries and goods included in the averaging calculation have been exported to.


4.5 Verification of the period elected by the producer

n) If the category under paragraph 12(4)(b) of the NAFTA Rules of Origin Regulations is chosen, ensure that the period elected is calculated over any month, any consecutive three month period that is evenly divisible into the number of months of the producer's fiscal year remaining at the beginning of the period, or the fiscal year of the motor vehicle producer to whom those goods are sold.

i) By means of industry reports or inquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold.

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ii) Where the producer chooses a one or three month period, ensure that the same duration is chosen for:

A) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure a); or

B) the remainder of the fiscal year of the automotive parts producer where such producer did to change the period to the fiscal year of the motor vehicle producer to whom those goods are sold.

o) If the category under paragraph 12(4)(d) of the NAFTA Rules of Origin Regulations is chosen and some of the goods are heavy-duty automotive goods but none of the goods are light-duty automotive goods, ensure that the period elected is calculated over any month, any consecutive three month period, or the fiscal year of the motor vehicle producer to whom these goods are sold.

i) By means of industry reports or inquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold.

ii) Where the producer chooses one or three month period, ensure that the same duration is chosen for:

A) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure a); or B) the remainder of the fiscal year of the automotive parts producer where such producer did to change the period to the fiscal year of the motor vehicle producer to whom those those goods are sold.

p) i) If the category under paragraph 12(4)(e) of the NAFTA Rules of Origin Regulations is chosen and the goods are only original equipment for the use in the production of heavy-duty vehicles and are sold to one or more motor vehicle producers, ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producer(s) to whom the goods are sold.

A) By means of industry reports or inquiries in writing, confirm the fiscal year(s) of the motor vehicle producer(s) to whom the goods are sold.

B) Where the producer chooses one or three month period, ensure that the same duration is chosen for:

I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to

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the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure a); or

II) the remainder of the fiscal year of the automotive parts producer where such producer did to change the period to the fiscal year of the motor vehicle producer to whom those those goods are sold.

ii) If the category under paragraph 12(4)(e) of the NAFTA Rules

of Origin Regulations is chosen and the goods are original equipment for use in the production of heavy-duty vehicles in combination with after-market parts and are sold to one or more motor vehicle producers ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producers(s) to whom the goods are sold.



I) the remainder of the fiscal year of the motor vehicle producer to whom those goods are sold, where the automotive parts producer has changed the period to the fiscal year of the motor vehicle producer to whom the goods are sold as identified in verification procedure a); or


q) i) If the category under paragraph 12(4)(f) of the NAFTA Rule of Origin Regulations is chosen and the goods are only original equipment for the use in the production of heavy-duty vehicles and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated on any month, any consecutive three month period or the fiscal year of the motor vehicle producer(s) to whom the goods are sold.




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ii) If the category under paragraph 12(4)(f) of the NAFTA Rules of Origin Regulations is chosen and the goods are original equipment for use in the production of heavy-duty vehicles in combination with after-market parts and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated any month, any consecutive three month period or the fiscal year of the motor vehicle producer(s) to whom the goods are sold.





iii) If the category under paragraph 12(4)(f) of the NAFTA Rules or Origin Regulations is chosen and the goods are only original equipment for the use in the production of heavy-duty vehicles, are sold to one or more motor vehicle producers and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producer(s) to whom the goods are sold.




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iv) If the category under paragraph 12(4)(f) of the NAFTA Rules of Origin Regulations is chosen and the goods are original equipment for use in the production of heavy-duty vehicles in combination with after-market parts, are sold to one or more motor vehicle producers and are exported to the territory of one or more NAFTA countries, ensure that the period elected is calculated on any month, any consecutive three month period, or the fiscal year of the motor vehicle producer(s) to whom the goods are sold.





4.6 Comparison and reconciliation of the submission of RVC

Information

r) Ensure that the goods and period as identified in the election to average obtained in verification procedure a) has not been modified in any way in the calculation of the actual RVC.


s) Conclude as to whether the averaging provisions defined by the election to average have been applied correctly.

t) Prepare adjustments as required.

5.REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM

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a) Obtain the relevant information concerning the Management of Information System (MIS) gathered through the 7. PLANT TOUR verification sub-program. Identify the areas of concern with respect to the MIS. Consider using the "Review of Policies, Procedures and Internal Controls Checklist" (See Appendix F) to assist in identifying concerns.










A) how are orders for motor vehicles entered into the system



D) how are material stock reports (i.e. KAN-BAN) and picking lists generated

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E) inventory (i.e. purchase from supplier(s), receipt, transfer to production, work-in-process, finished goods, shipment of finished goods)



i) General Controls





D) system testing;





A)handling errors;

B)program protection;

C)file protection;

D)security protection.



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B) audit trail;















a) Obtain from company officials supporting RVC information for the goods under review.

b) Review the costs provided in the submission of RVC information to determine if they are reflective of actual costs (as opposed to estimates that would have been used in the election to average).

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c) Ensure that all calculations provided with the information are correct. Ensure that the appropriate RVC percentage requirement has beenused by the company. Ensure that the good has met the RVC requirement based on these calculations.

d) Ensure that all the non-originating materials (i.e., materials that do not meet their required rule of origin) and materials of unknown origin have met the required tariff classification change portion of the rule of origin.

e) Review the labor and overhead information provided. Identify any excluded costs incorrectly included in the RVC calculation.

f) Identify any automotive component assembly, automotive component, sub-component , or listed material that are imported by the company and identified as originating materials. (Reference Schedule V)

g) Conduct risk analysis /ratio analysis on the total value for materials, labor and overhead in relation to the RVC requirement.


7. PLANT TOUR


To obtain an understanding of the entire operations of the verification company (i.e. manufacturing, assembly, warehouse, accounting, etc.).


a) Obtain an Organization Chart. Ensure all operations and or departments whose costs are included in the total cost calculation for RVC purposes have been reviewed and documented.

--Document the potential for costs to be included in total cost that should be excluded (i.e. costs not directly related to the production of the automotive goods including: sales promotion, marketing and after-sales service costs; royalties; shipping and packing costs; and non-allowable interest costs).

b) Observe and document the existence of the goods included in the election to average.

i) Confirm the goods to be included in the election to average are manufactured at that production facility.

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ii) Identify other goods that should be included in the election and goods that are included but should not be.

iii) Identify any differences that may exist with respect to the tariff classification of the goods under review.


d) Observe and document any concerns with regard to any possible Non-Qualifying Operations (i.e. unacceptable production or pricing practice used to circumvent the Rules of Origin) noted during the plant tour. This information will be used in 19. Non-Qualifying Operations sub-program.


--Document any concerns with respect to the potential allocation problems of costs not directly related to the goods included in the averaging calculation.




iii) Document any concerns with respect to the source of materials (i.e. dual sourcing, markings on materials, fungible materials, etc.) noted during the plant tour, especially automotive component assembly, automotive component, sub-component, and listed materials

iv). Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the goods included in the averaging calculation.

v). Document any concerns with respect to the shipping of finished goods (i.e. any costs of shipping and packing that may be included in the net cost calculation).

vi) Document any concerns with respect to the inventory and turnover of finished goods.

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g) Observe and document the production/manufacturing operations. Ensure each in-house manufacturing and sub-assembly operations have been documented (i.e. stamping, engine production, axle production, etc.)

i). Document any concerns with respect to the out-sourcing of manufacturing/production or sub-assembly operations. Evaluate whether assists may be provided to the out-sourced producers. This information will be used in 14. VALUE OF MATERIALS verification sub-program.

ii). Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the goods included in the averaging calculation.


i) Observe and document the Management of Information System Operations. Inquire as to the type of management reports that are produced (i.e. bills of materials, production reports, labor reports, material stock reports, etc.). This information will be used in 5. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program.


VERIFICATION SUB-OBJECTIVE:

The objectives of this verification sub-program are: 1) To determine if the intermediate material(s) (IM) designation, made by the heavy duty automotive goods producer, is in accordance with Paragraph 10(9)(a) and Subsections 7(4) and 7(19) of the NAFTA Regulations; 2)Where the Specific Rule of Origin for the IM requires that the non-originating materials making up the IM undergo a tariff classification change, that the tariff classification change requirement is met; 3) Where the Specific Rule of Origin requires that the IM meet a Regional Value Content (RVC), that the RVC requirement is met.; 4) document any self produced materials and containers and self produced accessories spare parts and tools designated as an IM.

Complete this sub-program only if the producer designates a self-produced intermediate material(s) (IM) in accordance with Paragraph 10(9)(a) and Subsection s 7(4) and 7(19) of the NAFTA Regulations.


8.1 Review of the IM Designation for Compliance With Paragraph 10(9)(a)

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a) Document all Intermediate Material (IM) designations made by the company.

b) Review the company designated HTS number and description of the intermediate material to ensure that the description in the Harmonized Tariff System of the NAFTA Party does not describe a heavy-duty component or sub-component.

c) Is the I M designation within the requirements of Paragraph 10(9)(a) of the NAFTA Regulations? An IM designation will be considered meeting the Paragraph 10(9)(a) requirements where the self-produced material is a material other than a heavy-duty component or sub-component and no other materials which are other than a heavy-duty component or sub-component that is subject to a RVC requirement and is incorporated into that I M is also designated by the producer as an IM.

d) Conclude on the Intermediate Material designation for compliance with Paragraph 10(9)(a).

8.2 HTS Classification of the IM

e) Obtain the correct tariff classification and Rule of Origin for the IM from the 11.TARIFF CLASSIFICATION verification sub-program.

8.3 Tariff Classification Change Requirements for the IM

f) Obtain the information with respect to the Tariff Classification for the I M from the 11.TARIFF CLASSIFICATION verification sub-program.

8.4 Review of the RVC Requirements of the IM

g) Inquire of the company officials as to how the value of the intermediate material was determined. See Subsection 7(6) of the NAFTA Regulations. Are all costs reasonably allocated to the IM according to Schedule VII.

h) Ensure that material, labor, overhead costs etc. allocated to the Intermediate Material are not double counted in the respective costs related to the final good. (i.e. the net cost of the good should be reduced to the extent of the IM designation). This information will be used in sub-programs 14. VALUE OF MATERIALS and 15. VALUE OF COSTS OTHER THAN MATERIALS

i) Perform the RVC requirement on the IM using the net cost method. Refer to sub-program 17. CALCULATION OF THE RVC verification sub-program for determining the RVC using the net cost content calculation.

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j) If more than one intermediate material has been identified, insure that, where the IM is subject to a RVC requirement, no other self-produced material subject to a RVC requirement is used in the production of that IM.

k) Conclude as to whether the IM is an originating material.

l) If an intermediate material is determined to be originating, calculate the non-originating value in the total cost of the IM and carry forward that value, as an originating cost, to be subtracted from the VNM (if not already reduced).



To ensure the bill(s) of materials (BOM) of the goods used in the averaging calculation are complete and accurate throughout the verification period.


a) Obtain all of the bills of materials (BOMs) for the goods that should be included in the averaging election. (Refer to 3. MOTOR VEHICLE AVERAGING ELECTION and 11. TARIFF CLASSIFICATION verification sub-programs.)

b) Verify the mathematical accuracy of the BOMs.

c) Obtain from 5. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program, the description of the system for the BOMs and any related documentation. If necessary, review the policy and procedures manual for the BOM with respect to the definition of the BOM, use of the BOM, what is reported on the BOM, who and when changes are made to the BOM, etc.

d) Compare the models of the BOMs to the averaging election to ensure they are included in the election. Identify any differences.

e) Sort the BOMs into the various models (goods) subject to averaging.

f) Obtain the volume of sales to the U.S. (and/or Canada or Mexico) for each model of goods subject to averaging. Calculate the percentage of sales by both volume and dollar value within each model.

--Obtain the production reports for each model and compare to the volumes of sales as provided by the company.

--Documents any concerns with respect to goods produced in a different period and being sold/shipped in the period under review.

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g) To ensure the BOMs are complete, select a sample of bills of materials (BOM) to:

i). compare the BOM to engineering documents/specifications (i.e. compare parts and quantity to be included in the good);

ii) compare the part numbers, descriptions and values, to picking lists used to obtain parts for the production from inventory;

iii) compare the bills of materials to product literature;

iv) review the sourcing of materials for consistency among the bills of materials.

v) Compare the BOMs to other BOMs of similar goods (i.e. use professional judgment to ensure all materials on the BOM are incorporated into the good and to ensure there are no missing materials that should be incorporated into the good).

vi) Document any differences. Obtain explanations from the company.

h) To ensure that the standard costs for materials on the BOM are consistent throughout the year:

i) review the company's standard cost accounting policies;

ii) inquire of company officials if there have been changes in the production process or the standard costs during the year;

iii) compare a sample of the BOMs to other BOMs for the same model from a different date during the year. If any differences are found discuss with company officials.




To ensure that the list of materials used in the averaged RVC calculation for net costs and value of non-originating materials is complete and accurate.

Note: The 9. BILL OF MATERIALS verification sub-program will have to be completed before proceeding with these verifications procedures


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a) Obtain the listing of materials and any additional supporting documentation used by the producer in the RVC calculation of the Net Costs (NC) and Value of Non-originating Materials (VNM). This listing should contain all the materials used on the production of all the final goods subject to the averaging provisions for the period under review.

b)Verify the mathematical accuracy of the materials list. Compare the totals reported on the listing to the total value of materials included in the net cost calculation and the value of non-originating materials in the submission of the RVC information.

c)Interview the person(s) responsible for developing this listing. Inquire as to how the list of materials was developed (i.e. how did the company ensure that only the materials used in the production of the motor vehicles subject to the averaging provisions are included on the list).

-Based on responses to the above, assess their knowledge of the NAFTA, the NAFTA Rules of Origin Regulations, and specifically the motor vehicle averaging provisions (if applicable ).

d) Match this listing with the general ledger and/or audited financial statements. If non-averaged goods are also produced, ensure the materials used to produce those goods are not included in this list.

e) Perform tests on the list of materials such as the following:

i) using production reports and average costs, recalculate the total of the value of materials included in the averaging calculation;

ii) select a sample of materials and recalculate the value of materials using average/standard values.

f) Select a sample of bills of materials included in the averaging calculation and perform the following:

i) compare the description of the BOM to the list of originating goods to ensure they are listed;

ii) using the production reports, ensure the quantity of materials on the list of materials is appropriate.

g) Select a sample of materials from the list of materials included in the averaging calculation and perform the following:

i) compare the description per the list of materials to the BOM to ensure they are used in the goods to be averaged;

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ii) using production reports, ensure the quantity on the list is appropriate for the materials used in the goods to be averaged.

h) Identify any accessories, spare parts and tools, packaging materials and containers for retail sale, and packing materials and containers for shipment, to be disregarded for evaluating the tariff classification change requirement. Provide this information to the person responsible for the 11. TARIFF CLASSIFICATION verification sub-program. Provide the information concerning packing materials and containers for shipment to the person responsible for the 15. VALUE OF COSTS OTHER THAN MATERIALS and 14. VALUE OF MATERIALS verification sub-programs.

i) Conclude on the verification sub-objective



To ensure that the heavy duty automotive good is properly classified under the Harmonized Tariff System (HTS) of tariff classification, and to ensure the correct rule of origin is applied.

To classify all materials which would not meet the necessary tariff classification change as required by the Specific Rule of Origin (Schedule I of the Uniform Regulations) applicable to the good if they were non-originating materials.

To identify and classify all automotive component assemblies, automotive components , sub-components and listed materials together with any other non-originating materials used by the producer in the production of the good in order to establish the Value of Non-originating Materials (VNM) in accordance with Section 10 of the Regulations.


11.1. General Introductory Procedures:

a) Interview the person(s) responsible for tariff classification to establish how the classifications of the good and the materials were determined. Obtain any rulings that the company has received from other customs administrations.


c) Obtain information from the company pertaining to the de minimis calculation when the company has applied the de minimis provisions to qualify the goods. To

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evaluate de minimis, refer to the verification procedures outlined in Chapter 5 of this verification (audit) manual.

d) To aid in the completion and accuracy of 12. SOURCE OF MATERIALS verification sub-program, note data on the material suppliers, if you come across this information while performing the verification procedures of this sub-program.

11.2 Classification of the Finished Goods and Intermediate Materials

e) Obtain and review documentation on the goods and IM including; bills of materials, public brochures, engineering specifications, invoices, bills of lading, owner's manual, catalogues and verify if it is consistent with the tariff classifications provided for the goods under review. Review the export documents for the Harmonized Tariff System (HTS) number for the goods being verified.

f) Obtain from 7. PLANT TOUR verification sub-program information with respect to the production of the goods or the IM. Physically inspect the good during a plant tour to aid in confirming the correct classification number and rule of origin of the finished goods and IMs.

g) Ensure that the goods and I Ms under review are properly classified in the RVC information on the election to average. The good and/or IM classification should be classified as applicable, to the Tariff Heading (4th digit), Subheading (6th digit), or where required by the Specific Rule of Origin the Item (8th digit) level of the Party?s HTS.

Where the tariff number is in doubt, take pictures, drawings, samples to the appropriate specialist for a classification.

h) Identify the Specific Rule of Origin for the "Heavy Duty Automotive Goods" and I M under review.

-Prepare a conclusion on the tariff classification declared by the company for the goods or the I M under review.

i) Ensure that the goods are included in the class of motor vehicles as elected by the producer (if applicable).

j) Does the specific rule of origin of the good require that the materials undergo a change in tariff classification ? If no, go to procedure

11.4 within this verification sub-program . If yes, continue.

11.3 Classification of Materials for Tariff Classification Change Requirement Only:

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To be completed where the non-originating materials included in the Heavy Duty Automotive Goods or IM are required to undergo a tariff classification change.

k) Analyze the Specific Rule of Origin for the good or IM identified in verification procedure h) to determine the tariff classification of the materials that would not meet the required tariff classification change if they were non-originating materials.

l) Obtain an accurate description of the materials used in the production of the goods, by physical examination, reviewing supplier parts catalogue, engineering documents, purchase orders, and/or supplier contracts. Document any self-produced materials designated in accordance with subsection 4(8) of the NAFTA Rules of Origin Regulations.

m) For the goods being exported to the country performing the verification, classify all materials in the list of materials, except those identified as accessories, spare parts and tools; packaging materials and container for retail sale and packing materials and containers for shipment to the level required for tariff classification change requirement. Note: Obtain this information from the 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION verification sub-program.

n) Identify those materials which would not meet the tariff classification change requirement if they were non-originating. The conclusion on the tariff classification change requirement will be performed in verification procedure g) in the 12. SOURCE OF MATERIALS verification sub-program.

11.4 Identification of Materials Used or Incorporated In the Good for VNM Purposes

o) Using the list of materials incorporated into the goods subject to averaging, obtain an accurate description of the materials by physical examination, reviewing supplier parts catalogues, engineering documents and/or supplier contracts. Identify:

i) material that are automotive component assemblies, automotive components, sub-components, listed materials and all other non-originating materials;

ii) For automotive component assemblies, identify the potential automotive components , sub-components, and listed materials;

iii) For automotive components, identify the potential sub-components and listed materials;

iv) For sub-components , identify the potential listed materials.

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p) Prepare a working paper to document all the information on the materials, used or incorporated into the goods subject to the averaging calculation at any level of production, that are identified above.




--the origin of materials which would not meet the tariff classification change as required by the Specific

Rule of Origin (Schedule I of the Regulations) if the materials were non-originating; and,

--the source of all materials or sub-materials that are automotive component assemblies, automotive components, sub-components, and listed materials, used or incorporated in the good in order to establish the value of non-originating materials (Section 10 of the Regulations) especially the ones claimed as originating materials by the producer or his supplier.



a) Obtain the list of materials reported as originating which if failing to originate, would not meet the tariff classification change required by the Specific Rule of Origin ( Schedule I of the Regulations). This list should be obtained from the 11.3 TARIFF CLASSIFICATION OF MATERIALS FOR Tariff classification change REQUIREMENT ONLY of the 11. TARIFF CLASSIFICATION verification sub-program.

b) Confirm the origin of these materials by reviewing the Certificates of Origin or supplier statements obtained by the producer and/or by reviewing the purchase order, invoice, and the receiving documents.

c) Physically inspect these materials to verify markings or any indications which might indicate that the materials are non- originating.

d) Assess if the 7% De Minimis Rule can be applied if there are non- originating materials that do not meet the required tariff classification change (see verification procedure f) in the 14. VALUE OF MATERIALS verification sub-program.

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e) Assess the need to send supplier confirmations for the purposes of determining the origin of materials for the tariff classification change requirement


12.2 Source of Materials for the Purpose of Determining the VNM

g) Obtain the complete list of materials identified in the Identification of Materials Used or Incorporated in the Good for VNM Purposes in the 11. TARIFF CLASSIFICATION verification sub-program. Add all other originating high value materials to this list.

h) From the list obtained in Verification procedure g):

i) select a sample of the materials which the exporter has claimed as originating (including those materials which may contain sub-materials);

ii) verify if the source of the above materials could be valid, by looking at the industry profile documentation, and other information for similar goods (i.e., Could these materials be imported?);

iii) interview company officials responsible for determining the origin of materials as found in the information response. Ask hat procedures they used to verify the source of the materials. Document strengths and weaknesses of the manner in which the company identified non-originating materials;

iv) if the company has received certificates of origin and/or supplier statements to verify the source of the materials, review them and determine if they are adequate (if not adequate these items may be considered high risk items for confirmation purposes).

i) Obtain information from the exporter's policy and procedures manuals and complete a plant tour to assist in identifying the source of materials. Physically inspect the materials to verify markings or any indications which might indicate if they were imported. Coordinate this work with that performed in verification procedure h)ii).

j) While conducting the plant tour and through inquiry of management, identify any part of the production process that may be sub-contracted to another company.

k) Review the concerns raised during the 7. PLANT TOUR verification sub-program.

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l) Obtain a list of suppliers for all materials. For the sample selected in verification procedure h) i) perform the following:

i) determine whether any of the suppliers have companies in a non-NAFTA country, or if the suppliers are U.S., Canadian or Mexican distributors (the materials from these suppliers will be considered high-risk for confirmation purposes);

ii) inquire of company officials if there were any supplier changes during the period under review, or were any materials sourced from more than one supplier. The Approved Vendor List or the history of the engineering specifications may provide evidence of supplier changes;

iii) determine whether there are any fungible (look for dual sourced materials) materials. Examine the parts and supplier lists, the Approved Vendor List, and inquire as to whether the same material is sourced from both a supplier from a NAFTA country and a non-NAFTA country, and if they source parts from distributors. (This information will be used in the 13. INVENTORY MANAGEMENT SYSTEM verification sub-program ).

m) Determine whether the 11. TARIFF CLASSIFICATION verification sub-program identified any materials that were designated as originating by the exporter but were in fact imported from a non-NAFTA country , i.e. obtain information from supplier catalogues and observation of markings during the plant tour.

n) Select a sample of originating materials from the list obtained in Verification procedure h) and perform the following:

i) scan the purchase invoice, any attached shipping documents, and bank endorsement stamp on the canceled check to determine whether they support the exporter's claim for the source (and value) of the material;

ii) select materials from this sample to verify markings and coordinate this work with that performed in verification procedure i;

iii) follow up on any contradictory observations; iv) prepare a working paper to control the confirmation process and to document results. o) Select a sample of the non-originating materials from the list obtained in verification procedure g) and determine if they are:

i) self-produced; ii) acquired by the producer; iii) imported directly by the producer; iv) imported by a person other than the producer.

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Obtain supplier statement for the acquired non-originating materials. This information will be used in the 14. VALUE OF MATERIALS sub-program.

p) Compare any supplier certificates of origin or supplier statements obtained through the verification to the list of materials in 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION verification sub-program. q) Evaluate the need to expand sampling procedures. r) Determine if the origin and VNM of any of the materials need to be confirmed.


s) Select suppliers from the list identified in g) from whom supplier confirmations will be obtained to confirm the origin of: 1) the materials claimed by the company or its supplier to be originating (and/or to verify VNM); or 2) materials that if found to be non-originating would not meet the tariff classification change requirements in Schedule I of the Regulations and that have been claimed as being originating by the company.

--Any verification of material suppliers should involve the following :

i) send confirmations to high risk suppliers who are distributors, for high dollar value materials, or suppliers known to import parts from outside the territory, or where the reliability of the certificates of origin or the suppliers certifications on file with the exporter and/or producer are questionable;

ii) find information on the suppliers in the exporter and/or producer correspondence files and purchase records, i.e. addresses, contact person, phone numbers, etc.; iii) ensure that confirmations are sent out to all suppliers if there is more than one supplier of a material or if suppliers were changed during the period under review; iv) follow up with the supplier to obtain a completed confirmation, this may be telephone within a predetermined time frame to ensure that all the completed confirmations are received; v) review the confirmations once they are received from the suppliers and compare the information on the confirmations with the information on the certificates of origin and/or supplier certifications filed with the exporter and/or producer. Confirmations for which there are no response or insufficient information will result in the material being considered non- originating for tariff classification change and VNM purposes; vi) determine if supplier confirmation letters should be sent to the suppliers of the suppliers of the exporter and/or producer, because there are materials which require further verification ; vii) after reviewing the supplier confirmation, consideration should be given to conducting a restricted supplier verification at the suppliers premises based on

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evidence gathered to date. However, such visits will have to be discussed with and approved by the appropriate Customs official prior to making any arrangements;

viii) prepare a working paper to control the confirmation process and to document the results ; and ix) prepare a letter to each supplier subject to the confirmation process, notifying them of whether or not the material was found to be originating.

12.4 GENERAL SUMMARY PROCEDURE




To determine if an applicable inventory management method is in place when fungible materials (physically separated or commingled) are used in the production of a good, or when fungible goods are physically combined or mixed in inventory, potentially to identify the origin of a specific shipment of goods.

In terms of fungible materials used in the production of heavy-duty automotive goods, an inventory management method must identify originating versus non-originating materials for the purposes of the tariff classification change requirement. Also, for the purposes of the RVC requirement, an inventory management method must, for a material that is an: automotive component; automotive sub-component ; automotive component assembly; and listed material identify the origin of those materials and for all materials that have more than one supplier, identify the different VNM values.




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a) Obtain from verification procedure l)iii in the 12. SOURCE OF MATERIALS verification sub-program, a listing of identified fungible materials.

b) Determine the impact on the origin of the goods under review should the inventory management system be found to be not acceptable. When fungible materials exist, evaluate the impact in terms of the tariff classification change requirement (consider the use of the de minimis provision) by reviewing 11.TARIFF CLASSIFICATION verification sub-program, as well as in terms of the Regional Value Content requirement by reviewing 14.VALUE OF MATERIALS verification sub-program and reviewing 17. CALCULATION OF THE REGIONAL VALUE CONTENT verification sub-program. If the impact is significant, proceed with the evaluation of the inventory management system.

c) Determine which of the following inventory management systems outlined in the NAFTA Regulations - Schedule X the company used for the fungible materials (goods): Specific Identification, FIFO, LIFO, and the Average Method

d) Document the inventory management system from beginning to end (i.e. purchasing, receiving, storage of materials, removal of materials from storage into production of goods, storage of goods and removal of goods from storage for shipment of goods).


f) If FIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable, first received were considered to be the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn.

g) If LIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable, last received was considered to be the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn.


i) Ensure whichever method that was chosen, including the averaging period in

the case of the averaging method, that it was used from the time it was chosen to the end of the fiscal year. Has the system changed since the inception of NAFTA?

j) Ensure that the company correctly determined the materials, identified by origin or by supplier, as applicable, in its opening inventory by:

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i) identifying, in the books of the producer, the latest receipts of fungible materials that add up to the amount of fungible materials in opening inventory at the time an inventory method is chosen;

ii) reviewing the origin or supplier of the materials (goods), as applicable, that make up those receipts;

iii) determining those fungible materials (goods) to be the fungible materials (goods) in opening inventory, identified by origin of the supplier, as applicable.

k) Review the inventory management system by performing compliance tests of a sample of purchase transactions. The sample should include transactions involving materials (goods) that were fungible materials (goods) at the inception of the NAFTA and materials (goods) that were identified as fungible since the inception (i.e. change in supplier).

l) Is the inventory management system tested periodically? Obtain a description of periodic testing and evaluate it's effectiveness.

m) Test a sample of fungible material (good) inventories by identifying the origin of opening inventory, adding receipts/adjustments of materials (goods) and deducting withdrawals/adjustments and compare your results to the company's records. (Can test a variety of periods, materials (goods) and production processes.)

n) Conclude on whether:

i) the inventory management system used by the Company is acceptable and meets all the requirements of Schedule X of the Regulations; or

ii) the inventory management system used by the company requires improvement to meet the requirements of Schedule X of the Regulations - document the weaknesses of the system - document the impact on the origin of the goods under review; or

iii) the inventory management system does not meet the requirements of Schedule X and the company can/cannot construct the necessary inventory system - document the impact on the origin of the goods under review.



To ensure that the value of originating and non-originating materials has been calculated in accordance with the NAFTA.

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14.1 General Valuation Procedures:

a) Using the information obtained with the 5. REVIEW OF THE MANAGEMENT INFORMATION SYSTEM verification sub-program assess the internal controls in place to preserve the quality and accuracy of the data available by reviewing: policy and procedures manuals with respect to the purchase of materials; internal auditor's reports; the setting of standards and identification of variances. Further assessment of internal controls can be made by performing a walk-through of the purchasing and receiving function, and documenting the flow of information by tracing material requisitioning, ordering, receiving and reporting returns, accounting, and cash disbursement.

b) From discussions with the company staff, find out who is responsible for determining the values for the materials and how the materials are valued. Is the same valuation method used for all the materials, i.e., do they use the same method for determining the value of non-originating materials and originating materials?

c) Review the calculations prepared by the company including any supporting documentation and supplier certifications and statements obtained by the producer. Determine if the procedure used to value materials is in accordance with the Regulations.

i) Identify all assumptions made by the company.

ii) Identify all additions to cost included in valuing the materials (freight, insurance, packing and other costs incurred in transporting the materials such as duties and brokers charges, including in-house broker costs). Apply the appropriate verification procedures to the costs being examined (examine invoices, calculations, standard costs, etc.).

iii) Identify the accounts from which the information was extracted. iv) Where materials are imported, verify that if the values of materials are in the same currency as the currency of the country of the person who provided the supplier statement is located. See Section 3 of the Regulations. v) Identify areas for further review. d) Identify any related suppliers and determine if the materials purchase price was affected by the relationship, and if an adjustment will be required. i) Identify and review accounts or any documents that may pertain to material transfers and/or transfer payments from the company to the parent to identify any possible assists. ii) If materials are dual sourced, compare the purchase prices of the related and non-related companies, i.e., obtain a price list from the producer listing suppliers,

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prices, and materials. iii) Review correspondence between the company and the related suppliers. Is there a possibility that the relationship affected the value used?

e) Inquire as to how price and usage variances are accounted for. Analyze if these variances (actual and standard cost) are material and adjust the value of the materials in the RVC calculation, if necessary.

14.2 Application of the De Minimis Rule

f) If there are non-originating materials that do not meet the required tariff classification change review the value of the sub-materials. Where the value of the sub-materials in the material (determined in accordance with Section 7 of the Regulations) is less than or equal to 7% of the transaction value (or total cost of the good, if the transaction value is unacceptable), the de minimis rule can be applied (See verification procedure d) in the 12. SOURCE OF MATERIALS verification sub-program).

14.3 Value of Materials to be Included in Net Cost:

g) Verify that all materials included in the net cost calculation are valued in accordance with Section 7 of the Regulations. The value of materials calculated in accordance with NAFTA includes the following regardless of whether the applicable value is the customs value of the material or the transaction value with respect to the transaction value with respect to the transaction in which the producer acquired the material: freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer; duties and taxes paid or payable with respect to the materials in the territory of one or more of the NAFTA countries, unless they were refunded or waived; customs brokerage fees (including in-house services); waste and spoilage resulting from the use of the material in the production (minus the value of reusable scrap).

When the value is the transaction value, the following may also be added: commissions, except buying commissions; elements (assists) supplied to the seller by the producer (materials; tools, dies, molds and other indirect materials; engineering, development, artwork, design work, and plans and sketches performed outside the country in which the producer is located) royalties; subsequent proceeds that accrue to the seller. The value of materials also includes accessories, spare parts, tools, packaging materials and containers for retail.

Obtain the value of the IM from the 8. INTERMEDIATE MATERIALS

DESIGNATION verification sub-program.

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h) Review the values of materials reported with the information response and assess if these amounts seem reasonable by comparison with other RVC information of similar goods.

i) Inquire into the results of the 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION verification sub-program, and take them into account while conducting the remaining verification procedures.

j) Select (Consider obtaining sufficient audit coverage) a sample of high risk materials for valuation purposes.(High risk for valuation purposes would be fungible materials; or originating materials that if found to be non-originating would make the good non-originating for RVC purposes. All materials should also be checked for correct valuation since originating materials that are overvalued and non-originating materials that may be undervalued would cause an overstatement of the RVC percentage.)

i) determine the actual price paid by the exporter/producer by tracing to the purchase invoice, the attached shipping documents and the bank endorsement stamp on the canceled check;

ii) calculate the difference between the actual and standard cost and compare with the price variance or variance from standard claimed by the exporter/producer; follow-up on any substantial differences; and

iii) trace the total invoice amount to the appropriate ledgers and sub-ledgers to verify that purchases have been recorded correctly in the exporter's/producer's books and records.

k) For the purpose of calculating the RVC, verify that the value of all materials calculated in accordance with Section 7 of the Regulations used or incorporated into the final goods are included in the net cost. Ensure that the value of intermediate materials or the VNM as outlined in Section 10 of the Regulations is not double counted in the total cost of the good.

l) Prepare a workpaper to ensure that all adjustments required for materials as a result of value of materials verification procedures have been recorded.

m) Conclude as to whether the value of materials is correct and consistent throughout the verification period.

14.4 Value of Non-Originating Materials:

The Value of Non-originating Materials (VNM) for Heavy Duty Automotive Goods calculated in accordance with Section 10. Although Section 10 includes all the

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materials which make up the VNM of the heavy duty automotive good, on an actual audit not all sections may apply.

n) Obtain the list of materials developed in the 12. SOURCE OF MATERIALS verification sub-program. Obtain the list of materials, and the value of the materials, contained in the intermediate material election, if applicable, from the 8. INTERMEDIATE MATERIALS DESIGNATION verification sub-program.

o) Select a sample of high risk materials and determine the VNM by reviewing commercial invoices, and customs invoices, and by applying the relevant valuation methods: (Consider materiality in terms of closeness to RVC requirement)

p) Did the heavy duty automotive goods producer self-produce a non-originating listed material that is used by himself in the production of the good (Paragraph 10(1)(a) of the Regulations)? -If no, proceed to verification procedure q) .If yes, continue with verification procedures p)i), p)ii) and piii), to determine the value of the non-originating material (VNM). (Verification procedures p)i) and p)ii) will apply independently to each material meeting the description of this verification procedure.)

i) VNM is the total cost of the self-produced listed material which is the result of allocating costs on the basis of Schedule VII. If this basis is used for the VNM stop here, if this basis is not used go on to verification procedure p) ii);

ii) VNM is the aggregate of each cost of the self-produced listed material which is the result of allocating costs on the basis of Schedule VII. If this basis is used for the VNM stop here, if this basis is not used go on to verification procedure p) iii). iii) VNM is the sum of A) and B) where:

A) For non-originating materials that were imported by the producer of the listed material, the VNM is the customs value of the non-originating materials plus, to the extent not included, the additional costs listed in Paragraph 10(2)(c) to 10(2)(f).

Note to verification procedure p)iii)A) : For reference purposes,

NAFTA Regulation Paragraphs 10(2)(c) through 10(2)(f) includes:

--freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer, Paragraph 10(2)(c)

--duties and taxes paid or payable with respect to the material in the territory of one or more of the NAFTA countries, other than duties and taxes that are

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waived, refunded, refundable, or otherwise recoverable including credit against duty or tax paid or payable, Paragraph 10(2)(d);

--customs brokerage fees (including the cost of in-house customs brokerage and customs clearance services, incurred with respect to the material in the territory of one or more of the NAFTA countries, Paragraph 10(2)(e);

--waste and spoilage resulting from the use of the material in the production of the good, minus the value of any reusable scrap or by-product, Paragraph 10(2)(f);

B) For non-originating materials that were not imported by the producer of the listed material (i.e. acquired by the producer of the listed material from a supplier) the VNM is: the price paid or payable for the non-originating material according to paragraph 10(2)(a) or 10(2)(b) (according to Schedule VIII) plus, to the extent not included, the additional costs listed in Paragraphs 10(2)(c) through (f). For a description of these costs see the Note: to verification procedure p)iii)A))

Note to verification procedure p): the VNM costs of p)iii) will only include the costs of acquiring the non-originating material and will be less than the costs determined in accordance with verification procedure p) i) above which include originating costs.

q) Did the heavy duty automotive goods producer acquire and use in the production of the good, a non-originating listed material, produced in the territory of a NAFTA country (Paragraph 10(1)(b))? -If no, proceed to verification procedure r). If yes, continue with this verification procedure to q) i) and q) ii) to determine the value of the non-originating listed material. (Verification procedure q)i) and q) ii) apply independently to each material meeting the description of this verification procedure )

i) Where no statement was provided by the supplier to the heavy duty goods producer, the VNM of the listed material is based on the price paid or payable (according to Schedule VIII), plus to the extent not included, the additional costs listed in Paragraph 10(2)(c) through (f). For a description of the additional costs see the Note to Verification procedure p)ii)A):

ii) Where a statement(s) was provided to the heavy duty goods producer in accordance with q)ii)A) and/or q)ii)B) by the producer of the listed material, the VNM is the sum of the values of A) and/or B) depending on the response to A) and B) below.

Note to q)ii): Statements provided by this verification procedure (both q) ii)A) and/or q) ii)B) are subject to the review noted in verification procedure z) of this Sub-objective.

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A) Did the producer of the listed material import the non-originating materials himself? If yes continue; if no go to B).

-Did the listed material statement report VNM as the customs value of the non-originating material plus, to the extent not included, the additional costs listed in Paragraph 10(2)(c) to 10(2)(f). (For a description of these costs see the Note: Verification procedure p)ii)A).

B) Did the producer of the listed material acquire the non-originating materials from a supplier located in the same NAFTA country?

-Did the listed material statement detail the costs incurred with respect to the transaction in which the non-originating materials were acquired from a person located in the same NAFTA country?

-Were the costs of acquiring the material in accordance with Subsection 10(2)?

Note to verification procedure q): Statements provided in accordance with verification procedures q)ii)A) and/or q)ii)B) will allow the heavy duty automotive producer to include in the VNM only the value of the non-originating materials that were used in the production in the non-originating listed material.

r) Did the heavy duty automotive goods producer use a, listed material, automotive component assembly, automotive component or sub-component that was imported from outside the territories of the NAFTA countries in the production of the good (Paragraph 10(1)(c) of the Regulations)? -If no, proceed to s). If yes, continue with verification procedures r) i) and r) ii) to determine the VNM. (verification procedure r)i) and r) ii) apply independently to each material meeting the description of this verification procedure).

i) Was the listed material, automotive component assembly, automotive component, or sub-component, imported by the producer? If yes continue, if no go to ii) below;

--VNM is the customs value of the material plus, to the extent not included in the customs value, the additional costs listed in Paragraph 10(2)(c) to 10(2)(f). For a description of these costs see the Note: to verification procedure p)ii)A)

ii) Was the listed material, automotive component assembly, automotive component or sub-component not imported by the producer?

--VNM is the cost determined in accordance with Subsection 10(2) of the NAFTA Regulations with respect to the transaction in which the heavy duty automotive goods producer acquired the imported material from outside the territories of the NAFTA countries from the supplier.

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s) Did the heavy duty automotive goods producer acquire and use an originating automotive component assembly, automotive component, or sub-component any of which contained a non-originating material, that was used by the producer in the production of the good (Paragraph 10(1)(d))? If no, proceed to t), the next verification procedure . If yes, continue with verification procedures s)i), s)ii), s)iii), and s)iv), to determine the value of the non-originating material. (Verification procedure s)i), s)ii), and s)iii) apply independently to each material meeting the description of this verification procedure.)

i) Does the producer of the good have a statement signed by the person from whom the originating material was acquired that states the sum of the values determined (under Paragraphs 10(1)(a), (b), (c), and (e)) by the producer of the originating material for each non-originating material referred to in A) through D) as follows, that is/are incorporated into that originating material? If yes, VNM is the sum of:

A) the value of each non-originating listed material (self-produced or acquired and produced in a NAFTA country) used in the production of the originating material determined under the Subparagraphs and Clauses of the Regulations, Subparagraphs 10(1)(a)and 10(1)(b). Refer to verification procedures p) and q)

B) The value of each non-originating material (which is a listed material, automotive component assembly, automotive component, or sub-component that is imported from outside the territories of the NAFTA countries) incorporated into the originating material (automotive component assembly,

automotive component, or sub-component) determined under the Subparagraphs of Paragraph 10(1)(c) of the NAFTA Regulations.

C) The value of each non-originating listed material used in production of a material referred to in Paragraph 10(1)(e) (i.e. non-originating automotive component assembly, automotive component, or sub-component produced in the NAFTA territory that is acquired by the producer) that is used in the production of the originating material determined under the Subparagraphs and Clauses of Paragraph 10(1)(a) and (b) of the NAFTA Regulations. Refer to verification procedures p) and q)

D) Where the value of the non-originating listed material referred to in C) of this verification procedure and used in the production of a non-originating automotive component assembly, automotive component or sub-component that is used in the production of the originating material, is not included in C), the value of that automotive component assembly, automotive component or sub-component, is determined under Subsection 10(1)(e)ii) (i.e. Subsection 10(2) with respect to the transaction in which the producer acquired the material). Note to verification procedure s) i).:A statement provided by this verification procedure is subject to the review noted in verification procedure z) ,

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ii) If the material is subject to a Regional Value Content requirement and the producer has a statement, signed by the person from whom the producer acquired that material, that states the regional value content requirement of the material, the VNM shall be; An amount equal to the number resulting from applying the following formula:

VM x (1 - RVC)

Where:

VM is the value of the acquired material, determined in accordance with Subsection 10(2), with respect to the transaction in which the producer of the good acquired the material, and

RVC is the regional value-content of the acquired material, expressed as a decimal.

Note to verification procedure s)ii): Statements provided by these verification procedures are subject to the review noted in verification procedure y).

iii) If the producer has none of the statements described in verification procedures s)i), s)ii), and s)iii), the VNM is the value of that automotive component assembly, automotive component, or sub-component , is determined in accordance with Subsection 10(2) of the NAFTA Regulations with respect to the transaction in which the producer acquired the material.

t) Did the heavy duty automotive goods producer acquire and use in the production of the good, a non-originating automotive component assembly, automotive component or sub-component produced in the territory of a NAFTA country (Paragraph 10(1)(e))? -If no, proceed to verification procedure u). If yes, continue with verification procedures t)i), and t)ii) to determine the VNM. (Note: verification procedure t)i), and t)ii) apply independently to each material meeting the description of this verification procedure.

i) Does the producer of the good have a statement signed by the person from whom the non-originating material was acquired, that states the sum of the values of non-originating materials incorporated into that non-originating material, determined by the producer of the non-originating material in accordance with Paragraphs 10(1)(a), (b), (c), (d), and (f). This procedure is subject to verification procedure z) of this Sub-objective.

Note to verification procedure t)i): A statement provided by this verification procedure is subject to the review noted in verification procedure z) of this Sub-objective.

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ii) If the producer does not have a statement described above, the value of the non-originating automotive component assembly, automotive component, or sub-component, should be determined in accordance with Subsection 10(2) with respect to the transaction in which the producer acquired the material;

u) Where the heavy duty automotive goods producer used a non-originating material in the production of a good not referred to in

Paragraphs (10)(1)(a), (b), (c), or (e), of the NAFTA Regulations (i.e. did the goods producer use a non-originating material other than a non-originating listed material; automotive component assembly; automotive component; or sub-component ) in the production of the good (Paragraph 10(1)(f) -Continue with verification procedures u)i), and u)ii), to determine the value of the non-originating material that is used by the producer in the production of the good, (verification procedures u)i) and u)ii) apply independently to each material meeting the description of this verification procedure).

i) where the non-originating material is imported by the producer of the good the value is;

-The customs value of that non-originating material plus, to the extent not included in the customs value, the costs referred to in Paragraphs 10(2)(c) to 10(2)(f). For a description of these costs see the Note: to verification procedure p) ii) A)

ii) where the non-originating material is not imported by the producer of the good i.e. (acquired by the goods producer from a supplier) the value is:

--The value of that non-originating material in accordance with Subsection 10(2) with respect to the transaction in which the producer acquired the material.

Note to verification procedure u): This verification procedure covers all non-originating materials other than a listed material; automotive component assembly; automotive component; or sub-component .Thus automotive goods including by not limited to hoses, gaskets, metal stampings, and extruded plastics: 1) not produced in a NAFTA country; or 2) produced in a NAFTA country but failing to meet the Rules of Origin; will not originate and should be included in the VNM of the automotive good.

v) Determine whether all costs incurred in transporting materials have been identified and correctly reported (i.e. freight, insurance, packing, etc.).

i) Test the method used by the company when identifying these costs, by selecting a sample of transactions involving purchases of material from the territory of the NAFTA countries and those from outside the territory of the NAFTA countries.

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iii) Prepare adjustments as required as a results of this testing. (keeping in mind materiality and risk)

w) Determine whether duty, taxes and brokerage fees with respect to the purchase and importation of materials have been identified and correctly reported, making adjustments as required. (keeping in mind materiality and risk)

x) Ensure that the total VNM is adjusted for any variances that affect individual values of non-originating materials.

14.5 Review of the Supplier VNM Statements:

y) During the verification of origin of a heavy duty automotive good where the producer has a supplier statement in accordance with s)ii) which states the acquired material (if an automotive component assembly; automotive component; or sub-component referred to in the statement) is an originating material, and during the course of an origin verification of the heavy duty automotive good the acquired material is found not to be an originating material, the VNM of the heavy duty automotive good with respect to the acquired material shall be determined in accordance with Subsection 10(2) of the NAFTA regulations with respect to the transaction in which the producer acquired it.

z) Where any person has information with regard to statements covering: 1) a non-originating material that is acquired and incorporated into a non-originating listed material referred to in verification procedure q) ii) of this verification procedure; 2) non-originating materials incorporated into an originating automotive component assembly; automotive component; or sub-component referred to in verification procedure s) i) of this verification procedure; and 3) non-originating material incorporated into a non-originating automotive component assembly, automotive component; or sub-component referred to in verification procedure t) i) of this verification procedure; and does not allow the customs administration to verify the information during a verification of origin, the VNM shall be determined in accordance with Subsection 10(2) of the NAFTA regulations with respect to the transaction in which the producer acquired it.

14.6 Comparing the Verified VNM With the Producers Figures

aa) Sum the values of the non-originating materials determined in verification procedure p) through u) subtracting any adjustments as a result of verification procedure y), z), or other reductions., Compare the results of the sample to the

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VNM initially determined by the heavy duty automotive goods producer for the sample.

bb) Explain any discrepancies between the audit derived figure and the figure initially reported by the heavy duty goods producer

cc) Reconcile the materials making up the VNM determined as a result of this Sub-objective with the producers list of non-originating items; reconcile the VNM to the list of materials. Note any excess (unreconciled) non-originating materials in the VNM or on the list of materials.

15 VALUE OF COSTS OTHER THAN MATERIALS


To verify that the Regional Value Content (RVC) requirement with respect to costs other than materials (labor, overhead, excluded costs, and other costs), as required by the NAFTA Rules of Origin Regulations, has been met where the Net Cost Method has been used.

SUB-OBJECTIVE

To ensure that the net cost has been determined correctly by using only eligible costs and reasonable cost allocation methods.


a) Trace the details of the net costs reported with the RVC information to the exporter/producer's working schedules of cost. Trace these working schedules to the books and records.

b) Identify the potential for Excluded Costs including: sales promotion, marketing and after-sales service costs; royalty; shipping and packing costs; and non-allowable interest costs; being included in the net cost of the good. Consider whether these costs are attributable to the good, or to qualifying intermediate materials.

c) Ensure that period costs, product costs, and other costs incurred in the territory of one or more of the Parties are included in the net cost figure by scanning the detail in support of the net cost values reported in the RVC information. Ensure that the net cost does not include:



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iv) gains related to currency conversion that are related to the production of the good. Losses are included in the net cost.



vii) cumulative effect of accounting changes reported in accordance with a specific requirement of the applicable Generally Accepted Accounting Principles;


d) Review the amounts of labor and overhead included in the RVC calculation. Reconcile these amounts into the financial statements. Are these costs reasonably allocated to the good under review.

e) Evaluate the method(s) used to allocate common expenses to the product under review and assess whether the method(s) used are consistent with the recommendations in Schedule VII of the NAFTA Rules of Origin Regulations.

f) Obtain copies of agreements related to sales promotions and marketing. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation.

g) Obtain copies of contracts related to shipping and packing costs. Review the terms of the contracts and ensure that they were properly taken into account in the net cost calculation.

h) Refer to 10. LIST OF MATERIALS USED TO CALCULATE THE VALUE OF MATERIALS IN THE RVC CALCULATION verification sub-program to identify any materials considered to be packing materials and containers for shipment purposes. Ensure that the value for packing materials is not included in the calculation of the net cost of the good.

i) Obtain copies of royalty agreements, technical assistance agreements, and other similar documents. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation. Not included as an Excluded Cost are payments under technical assistance agreements or similar agreements that can be related to specific services such as personnel training, engineering, tooling, etc.,

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j) Obtain copies of loan agreements. Review the terms of these agreements, particularly the interest rates charged and ensure that any non-allowable interest costs have been properly taken into account in the net cost calculation.

k) Review the chart of accounts and the trial balance to identify those accounts included in the net cost calculation which fall within the elements of excluded costs and conduct the following tests:

- select a sample of costs and trace to supporting commercial documentation, paying particular attention to journal voucher type entries; and

- where costs have been allocated for these costs, ensure that the method of allocation is consistent with that recommended in Schedule VII of the NAFTA Rules of Origin Regulations; - where it is determined that these costs should not be included in net costs, ensure that the reversal is only for the amount originally allocated.

l) Review the chart of accounts and trial balance to identify accounts which appear to be included costs but that the company has ignored in the net cost calculation. List these accounts for further testing to supporting documentation and discussion with company personnel.

m) When the heavy-duty automotive goods are motor vehicles which are produced in a new plant , obtain the value of machinery from 2. RVC REQUIREMENTS FOR HEAVY-DUTY AUTOMOTIVE GOODS sub-program.

n) Prepare a working paper to adjust the net cost figure on the RVC information for any excluded costs, or not allowable costs not deducted by the exporter/producer. (Remember that excluded costs attributable to qualifying intermediate materials remain in the calculation of net cost of the good)

o) Conclude on the verification sub-objective.

16. ACCUMULATION


To ensure that the exporter/producer that chose to accumulate the production of one (or more) of hissuppliers did so in accordance with Section 14 of the NAFTA Rules of Origin Regulations.

General

For purposes of determining whether a good is an originating good, an exporter or producer of a good may choose to accumulate the production of one or more producers, in the territory of one or more of the NAFTA countries, of materials

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that are incorporated into that good so that the production of the materials shall be considered to have been performed by that exporter or producer, provided that:

-all non-originating materials used in the production of the good undergo an applicable tariff classification change and the good satisfies any applicable RVC requirement, entirely in the territory of one or more of the Parties; and -the good satisfies all other rules of origin requirements.

Requirements

-In order to accumulate the production of a materials,


ii) where an applicable change in tariff classification is applied to determine whether the good is an originating good the producer of the good must have a statement signed by the producer of the material that states the tariff classification of all non-originating materials used by that producer in the production of that material and that the production of the material took place entirely in the territory of one or more of the NAFTA countries.

-a producer of a good who chooses to accumulate is not required to accumulate the production of all materials that are incorporated into the good; -any information contained in the certification that concerns the value of materials or costs shall be in the same currency as the currency of the country in which the person who provided the statement is located.

Statement Needed

Non-Averaging of costs from accumulated production



i) the net cost incurred by the producer of the good with respect to the material shall be the net cost incurred by the producer of the material plus, where not included in the net cost incurred by the producer of the material the costs referred to in paragraphs 7(1)(c) through (e) of the Regulations (i.e., freight,

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insurance, packing, transport to location of producer, duties and taxes, customs brokerage fees); and

ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of non-originating materials used by the producer of the material

or


i) the net costs incurred by the producer of the good with respect to the material shall be the value of the material determined in accordance with subsection 7(1) of the Regulations (this is covered in 14. VALUE OF MATERIALS sub-program), and



Where an exporter or producer of a good does not have a statement as provided in (a) or (b) above, but does have a statement signed by a producer of a material that is used in the production of the good that


i) the net cost incurred by the producer of the good wit respect to the material shall be the sum of the net costs incurred by the producer of the material with respect to that material and d the identical materials or similar materials, divided by the number of units of materials with respect to which the statement is made, plus, where not included i the net costs incurred by the producer of the material, the costs referred to in paragraphs 7(1)c) through (e) of the Regulations, an d

ii) the value of non-originating materials used by the producer of the good with respect to eh material shall be the sum of the values of non-originating materials used by the producer of the material with respect to that material and the

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identical materials or similar materials divided by the number of units of material with respect to which the statement is made;

or




16. ACCUMULATION


Done



In that regard, ensure that the period of time over which the information provided by the supplier was calculated, falls within the fiscal year of the heavy-duty automotive goods producer.


d) Ensure that the profit component of the material being accumulated is not included in the net cost information by examining the supplier information and by comparing the price paid by the producer to the cost information provided by the supplier, if possible.

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e) Use the following verification sub-programs (only the applicable verification procedures) in order to evaluate the information received: 11. TARIFF CLASSIFICATION; 12. SOURCE OF MATERIALS;13.INVENTORY MANAGEMENT SYSTEM; 14. VALUE OF MATERIALS; 8. INTERMEDIATE MATERIALS DESIGNATION; 17. CALCULATION OF REGIONAL VALUE CONTENT.

NOTE: Consideration should be given to the use of supplier confirmations and visits to the supplier to verify the authenticity of the information reported to the exporter/producer.



To determine whether the good satisfies the NAFTA Regional Value Content requirement.

VERIFICATION PROCEDURES Done

a) Obtain the value of all materials to be included in the net cost and the value of non-originating materials. See verification sub-program 14. VALUE OF MATERIALS. b) Add to the value of all materials to be included in the net cost, labor, overhead, period costs, and other costs, to be includedin the net cost of the good being verified. See verification sub-program 15. COSTS OTHER THAN MATERIALS. c) Subtract the value of all non-originating materials from the net cost of the good. d) Divide the difference in verification procedure c) of this verification procedure by the net cost (determined in b) of the good. e) Multiply the result obtained in d) by 100. f) Conclude on the sub-objective.





a) Determine whether the goods subject to verification originate under the NAFTA by documenting whether the tariff classification change and/or RVC requirements in the Specific Rule of Origin have been met. Refer to the 12. SOURCE OF MATERIALS and 17. CALCULATION OF THE RVC verification

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sub-programs. Prepare a working paper to document which goods originate and which goods do not originate under the NAFTA.

b) Conclude on the sub-objective.



To ensure that the goods do not qualify as originating only by reason of a production or pricing practice, of which the object is to circumvent the rules of origin as set out in Chapter 4 of the NAFTA. Note: A good shall not be considered to be an originating good where there is a preponderance of evidence that the object of a production or pricing practice was to circumvent the Rules of Origin. In regard to unacceptable production practices, circumvention consists of any alteration or process performed on goods for the purpose of circumventing the rule of origin requirements. For example, when the processing or assembling performed in the territory of one Party of the NAFTA is reversed or substantially altered after the goods have been imported into the territory of another Party, and such processing or assembly was not performed for any commercial purpose other than to qualify the goods for the NAFTA tariff treatment, then this will be considered circumvention.


19.1 Non-qualifying Production/Assembly Operations a) During the on-site visit, interview personnel in order to understand the production/assembly operations of the entire plant(s) where the goods subject to averaging are produced. Document any concerns with respect to possible non-qualifying production/assembly operations. b) Review the previously obtained bill(s) of materials and any product literature for the goods that are subject to averaging. Document any concerns with respect to non-qualifying production/assembly operations. c) Review verification sub-program 7 of this verification program entitled the PLANT TOUR. Identify any concerns noted during the tour with respect to non-qualifying production/assembly operations. d) Review documents related to transportation (consider documents obtained in the 20. TRANSSHIPMENT verification sub-program) and document any concerns with respect to the finished goods being altered subsequent to importation. e) Prepare a written evaluation of the possible non-qualifying production/assembly operation and assess the evidence gathered.


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f) When completing the remaining verification procedures for the goods subject to averaging, are there any practice(s) that could be construed as a pricing practice that has been implemented by the company for the purpose of circumventing the rule of origin requirements so that the exported goods can qualify as originating. g) Identify major adjustments made as a result of the VALUE OF MATERIALS verification sub-program, and document any concerns. h) Review adjustments made to the purchases accounts at the end of the year and the beginning of the next year. Identify any concerns. i) Prepare a written evaluation of the non-qualifying pricing practice(s) and assess the extent of the evidence gathered.

19.3 Conclusion on Non-Qualifying Operations

j) Conclude on the Non-qualifying Operations Sub-objective.

20. TRANSSHIPMENT


To verify that the originating good, by reason of having undergone production that satisfies the requirements of section 4 of the NAFTA Rules of Origin Regulations, (1) is not withdrawn from customs control outside the territories of the NAFTA countries; and (2) does not undergo further production or any other operation outside the territories of the Parties, other than unloading, reloading, or any other operation necessary to preserve it in good condition such as inspection, removal of dust that accumulates during shipment , ventilation, spreading out or drying, chilling, replacing salt, sulphur dioxide or other aqueous solutions, replacing damaged packing materials and containers and removal of units or of the goods that are spoiled or damaged and present a danger to the remaining units of the good or to transport the good to the territory of the Party.

VERIFICATION PROCEDURES W/P

a) Obtain and review copies of the invoices, bills of lading or waybills for the goods subject to verification for a sample period. Document the shipping route and all points of shipment and transshipment prior to the importation of the goods. Determine if the goods have been conveyed directly on a through bill of lading from the exporter to a consignee. Consider gathering information from the importer.

b) If the goods have not been shipped directly on a through bill of lading, they may be transshipped through an intermediate country, provided that:

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i) the goods remain under Customs transit control in the intermediate country; and

ii) the goods undergo no operations in the intermediary country other than the unloading, reloading, or operations necessary to preserve the goods in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulfur or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the good that are spoiled, or damaged and present a danger to the remaining units of the good or any other operation necessary to transport the good to a NAFTA country.

20. TRANSSHIPMENT Done W/P

In order to substantiate the above, request documentation from the exporter and/or importer. Documents include, but shall not be limited to: 1) customs receipts and release documents; 2) exporter/ producer shipment/production records; 3) list of serial numbers or lot numbers of the goods; 4) temporary import and corresponding export documentation; 5) research material explaining the non-NAFTA customs operations and procedures.

c) Determine whether any of the goods shipped were not produced by the producer. Consider the potential for fungible goods. If fungible goods are found, refer to the INVENTORY MANAGEMENT SYSTEM verification sub-program.

d) From the transshipment information requested in verification procedure b) of this program, consider requesting that the exporter/producer develop a working paper which shows a reconciliation of shipments of goods exported by the exporter/producer and imported into the territory of the other NAFTA Party, taking into account their quantities and values.

e) Conclude on the verification sub-objective.

APPENDIX R


HEAVY DUTY AUTOMOTIVE GOODS

- NON-AVERAGED

TABLE OF CONTENTS

HEAVY-DUTY AUTOMOTIVE VERIFICATION PROGRAM (NON-AVERAGED)

(Sub-programs 1 through 18)

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• DEFINITION OF TERMS (Pgs. 1-4)

1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISIONS FOR HEAVY-DUTY AUTOMOTIVE GOODS WHERE THE COMPANY HAS NOT ELECTED TO AVERAGE THE COSTS OF THESE GOODS (pg. 5-6)

2. RVC PERCENTAGE REQUIREMENTS FOR HEAVY-DUTY AUTOMOTIVE GOODS 2.1 Staged RVC Requirement for a Good of a Tariff Provision Listed in Schedule IV 2.2 Staged RVC Requirements for a Heavy-Duty Vehicles and Heavy-Duty Components 2.3 Special RVC Requirements for Heavy-Duty Vehicles Produced in a New Plant 2.4 Value of Machinery 2.5. Special RVC Requirements for Heavy Duty Vehicles Produced in a Refit Plant 2.6 General Summary Procedures



5. PLANT TOUR

6. INTERMEDIATE MATERIALS DESIGNATION 6.1. Review of the IM Designation for Compliance With Paragraph 10(9)(a) 6.2. HS Classification of the IM 6.3. Tariff Classification Change Requirements for the IM 6.4. Review of the RVC Requirements of the IM


8. TARIFF CLASSIFICATION 8.1. General Introductory Procedures 8.2. Classification of the Finished Goods and Intermediate Materials (IMs) 8.3. Classification of Materials for Tariff Classification Requirement Only 8.4. Identification of Materials Used or Incorporated in the Good for VNM Purposes

9. SOURCE OF MATERIALS 9.1 Tariff Classification Change Analysis 9.2 Source of Materials for the Purpose of Determining the VNM 9.3 Supplier Confirmations 9.4. General Summary Procedure

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11. VALUE OF MATERIALS 11.1 General Valuation Procedures 11.2 Application of the De Minimis Rule 11.3. Value of Materials to be Included in Net Cost 11.4 Value of Non-originating Materials 11.5 Review of Supplier VNM Statements 11.6 Comparing the Verified VNM With the Producers Figures

12 . VALUE OF COSTS OTHER THAN MATERIALS

13. ACCUMULATION



16. NON-QUALIFYING OPERATIONS 16.1 Non-qualifying Production/Assembly Operations 16.2 Non-qualifying Pricing Practices 16.3 Conclusion on Non-qualifying Operations

18. TRANSSHIPMENT


TO ENSURE THAT THE HEAVY-DUTY AUTOMOTIVE GOOD, WHERE AN ELECTION TO AVERAGE HAS NOT BEEN FILED, IS AN ORIGINATING GOOD IN ACCORDANCE WITH THE NAFTA RULES OF ORIGIN REGULATIONS AND CONSIDERING THE SPECIAL RVC CALCULATION REQUIREMENTS INCLUDED IN SECTION 10 (HEAVY-DUTY AUTOMOTIVE GOODS) AND SECTION 13 (SPECIAL RVC REQUIREMENTS) OF THE NAFTA UNIFORM REGULATIONS.

DEFINITIONS

Note to the Definitions: In order to assist in understanding the audit program wherever a word or group of words are used as defined, the word or words will appear in bold print :

"Automotive Component" means a good that is referred to in Column I of an item of Schedule V.

"Automotive Component Assembly(ies)" means a good other than a heavy-duty vehicle that incorporates an automotive component.

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a) motor vehicles of any of Subheading 8701.20, Tariff Items 8702.10.30 and 8702.90.30 (except for the transport of 16 or more persons), subheadings 8704.10, 8704.22, 8704.23, 8704.32 and 8704.90 and Headings 8705 and 8706,

b) motor vehicles provided for in any of Subheadings 8701.10 and 8701.30 through 8701.90,

c) motor vehicles provided for in any of Tariff Items 8702.10.60 and 8702.90.60 (vehicles for transport of 15 or fewer persons) and Subheadings 8704.21 and 8704.31, and

d) motor vehicles provided for in any of Subheadings 8703.21 through 8703.90. "Complete motor vehicle assembly process" means the production of a motor vehicle from separate constituent parts, which parts include the following:

a) a structural frame or unibody,

b) body panels,

c) an engine, a transmission and a drive train,

d) brake components,

e) steering and suspension components,

f) seating and internal trim,

g) bumpers and external trim,

h) wheels, and

i) electrical and lighting components. "First prototype" means the first motor vehicle that

a) is produced using tooling and processes intended for the production of motor vehicles offered for sale, and

b) follows the complete motor vehicle assembly process in a manner not specifically designed for testing purposes.


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a) where there is a luggage floor panel in the motor vehicle, at the place where that luggage floor panel begins, and

b) where there is no luggage floor panel in the motor vehicle, at the place where the passenger compartment of the motor vehicle ends.

"Heavy-duty automotive good(s)" means a heavy-duty vehicle or a heavy-duty component.

"Heavy-duty component(s)" means an Automotive Component or automotive component assembly that is for use as original equipment in the production of a heavy-duty vehicle.

"Heavy-duty vehicle(s)" means a motor vehicle provided for in any pf Heading 8701, Tariff Items 8702.10.30 and 8702.90.30 (vehicles for the transport of 16 or more persons), and Subheadings 8704.10, 8704.22, 8704.23, 8704.32 and 8704.90 and heading 8705, and 8706.

"Listed material(s)" means a good that is referred to in column II of an item of Schedule V.


"Model line" means a group of motor vehicles having the same platform or model name .

"Model name" means the word, group of words, letter, number or similar designation assigned to a motor vehicle by a marketing division of a motor vehicle assembler

(a) to differentiate the motor vehicle from other motor vehicles that use the same platform design,

(b) to associate the motor vehicle with other motor vehicles that use different platform designs, or

(c) to denote a platform design.




a) a good of a tariff provision listed in Schedule IV, or

b) an automotive component assembly, automotive component, sub-component or listed material.


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a) light-duty vehicles and heavy-duty vehicles,

b) goods of a tariff provision listed in Schedule IV, and

c) automotive component assemblies, automotive components, sub-components, and listed materials. "Refit" means a closure of a plant for a period of at least three consecutive months that is for purposes of plant conversion or retooling.

Schedule V of the NAFTA Rules of Origin Regulations

Item Column I Column II

Automotive Components Listed Materials

1. For engines provided for in cast blocks, cast heads, fuel nozzles, fuel injector pumps, heading 8407 or 8408 glow plugs, turbochargers, superchargers, electronic engine controls, intake manifolds, exhaust manifolds, intake valves, exhaust valves, crankshafts, camshafts, alternators, starters, air cleaner assemblies, pistons, connecting rods and assemblies made therefrom, rotor assemblies for rotary engines, flywheels (for manual transmissions), flexplates (for automatic transmissions), oil pans, oil pumps, pressure regulators, water pumps, crankshaft gears, camshaft gears, radiator assemblies, charge-air coolers.

2 For Gear boxes (transmissions) (a) for manual transmissions: transmission cases and provided for in subheading clutch housings; clutches; internal shifting mechanisms; 8708.40 gear sets, synchronizers and shafts; and (b) for torque convertor type transmissions: transmission cases and convertor housings; torque convertor assemblies;gear sets and clutches; electronic transmission controls.

"Size Category" , with respect to a light-duty vehicle, means that the total of the interior volume for passengers and the interior volume for luggage is

(a) 85 cubic feet (2.38 m3 ) or less,

(b) more than 85 cubic feet (2.38 m3 ) but less than 100 cubic feet (2.80 m3 ),

(c) 100 cubic feet (2.80 m3 ) or more but not more than 110 cubic feet (3.08 m3 ),

(d) more than 110 cubic feet (3.08 m3) but less than 120 cubic feet (3.36 m3), or

(e) 120 cubic feet (3.36 m3) or more.

"Sub-component" means a good that comprises a listed material and one or more other materials or listed materials.


1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISIONS FOR HEAVY

-DUTY AUTOMOTIVE GOODS WHERE THE COMPANY HAS NOT ELECTED TO

AVERAGE THE COSTS OF THESE GOODS

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To ensure that the good is a heavy-duty automotive good and in the case that the company has NOT elected to average the sum of the net costs incurred and the sum of the values of non-originating materials used by the producer in accordance with Subsections 11(1) or 13(4) of the Regulations.


a) Using the definition of a heavy-duty vehicle, determine whether the good is classified in one of the tariff provisions listed in the definition of a heavy-duty vehicle and the producer has NOT filed an election to average the sum of the net costs incurred and the values of non-originating materials in accordance with Subsections 11(1) or 13(4) of the Regulations.

b) If the good is:

i) an Automotive Component or Automotive Component Assembly,

ii) for use as original equipment in the production of a heavy-duty vehicle; and

iii) the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with Subsection 12(1) of the Regulations. If so, this verification program is applicable.


NOTE: If the good is a heavy duty automotive good but the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with Subsection 11(1), 12(1) or 13(4) of the Regulations, complete the Heavy-Duty Automotive Goods (Averaged) verification program. If the good is a light-duty automotive good and the producer has elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsections 11(1), 12(1) or 13(4) of the Regulations, use the Light Duty Automotive Goods (Averaged) verification program.

1. ELIGIBILITY FOR THE NAFTA RULES OF ORIGIN PROVISION FOR HEAVY-DUTY AUTOMOTIVE GOODS WHERE THE COMPANY HAS NOT ELECTED TO AVERAGE THE COSTS OF THESE GOODS

If the good is a light duty automotive good but the producer has not elected to average the sum of the net costs incurred and the values of non-originating materials in accordance with subsection 11(1), 12(1), or 13(4) of the Regulations, use the Light-Duty Automotive Goods (Non-Averaged) verification program.

If the good is not a heavy duty automotive good nor a light duty automotive good, then the general verification programs found in Chapter 5 of the NAFTA Audit (Verification) Manual are applicable.

2. RVC PERCENTAGE REQUIREMENTS FOR HEAVY-DUTY AUTOMOTIVE GOODS


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To ensure that the applicable minimum Regional Value Content (RVC) percentage requirement is used by the producer to determine whether the heavy-duty vehicles and heavy-duty components qualify as originating under the NAFTA.



2.1 RVC Percentage Requirement for a Good of a Tariff Provision Listed in Schedule IV, that is Subject to a Regional Value Content Requirement and is for use in a Heavy-Duty Vehicle, Except for a Good of any of Heading Nos. 8407 and 8408 and Subheading No. 8708.40 or any of Subheading Nos. 8482.10 through 8482.80, 8483.20 and 8483.30.

a) Determine if the fiscal year of the producer started before July 2, 1997. If so, the RVC requirement is 50%. b) Determine if the fiscal year of the producer started after July 1, 1997, but before July 2, 2001. If so, the RVC requirement is 55%. c) Determine if the fiscal year of the producer started after July 1, 2001. If so, the RVC requirement is 60%.

2.2 Staged Heavy Duty Vehicles and Heavy Duty Components RVC Requirement

Regional Value Content (RVC) Percentage Requirements for light-duty vehicles, or a good provided for in any of heading 8407 and 8408 and subheading 8708.40, that is for use in a heavy-duty vehicle.

d) Determine if the fiscal year of the producer started before July 2, 1997. If so, the RVC requirement is 50%.

e) Determine if the fiscal year of the producer started after July 1, 1997, but before July 2, 2001. If so, the RVC requirement is 56%.

f) Determine if the fiscal year of the producer started after July 1, 2001. If so, the RVC requirement is 62.5%.

2.3 Special RVC Requirements for Heavy-Duty Vehicles Produced in a New Plant

g) Determine if the plant in which the heavy-duty vehicles are produced consists of, or includes, a new building in which the heavy-duty vehicles are assembled. h) Determine if the heavy-duty vehicles produced meet the definition of first prototype .

i) Determine the date of production of the first prototype and whether or not it has been five years since the date on which the first prototype has been produced. If greater than five years after the date on which the first prototype was produced, use the appropriate RVC requirements as identified in Verification Procedures a) through c).

j) Determine if the heavy-duty vehicle is of a:

i) class of motor vehicle, or

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ii) marque, that was not previously produced by the motor vehicle assembler in the territory of any of the NAFTA countries.


k) For purposes of determining the value of machinery that was never previously used for production, and that is used in the new building (s) for the purposes of the complete motor vehicle assembly process with respect to that vehicle, obtain the motor vehicle assembler's fixed asset sub-ledger and the supporting invoices for the new machinery acquired to produce the motor vehicle. l) Using the information obtained in verification procedure h) above review the producer's calculation of the value of machinery to ensure that the value of machinery that was never previously used for production, and that is used in the new building(s) for the purposes of the complete motor vehicle assembly process with respect to that motor vehicle, is at least 90% of the value of all machinery used for the purposes of that process.

i) Where the machinery was acquired by the producer of the motor vehicle from another person, the value of the machinery is the cost of that machinery that is recorded on the books of the producer.

ii) Where the machinery was used previously by the producer of the motor vehicle in the production of another good, the value of machinery is the cost of the machinery that is recorded on the books of the producer minus accumulated depreciation of that machinery that is recorded on those books.

iii) Where the machinery was produced by the producer of the motor vehicle, the value of the machinery is the total cost incurred with respect to that machinery, calculated on the basis of the costs that are recorded on the books of the producer.

m) Conclude as to whether all the conditions outlined in verification procedures g) through l) are met. If so, the RVC requirement is not less than 50% for five years after the date on which the first prototype is produced in the plant by the motor vehicle assembler . The RVC requirements outlined in verification procedure 2.1 apply for the periods following five years after the date on which the first prototype is produced.

2.5 Special RVC Requirements for Heavy-Duty Vehicles Produced in a Refit Plant

n) Determine if the plant which the heavy-duty vehicles are produced meets the definition of refit.

o) Determine if the heavy-duty vehicles produced in the refit plant meet the definition of first prototype.

p) Determine the date of production of the first prototype and whether or not it has been two years since the date on which the first prototype has been produced. If greater than two years after the date on which the first prototype was produced, use the appropriate RVC requirements for heavy-duty automotive goods as identified in Verification procedure 2.2.

q) Determine if the heavy-duty motor vehicle is of a:

i) class of motor vehicles, or

ii) marque, that was not assembled by the motor vehicle assembler in the plant before the refit.

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r) Conclude as to whether the conditions outlined in verification procedures n) through q) are met. If met, the RVC requirement is not less that 50% for two years after the date on which the first prototype is producedin the plant by the motor vehicle assembler . The RVC requirements outlined in Verification procedure 2.1 apply for the period following two years beginning with the date on which the first prototype is produced.

s) Prepare any adjustments, as required.


t) Conclude on the verification sub-objective

3. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM VERIFICATION SUB-OBJECTIVE



a) Obtain the relevant information concerning the Management of Information System (MIS) gathered through the 7. PLANT TOUR verification sub-program. Identify the areas of concern with respect to the MIS. Consider using the "Review of Policies, Procedures and Internal Controls Checklist" (See Appendix F) to assist in identifying concerns.










A) how are orders for motor vehicles entered into the system


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D) how are material stock reports (i.e. KAN-BAN) and picking lists generated

E) inventory (i.e. purchase from supplier(s), receipt, transfer to production, work-in-process, finished goods, shipment of finished goods)



i) General Controls





D) system testing;





A)handling errors;

B)program protection;

C)file protection;

D)security protection.




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B) audit trail;















a) Obtain from company officials supporting RVC information for the goods under review on a shipment by shipment basis.

b) Review the costs provided in the submission of RVC information to determine if they are reflective of actual costs .

c) Ensure that all calculations provided with the information are correct. Ensure that the appropriate RVC percentage requirement has beenused by the company. Ensure that the good has met the RVC requirement based on these calculations.

d) Ensure that all the non-originating materials (i.e., materials that do not meet their required rule of origin) and materials of unknown origin used in the production of the good have met the required tariff classification change portion of the rule of origin.

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e) Review the labor and overhead information provided.

Identify any excluded costs incorrectly included in the RVC calculation. Ensure that all costs allocated to the good subject to the verification are in fact actual costs incurred in the production of such good on the specific date of production.

f) Identify any automotive component assembly, automotive component, sub-component , or listed material that are imported by the company and identified as originating materials. (Reference Schedule V)

g) Conduct risk analysis /ratio analysis on the total value for materials, labor and overhead in relation to the RVC requirement.


5. PLANT TOUR


To obtain an understanding of the entire operations of the verification company (i.e. manufacturing, assembly, warehouse, accounting, etc.).


a) Obtain an Organization Chart. Ensure all operations and or departments whose costs are included in the total cost calculation for RVC purposes have been reviewed and documented. --Document the potential for costs to be included in total cost that should be excluded (i.e. costs not directly related to the production of the automotive goods including: sales promotion, marketing and after-sales service costs; royalties; shipping and packing costs; and non-allowable interest costs).

b) Observe and document the existence of the goods.

i) Confirm the goods to be included in the election to average are manufactured at that production facility.

ii) Identify any differences that may exist with respect to the tariff classification of the goods under review.


d) Observe and document any concerns with regard to any possible Non-Qualifying Operations (i.e. unacceptable production or pricing practice used to circumvent the Rules of Origin) noted during the plant tour. This information will be used in 16. NON-QUALIFYING OPERATIONS sub-program.


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--Document any concerns with respect to the potential allocation problems of costs not directly related to the goods included in the calculation.




iii) Document any concerns with respect to the source of materials (i.e. dual sourcing, markings on materials, fungible materials, etc.) noted during the plant tour, especially automotive component assembly, automotive component, sub-component, and listed materials

iv). Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the good under review.

v). Document any concerns with respect to the shipping of finished goods (i.e. any costs of shipping and packing that may be included in the net cost calculation).

vi) Document any concerns with respect to the inventory and turn-over of finished goods.

g) Observe and document the production/manufacturing operations. Ensure each in-house manufacturing and sub-assembly operations have been documented (i.e. stamping, engine roduction, axle production, etc.)

i). Document any concerns with respect to the out-sourcing of manufacturing/production or sub-assembly operations. Evaluate whether assists may be provided to the out-sourced producers.

This information will be used in 14. VALUE OF MATERIALS verification sub-program.

ii). Document any concerns with respect to the potential for costs being included in the RVC calculation that are not directly attributable to the good under review.

h) Observe and document the financial accounting operations. Ensure the materials ordering, receiving, inventory flow, direct labor costing, indirect material costing and overhead allocation per unit are all documented.

i) Observe and document the Management of Information System Operations. Inquire as to the type of management reports that are produced (i.e. bills of materials, production reports, labor reports, material stock reports, etc.). This information will be used in 3. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program.


VERIFICATION SUB-OBJECTIVE:

The objectives of this verification sub-program are: 1) To determine if the intermediate material(s) (IM) designation, made by the heavy duty automotive goods producer, is in accordance with

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Paragraph 10(9)(a) and Subsection 7(4) and 7(19) of the NAFTA Regulations; 2)Where the Specific Rule of Origin for the IM requires that the non-originating materials making up the IM undergo a tariff classification change, that the tariff classification change requirement is met; 3) Where the Specific Rule of Origin requires that the IM meet a Regional Value Content (RVC), that the RVC requirement is met; and 4) To document any self-produced materials and containers and self produced accessories spare parts and tools designated as an IM.

Complete this sub-program only if the producer designates a self-produced intermediate material(s) (IM) in accordance with Paragraph 10(9)(a) and Subsection s 7(4) & 7(19) of the NAFTA Regulations.


6.1 Review of the IM Designation for Compliance With Paragraph 10(9)(a)

a) Document all Intermediate Material (IM) designations made by the company.

b) Review the company designated HTS number and description of the intermediate material to ensure that the description in the Harmonized Tariff System of the NAFTA Party does not describe a heavy-duty component or sub-component.

c) Is the IM designation within the requirements of Paragraph 10(9)(a) of the NAFTA Regulations? An IM designation will be considered meeting the Paragraph 10(9)(a) requirements where the self-produced material is a material other than a heavy-duty component or sub-component and no other materials which are other than a heavy-duty component or sub-component that is subject to a RVC requirement and is incorporated into that I M is also designated by the producer as an IM.

d) Conclude on the Intermediate Material designation for compliance with Paragraph 10(9)(a).

6.2 HTS Classification of the IM

e) Obtain the correct tariff classification and Rule of Origin for the IM from the 8.TARIFF CLASSIFICATION verification sub-program.

6.3 Tariff Classification Change Requirements for the IM

f) Obtain the information with respect to the Tariff Classification for the I M from the 8.TARIFF CLASSIFICATION verification sub-program.

6.4 Review of the RVC Requirements of the IM

g) Inquire of the company officials as to how the value of the intermediate material was determined. See Subsection 7(6) of the NAFTA Regulations. Are all costs reasonably allocated to the IM according to Schedule VII?

h) Ensure that material, labor, overhead costs etc. allocated to the Intermediate Material are not double counted in the respective costs related to the final good. (i.e. the net cost of the good should be reduced to the extent of the IM designation). This information will be used in sub-programs 11. VALUE OF MATERIALS and 12. VALUE OF COSTS OTHER THAN MATERIALS

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i) Perform the RVC requirement on the IM using the net cost method. Refer to sub-program 14. CALCULATION OF THE RVC verification sub-program for determining the RVC using the net cost content calculation.

j) If more than one intermediate material has been identified, ensure that, where the IM is subject to a RVC requirement, no other self-produced material subject to a RVC requirement is used in the production of that IM.

k) Conclude as to whether the IM is an originating material.

l) If an intermediate material is determined to be originating, calculate the non-originating value in the total cost of the IM and carry forward that value, as an originating cost, to be subtracted from the VNM (if not already reduced).



To ensure the bill of materials (BOM) of the good under review is complete and accurate throughout the verification period.


a) Obtain the bills of materials (BOM) and any additional supporting documentation for the good under review used by the producer to prepare the submission of RVC information. (Refer to 8. TARIFF CLASSIFICATION verification sub-programs.)

b) Verify the mathematical accuracy of the BOM.

c) Compare the values of the materials and the materials themselves (inventory part number and name) on the BOM and the other supporting documentation to totals reported in the submission of RVC information. If information concerning the origin of the materials or sourcing of the materials is on the BOM and the supporting documentation, also compare this information to the origin of the materials declared in the submission of RVC information.

d) Obtain from 3. REVIEW OF THE MANAGEMENT OF INFORMATION SYSTEM verification sub-program, the description of the system for the BOM and any related documentation that is required to complete verification procedure f). If necessary, review the policy and procedures manual for the BOM with respect to the definition of the BOM, use of the BOM, what is reported on the BOM, who and when changes are made to the BOM, etc.

e) To ensure that the BOM is complete:

i). compare the BOM to engineering documents/specifications (i.e. compare parts and quantity to be included in the good);

ii). compare the part numbers, descriptions and values, to picking lists used to obtain parts for the production from inventory (ensure this matches the inventory management method as described in the MIS review);

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iii).compare the BOM to product literature;

iv). review the sourcing of materials for consistency on the BOM.

v) Compare the BOM to a BOM of similar goods (i.e. use professional judgment to ensure all materials on the BOM are incorporated into the good and to ensure there are no missing materials that should be incorporated into the good).

vi) Document any differences. Obtain explanations from the company.

f) Review the company's standard cost accounting policies, if standard costs were used. If so, ensure that the standard cost of the good has been adjusted to the actual cost of production of the good on a per unit basis. Inquire with company officials if any differences are found.

g) Identify any accessories, spare parts and tools, packaging materials and containers for retail sale and packing materials and containers for shipment to be disregarded for evaluating the tariff classification change requirement. Provide this information to the person responsible for the 8. TARIFF CLASSIFICATION verification sub-program. Provide the information concerning packing materials and containers for shipment to the person responsible for the 12. RVC- COSTS OTHER THAN MATERIALS and 11.VALUE OF MATERIALS verification sub-program.




To ensure that the heavy duty automotive good is properly classified under the Harmonized Tariff System (HTS) of tariff classification, and to ensure the correct rule of origin is applied.

To classify all materials which would not meet the necessary tariff classification change as required by the Specific Rule of Origin (Schedule I of the Uniform Regulations) applicable to the good if they were non-originating materials.

To identify and classify all automotive component assemblies, automotive components , sub-components and listed materials together with any other non-originating materials used by the producer in the production of the good in order to establish the Value of Non-originating Materials (VNM) in accordance with Section 10 of the Regulations.


8.1. General Introductory Procedures:

a) Interview the person(s) responsible for tariff classification to establish how the classifications of the good and the materials were determined. Obtain any rulings that the company has received from other customs administrations.


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c) Obtain information from the company pertaining to the de minimis calculation when the company has applied the de minimis provisions to qualify the goods. To evaluate de minimis, refer to the verification procedures outlined in Chapter 5 of this verification (audit) manual.

d) To aid in the completion and accuracy of the 9. SOURCE OF MATERIALS verification sub-program, note data on the material suppliers, if you come across this information while performing the verification procedures of this sub-program.

8.2 Classification of the Finished Goods and Intermediate Materials

e) Obtain and review documentation on the good and IM including; bill of materials, public brochures, engineering specifications, invoices, bills of lading, owner's manual, catalogues and verify if it is consistent with the tariff classifications provided for the good under review. Review the export documents for the Harmonized Tariff System (HTS) number for the good being verified.

f) Obtain from 5. PLANT TOUR verification sub-program information with respect to the production of the goods or the IM. Physically inspect the good during a plant tour to aid in confirming the correct classification number and rule of origin of the finished goods and IMs.

g) Ensure that the good and IMs under review are properly classified in the RVC information. The good and/or IM classification should be classified as applicable, to the Tariff Heading (4th digit), Subheading (6th digit), or where required by the Specific Rule of Origin the Item (8th digit) level of the Party?s HTS. Where the tariff number is in doubt, take pictures, drawings, samples to the appropriate specialist for a classification.

h) Identify the Specific Rule of Origin for the Heavy Duty Automotive Good and I M under review. Prepare a conclusion on the tariff classification declared by the company for the good or the I M under review.

i) Does the specific rule of origin of the good require that the materials undergo a change in tariff classification ? If no, go to procedure 8.4 within this verification sub-program . If yes, continue.

8.3 Classification of Materials for Tariff Classification Change Requirement Only:

To be completed where the non-originating materials included in the Heavy Duty Automotive Good or IM are required to undergo a tariff classification change.

j) Analyze the Specific Rule of Origin for the good or IM identified in verification procedure g) to determine the tariff classification of the materials that would not meet the required tariff classification change if they were non-originating materials.

k) Obtain an accurate description of the materials used in the production of the good, by physical examination, reviewing supplier parts catalogue, engineering documents, purchase orders, and/or supplier contracts. Document any self produced materials designated in accordance with subsection 4(8) of the NAFTA Rules of Origin Regulations.

l) Classify all materials on the BOM, except those identified as accessories, spare parts and tools; packaging materials and containers for retail sale and packing materials and containers for shipment to the level required for tariff classification change requirement. Note: obtain this information from the 7. BILL OF MATERIALS verification sub-program.

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m) Identify those materials which would not meet the tariff classification change requirement if they were non-originating. The conclusion on the tariff classification change requirement will be performed in verification procedure g) in the 9. SOURCE OF MATERIALS verification sub-program.

8.4 Identification of Materials Used or Incorporated In the Good for VNM Purposes

n) Using the BOM of the good under review, obtain an accurate description of the materials by physical examination, reviewing supplier parts catalogues, engineering documents and/or supplier contracts. Identify:

i) material that are automotive component assemblies, automotive components, sub-components, listed materials and all other non-originating materials;

ii) For automotive component assemblies, identify the potential automotive components , sub-components, and listed materials;

iii) For automotive components, identify the potential sub-components and listed materials;

iv) For sub-components , identify the potential listed materials.

o) Prepare a working paper to document all the information on the materials used or incorporated into the good subject to the verification at any level of production.




--the origin of materials which would not meet the tariff classification change as required by the Specific

Rule of Origin (Schedule I of the Regulations) if the materials were non-originating;

--the source of all materials or sub-materials that are automotive component assemblies, automotive components, sub-components, and listed materials, used or incorporated in the good in order to establish the value of non-originating materials (Section 10 of the Regulations) especially the ones claimed as originating materials by the producer or his supplier; and

-the source of originating materials for tariff treatment purposes.



a) Obtain the list of materials reported as originating which if failing to originate, would not meet the tariff classification change required by the Specific Rule of Origin ( Schedule I of the Regulations). This list should be obtained from the 8.3 TARIFF CLASSIFICATION OF MATERIALS FOR TARIFF CLASSIFICATION CHANGE REQUIREMENT ONLY of the 8. TARIFF CLASSIFICATION verification sub-program.

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b) Confirm the origin of these materials by reviewing the Certificates of Origin or supplier statements obtained by the producer and/or by reviewing the purchase order, invoice, and the receiving documents.

c) Physically inspect these materials to verify markings or any indications which might indicate that the materials are non- originating.

d) Assess if the 7% De Minimis Rule can be applied if there are non-originating materials that do not meet the required tariff classification change (see verification procedure f) in the 11. VALUE OF MATERIALS verification sub-program.

e) Assess the need to send supplier confirmations for the purposes of determining the origin of materials for the tariff classification change requirement.


9.2 Source of Materials for the Purpose of Determining the VNM

g) Obtain the complete list of materials identified in the 8.4 IDENTIFICATION OF MATERIALS USED OR INCORPORATED IN THE GOOD FOR VNM PURPOSES in the 8. TARIFF CLASSIFICATION verification sub-program. Add all other originating high value materials to this list.

h) From the list obtained in Verification procedure g):

i) select a sample of the materials which the exporter has claimed as originating (including those materials which may contain sub-materials);

ii) verify if the source of the above materials could be valid, by looking at the industry profile documentation, and other information for similar goods (i.e., Could these materials be imported?);

iii) interview company officials responsible for determining the origin of materials as found in the information response. Ask what procedures they used to verify the source of the materials. Document strengths and weaknesses of the manner in which the company identified non-originating materials;

iv) if the company has received certificates of origin and/or supplier statements to verify the source of the materials, review them and determine if they are adequate (if not adequate these items may be considered high risk items for confirmation purposes).

i) Obtain information from the exporter's policy and procedures manuals and complete a plant tour to assist in identifying the source of materials. Physically inspect the materials to verify markings or any indications which might indicate if they were imported. Coordinate this work with that performed in verification procedure h)ii).

j) While conducting the plant tour and through inquiry of management, identify any part of the production process that may be sub-contracted to another company.

k) Review the concerns raised during the 5. PLANT TOUR verification sub-program.

l) Obtain a list of suppliers for all materials. For the sample selected in verification procedure h) i) perform the following:

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i) determine whether any of the suppliers have companies in a non-NAFTA country, or if the suppliers are U.S., Canadian or Mexican distributors (the materials from these suppliers will be considered high-risk for confirmation purposes);

ii) inquire of company officials if there were any supplier changes or were any materials sourced from more than one supplier. The Approved Vendor List or the history of the engineering specifications may provide evidence of supplier changes;

iii) determine whether there are any fungible (look for dual sourced materials) materials. Examine the parts and supplier lists, the Approved Vendor List, and inquire as to whether the same material is sourced from both a supplier from a NAFTA country and a non-NAFTA country, and if they source parts from distributors. (This information will be used in the 10. INVENTORY MANAGEMENT SYSTEM verification sub-program ).

m) Determine whether the 8. TARIFF CLASSIFICATION verification sub-program identified any materials that were designated as originating by the exporter but were in fact imported from a non-NAFTA country , i.e. obtain information from supplier catalogues and observation of markings during the plant tour.

n) Select a sample of originating materials from the list obtained in Verification procedure h) and perform the following:

i) scan the purchase invoice, any attached shipping documents, and bank endorsement stamp on the canceled check to determine whether they support the exporter's claim for the source (and value) of the material;

ii) select materials from this sample to verify markings and coordinate this work with that performed in verification procedure i;

iii) follow up on any contradictory observations;

iv) prepare a working paper to control the confirmation process and to document results.

o) Select a sample of the non-originating materials from the list obtained in verification procedure g) and determine if they are:

i) self-produced;

ii) acquired by the producer;

iii) imported directly by the producer;

iv) imported by a person other than the producer. Obtain supplier statement for the acquired non-originating materials. This information will be used in the 11. VALUE OF MATERIALS sub-program.

p) Compare any supplier certificates of origin or supplier statements obtained through the verification procedures identified above to the BOM identified in the 7. BILL OF MATERIALS verification sub-program.

q) Evaluate the need to expand sampling procedures.

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r) Determine if the origin and VNM of any of the materials need to be confirmed.


s) Select suppliers from the list identified in g) from whom supplier confirmations will be obtained to confirm the origin of: 1) the materials claimed by the company or its supplier to be originating (and/or to verify VNM); or 2) materials that if found to be non-originating would not meet the tariff classification change requirements in Schedule I of the Regulations and that have been claimed as being originating by the company.

--Any verification of material suppliers should involve the following :

i) send confirmations to high risk suppliers who are distributors, for high dollar value materials, or suppliers known to import parts from outside the territory, or where the reliability of the certificates of origin or the suppliers certifications on file with the exporter and/or producer are questionable;

ii) find information on the suppliers in the exporter and/or producer correspondence files and purchase records, i.e. addresses, contact person, phone numbers, etc.;

iii) ensure that confirmations are sent out to all suppliers if there is more than one supplier of a material or if suppliers were changed;

iv) follow up with the supplier to obtain a completed confirmation, this may be telephone within a predetermined time frame to ensure that all the completed confirmations are received;

v) review the confirmations once they are received from the suppliers and compare the information on the confirmations with the information on the certificates of origin and/or supplier certifications filed with the exporter and/or producer. Confirmations for which there are no response or insufficient information will result in the material being considered non-originating for tariff classification change and VNM purposes;

vi) determine if supplier confirmation letters should be sent to the suppliers of the suppliers of the exporter and/or producer, because there are materials which require further verification ;

vii) after reviewing the supplier confirmation, consideration should be given to conducting a restricted supplier verification at the suppliers premises based on evidence gathered to date. However, such visits will have to be discussed with and approved by the appropriate Customs official prior to making any arrangements;

viii) prepare a working paper to control the confirmation process and to document the results ; and

ix) prepare a letter to each supplier subject to the confirmation process, notifying them of whether or not the material was found to be originating.

9.5 General Summary Procedure



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To determine if an applicable inventory management method is in place when fungible materials (physically separated or commingled) are used in the production of a good, or when fungible goods are physically combined or mixed in inventory, potentially to identify the origin of a specific shipment of goods.

In terms of fungible materials used in the production of heavy-duty automotive goods, an inventory management method must identify originating versus non-originating materials for the purposes of the tariff classification change requirement. Also, for the purposes of the RVC requirement, an inventory management method must, for a material that is an: automotive component; automotive sub-component ; automotive component assembly; and listed material identify the origin of those materials and for all materials that have more than one supplier, identify the different VNM values.




a) Obtain from verification procedure l)iii in the 9. SOURCE OF MATERIALS verification sub-program, a listing of identified fungible materials.

b) Determine the impact on the origin of the goods under review should the inventory management system be found to be not acceptable. When fungible materials exist, evaluate the impact in terms of the tariff classification change requirement (consider the use of the de minimis provision) by reviewing 8.TARIFF CLASSIFICATION verification sub-program, as well as in terms of the Regional Value Content requirement by reviewing 11.VALUE OF MATERIALS verification sub-program and reviewing 14. CALCULATION OF THE REGIONAL VALUE CONTENT verification sub-program. If the impact is significant, proceed with the evaluation of the inventory management system.

c) Determine which of the following inventory management systems outlined in the NAFTA Regulations - Schedule X the company used for the fungible materials (goods): Specific Identification, FIFO, LIFO, and the Average Method

d) Document the inventory management system from beginning to end (i.e. purchasing, receiving, storage of materials, removal of materials from storage into production of goods, storage of goods and removal of goods from storage for shipment of goods).


f) If FIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable,

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first received were considered to be the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn.

g) If LIFO was used, review the company's receipts and withdrawals from the inventory record system. Ensure that the fungible materials (goods), identified by origin or supplier, as applicable, last received was considered to be the fungible materials (goods), identified by origin or supplier, as applicable, first withdrawn.


i) Ensure whichever method that was chosen, including the averaging period in the case of the averaging method, that it was used from the time it was chosen to the end of the fiscal year. Has the system changed since the inception of NAFTA? j) Ensure that the company correctly determined the materials (goods), identified by origin or by supplier, as applicable, in its opening inventory by: i) identifying, in the books of the producer, the latest receipts of fungible materials (goods) that add up to the amount of fungible materials (goods) in opening inventory at the time an inventory method is chosen; ii) reviewing the origin or supplier of the materials (goods), as applicable, that make up those receipts; iii) determining those fungible materials (goods) to be the fungible materials (goods) in opening inventory, identified by origin of the supplier, as applicable. k) Review the inventory management system by performing compliance tests of a sample of purchase transactions. The sample should include transactions involving materials (goods) that were fungible materials (goods) at the inception of the NAFTA and materials (goods) that were identified as fungible since the inception (i.e. change in supplier). l) Is the inventory management system tested periodically? Obtain a description of periodic testing and evaluate it's effectiveness. m) Test a sample of fungible material (good) inventories by identifying the origin of opening inventory, adding receipts/adjustments of materials (goods) and deducting withdrawals/adjustments and compare your results to the company's records. n) Conclude on whether: i) the inventory management system used by the Company is acceptable and meets all the requirements of Schedule X of the Regulations; or ii) the inventory management system used by the company requires improvement to meet the requirements of Schedule X of the Regulations - document the weaknesses of the system - document the impact on the origin of the goods under review; or iii) the inventory management system does not meet the requirements of Schedule X and the company can/cannot construct the necessary inventory system - document the impact on the origin of the goods under review.


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VERIFICATION SUB-OBJECTIVE To ensure that the value of originating and non-originating materials has been calculated in accordance with the NAFTA.


11.1 General Valuation Procedures: a) Using the information obtained with the 3. REVIEW OF THE MANAGEMENT INFORMATION SYSTEM verification sub-program assess the internal controls in place to preserve the quality and accuracy of the data available by reviewing: policy and procedures manuals with respect to the purchase of materials; internal auditor's reports; the setting of standards and identification of variances. Further assessment of internal controls can be made by performing a walk-through of the purchasing and receiving function, and documenting the flow of information by tracing material requisitioning, ordering, receiving and reporting returns, accounting, and cash disbursement. b) From discussions with the company staff, find out who is responsible for determining the values for the materials and how the materials are valued. Is the same valuation method used for all the materials, i.e., do they use the same method for determining the value of non-originating materials and originating materials? c) Review the calculations prepared by the company including any supporting documentation and supplier certifications and statements obtained by the producer. Determine if the procedure used to value materials is in accordance with the Regulations. i) Identify all assumptions made by the company. ii) Identify all additions to cost included in valuing the materials (freight, insurance, packing and other costs incurred in transporting the materials such as duties and brokers charges, including in-house broker costs). Apply the appropriate verification procedures to the costs being examined (examine invoices, calculations, standard costs, etc.). iii) Identify the accounts from which the information was extracted. iv) Where materials are imported, verify that if the values of materials are in the same currency as the currency of the country of the person who provided the supplier statement is located. See Section 3 of the Regulations. v) Identify areas for further review. d) Identify any related suppliers and determine if the materials purchase price was affected by the relationship, and if an adjustment will be required. i) Identify and review accounts or any documents that may pertain to material transfers and/or transfer payments from the company to the parent to identify any possible assists. ii) If materials are dual sourced, compare the purchase prices of the related and non-related companies, i.e., obtain a price list from the producer listing suppliers, prices, and materials. iii) Review correspondence between the company and the related suppliers. Is

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there a possibility that the relationship affected the value used? e) Inquire as to how price and usage variances are accounted for. Analyze if these variances (actual and standard cost) are material and adjust the value of the materials in the RVC calculation, if necessary.

11.2 Application of the De Minimis Rule f) If there are non-originating materials that do not meet the required tariff classification change review the value of the sub-materials. Where the value of the sub-materials in the material (determined in accordance with Section 7 of the Regulations) is less than or equal to 7% of the transaction value (or total cost of the good, if the transaction value is unacceptable), the de minimis rule can be applied (See verification procedure d) in the 9. SOURCE OF MATERIALS verification sub-program).

11.3 Value of Materials to be Included in Net Cost: g) Verify that all materials included in the net cost calculation are valued in accordance with Section 7 of the Regulations. The value of materials calculated in accordance with NAFTA includes the following regardless of whether the applicable value is the customs value of the material or the transaction value with respect to the transaction value with respect to the transaction in which the producer acquired the material: freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer; duties and taxes paid or payable with respect to the materials in the territory of one or more of the NAFTA countries, unless they were refunded or waived; customs brokerage fees (including in-house services); waste and spoilage resulting from the use of the material in the production (minus the value of reusable scrap).

When the value is the transaction value, the following may also be added: commissions, except buying commissions; elements (assists) supplied to the seller by the producer (materials; tools, dies, molds and other indirect materials; engineering, development, artwork, design work, and plans and sketches performed outside the country in which the producer is located) royalties; subsequent proceeds that accrue to the seller. The value of materials also includes accessories, spare parts, tools, packaging materials and containers for retail sale.

Obtain the value of the IM from the 6. INTERMEDIATE MATERIALS

DESIGNATION verification sub-program.

h) Review the values of materials reported with the information response and assess if these amounts seem reasonable by comparison with other RVC information of similar goods. i) Inquire into the results of the 7. BILL OF MATERIALS verification sub-program, and take them into account while conducting the remaining verification procedures.

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j) Select (consider obtaining sufficient audit coverage) a sample of high risk materials for valuation purposes.(High risk for valuation purposes would be fungible materials; or originating materials that if found to be non-originating would make the good non-originating for RVC purposes. All materials should also be checked for correct valuation since originating materials that are overvalued and non-originating materials that may be undervalued would cause an overstatement of the RVC percentage.) i) determine the actual price paid by the exporter/producer by tracing to the purchase invoice, the attached shipping documents and the bank endorsement stamp on the canceled check; ii) calculate the difference between the actual and standard cost and compare with the price variance or variance from standard claimed by the exporter/producer; follow-up on any substantial differences; and iii) trace the total invoice amount to the appropriate ledgers and sub-ledgers to verify that purchases have been recorded correctly in the exporter's/producer's books and records. k) For the purpose of calculating the RVC, verify that the value of all materials calculated in accordance with Section 7 of the Regulations used or incorporated into the final goods are included in the net cost. Ensure that the value of intermediate materials or the VNM as outlined in Section 10 of the Regulations is not double counted in the total cost of the good. l) Prepare a work paper to ensure that all adjustments required for materials as a result of value of materials verification procedures have been recorded. m) Conclude as to whether the value of materials is correct.

11.4 Value of Non-Originating Materials: The Value of Non-originating Materials (VNM) for Heavy Duty Automotive Goods calculated in accordance with Section 10. Although Section 10 includes all the materials which make up the VNM of the heavy duty automotive good, on an actual audit not all sections may apply. n) Obtain the list of materials developed in the 12. SOURCE OF MATERIALS verification sub-program. Obtain the list of materials, and the value of the materials, contained in the intermediate material election, if applicable, from the 6. INTERMEDIATE MATERIALS DESIGNATION verification sub-program. o) Select a sample of high risk materials and determine the VNM by reviewing commercial invoices, and customs invoices, and by applying the relevant valuation methods: (Consider materiality in terms of closeness to RVC requirement) p) Did the heavy duty automotive goods producer self-produce a non-originating listed material that is used by himself in the production of the good (Paragraph 10(1)(a) of the Regulations)? -If no, proceed to verification procedure q) .If yes, continue with verification procedures p)i), p)ii), to determine the value of the non-originating material (VNM). (Verification procedures p)i), p)ii) and p)iii) will apply independently to each material meeting the description of this verification procedure.)

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i) VNM is the total cost of the self-produced listed material which is the result of allocating costs on the basis of Schedule VII. If this basis is used for the VNM stop here, if this basis is not used go on to verification procedure p) ii); ii) VNM is the aggregate of each cost of the self-produced listed material which is the result of allocating costs on the basis of Schedule VII. If this basis is used for the VNM stop here, if this basis is not used go on to verification procedure p)iii); iii) VNM is the sum of A) and B) where:

A) For non-originating materials that were imported by the producer of the listed material, the VNM is the customs value of the non-originating materials plus, to the extent not included, the additional costs listed in Paragraph 10(2)(c) to 10(2)(f).

Note to verification procedure p)ii)A) : For reference purposes, NAFTA Regulation Paragraphs 10(2)(c) through 10(2)(f) includes: --freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer, Paragraph 10(2)(c) --duties and taxes paid or payable with respect to the material in the territory of one or more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable, or otherwise recoverable including credit against duty or tax paid or payable, Paragraph 10(2)(d); --customs brokerage fees (including the cost of in-house customs brokerage and customs clearance services, incurred with respect to the material in the territory of one or more of the NAFTA countries, Paragraph 10(2)(e); --waste and spoilage resulting from the use of the material in the production of the good, minus the value of any reusable scrap or by-product, Paragraph 10(2)(f); B) For non-originating materials that were not imported by the producer of the listed material (i.e. acquired by the producer of the listed material from a supplier) the VNM is: the price paid or payable for the non-originating material according to paragraph 10(2)(a) or 10(2)(b) (according to Schedule VIII) plus, to the extent not included, the additional costs listed in Paragraphs 10(2)(c) through (f). For a description of these costs see the Note: to verification procedure p)ii)A)) Note to verification procedure p): the VNM costs of p)ii) will only include the costs of acquiring the non-originating material and will be less than the costs determined in accordance with verification procedure p) i) above which include originating costs. q) Did the heavy duty automotive goods producer acquire and use in the production of the good, a non-originating listed material, produced in the territory of a NAFTA country (Paragraph 10(1)(b))? -If no, proceed to verification procedure r). If yes, continue with this verification procedure to q) i) and q) ii) to determine the value of the non-originating listed material. (Verification procedure q)i) and q) ii) apply independently to each material meeting the description of this verification procedure ) i) Where no statement was provided by the supplier to the heavy duty goods producer, the VNM of the listed material is based on the price paid or payable

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(according to Schedule VIII), plus to the extent not included, the additional costs listed in Paragraph 10(2)(c) through (f). For a description of the additional costs see the Note to Verification procedure p)ii)A): ii) Where a statement(s) was provided to the heavy duty goods producer in accordance with q)ii)A) and/or q)ii)B) by the producer of the listed material, the VNM is the sum of the values of A) and/or B) depending on the response to A) and B) below. Note to q) ii): Statements provided by this verification procedure (both q) ii)A) and/or q) ii)B) are subject to the review noted in verification procedure z) of this Sub-objective. A) Did the producer of the listed material import the non-originating materials himself? If yes continue; if no go to B). -Did the listed material statement report VNM as the customs value of the non-originating material plus, to the extent not included, the additional costs listed in Paragraph 10(2)(c) to 10(2)(f). (For a description of these costs see the Note: Verification procedure p)ii)A). B) Did the producer of the listed material acquire the non-originating materials from a supplier located in the same NAFTA country? -Did the listed material statement detail the costs incurred with respect to the transaction in which the non-originating materials were acquired from a person located in the same NAFTA country? -Were the costs of acquiring the material in accordance with Subsection 10(2)? Note to verification procedure q): Statements provided in accordance with verification procedures q)ii)A) and/or q)ii)B) will allow the heavy duty automotive producer to include in the VNM only the value of the non-originating materials that were used in the production in the non-originating listed material. r) Did the heavy duty automotive goods producer use a, listed material, automotive component assembly, automotive component or sub-component that was imported from outside the territories of the NAFTA countries in the production of the good (Paragraph 10(1)(c) of the Regulations)? -If no, proceed to s). If yes, continue with verification procedures r) i) and r) ii) to determine the VNM. (verification procedure r)i) and r) ii) apply independently to each material meeting the description of this verification procedure). i) Was the listed material, automotive component assembly, automotive component, or sub-component, imported by the producer? If yes continue, if no go to ii) below; --VNM is the customs value of the material plus, to the extent not included in the customs value, the additional costs listed in Paragraph 10(2)(c) to 10(2)(f). For a description of these costs see the Note: to verification procedure p)ii)A) ii) Was the listed material, automotive component assembly, automotive component or sub-component not imported by the producer? --VNM is the cost determined in accordance with Subsection 10(2) of the NAFTA Regulations with respect to the transaction in which the heavy duty automotive goods producer acquired the imported material from outside the territories of the NAFTA countries from the supplier. s) Did the heavy duty automotive goods producer acquire and use an originating

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automotive component assembly, automotive component, or sub-component any of which contained a non-originating material, that was used by the producer in the production of the good (Paragraph 10(1)(d))? If no, proceed to t), the next verification procedure . If yes, continue with verification procedures s)i), s)ii), s)iii), and s)iv), to determine the value of the non-originating material. (Verification procedure s)i), s)ii), and s)iii) apply independently to each material meeting the description of this verification procedure.) i) Does the producer of the good have a statement signed by the person from whom the originating material was acquired that states the sum of the values determined (under Paragraphs 10(1)(a), (b), (c), and (e)) by the producer of the originating material for each non-originating material referred to in A) through D) as follows, that is/are incorporated into that originating material? If yes, VNM is the sum of: A) the value of each non-originating listed material (self-produced or acquired and produced in a NAFTA country) used in the production of the originating material determined under the Subparagraphs and Clauses of the Regulations, Subparagraphs 10(1)(a)and 10(1)(b). Refer to verification procedures p) and q) B) The value of each non-originating material (which is a listed material, automotive component assembly, automotive component, or sub-component that is imported from outside the territories of the NAFTA countries) incorporated into the originating material (automotive component assembly, automotive component, or sub-component) determined under the Subparagraphs of Paragraph 10(1)(c) of the NAFTA Regulations. C) The value of each non-originating listed material used in production of a material referred to in Paragraph 10(1)(e) (i.e. non-originating automotive component assembly, automotive component, or sub-component produced in the NAFTA territory that is acquired by the producer) that is used in the production of the originating material determined under the Subparagraphs and Clauses of Paragraph 10(1)(a) and (b) of the NAFTA Regulations. Refer to verification procedures p) and q) D) Where the value of the non-originating listed material referred to in C) of this verification procedure and used in the production of a non-originating automotive component assembly, automotive component or sub-component that is used in the production of the originating material, is not included in C), the value of that automotive component assembly, automotive component or sub-component, is determined under Subsection 10(1)(e)ii) (i.e. Subsection 10(2) with respect to the transaction in which the producer acquired the material). Note to verification procedure s) i).:A statement provided by this verification procedure is subject to the review noted in verification procedure z) , ii) If the material is subject to a Regional Value Content requirement and the producer has a statement, signed by the person from whom the producer acquired that material, that states the regional value content requirement of the material, the VNM shall be; An amount equal to the number resulting from applying the following formula:

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VM x (1 - RVC) Where: VM is the value of the acquired material, determined in accordance with Subsection 10(2), with respect to the transaction in which the producer of the good acquired the material, and RVC is the regional value-content requirement for the acquired material, expressed as a decimal. Note to verification procedure s)ii): Statements provided by these verification procedures are subject to the review noted in verification procedure y). iii) If the producer has none of the statements described in verification procedures s)i), s)ii), and s)iii), the VNM is the value of that automotive component assembly, automotive component, or sub-component , is determined in accordance with Subsection 10(2) of the NAFTA Regulations with respect to the transaction in which the producer acquired the material. t) Did the heavy duty automotive goods producer acquire and use in the production of the good, a non-originating automotive component assembly, automotive component or sub-component produced in the territory of a NAFTA country (Paragraph 10(1)(e))? -If no, proceed to verification procedure u). If yes, continue with verification procedures t)i), and t)ii) to determine the VNM. (Note: verification procedure t)i), and t)ii) apply independently to each material meeting the description of this verification procedure. i) Does the producer of the good have a statement signed by the person from whom the non-originating material was acquired, that states the sum of the values of non-originating materials incorporated into that non-originating material, determined by the producer of the non-originating material in accordance with Paragraphs 10(1)(a), (b), (c), (d), and (f). This procedure is subject to verification procedure z) of this Sub-objective. Note to verification procedure t)i): A statement provided by this verification procedure is subject to the review noted in verification procedure z) of this Sub-objective. ii) If the producer does not have a statement described above, the value of the non-originating automotive component assembly, automotive component, or sub-component, should be determined in accordance with Subsection 10(2) with respect to the transaction in which the producer acquired the material; u) Where the heavy duty automotive goods producer used a non-originating material in the production of a good not referred to in Paragraphs (10)(1)(a), (b), (c), or (e), of the NAFTA Regulations (i.e. did the goods producer use a non-originating material other than a non-originating listed material; automotive component assembly; automotive component; or sub-component ) in the production of the good (Paragraph 10(1)(f) -Continue with verification procedures u)i), and u)ii), to determine the value of the non-originating material that is used by the producer in the production of the good, (verification procedures u)i) and u)ii) apply independently to each material meeting the description of this verification procedure). i) where the non-originating material is imported by the producer of the good the value is; -The customs value of that non-originating material plus, to the extent not

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included in the customs value, the costs referred to in Paragraphs 10(2)(c) to 10(2)(f). For a description of these costs see the Note: to verification procedure p) ii) A) ii) where the non-originating material is not imported by the producer of the good i.e. (acquired by the goods producer from a supplier) the value is: --The value of that non-originating material in accordance with Subsection 10(2) with respect to the transaction in which the producer acquired the material.

Note to verification procedure u): This verification procedure covers all non-originating materials other than a listed material; automotive component assembly; automotive component; or sub-component .Thus automotive goods including by not limited to hoses, gaskets, metal stampings, and extruded plastics: 1) not produced in a NAFTA country; or 2) produced in a NAFTA country but failing to meet the Rules of Origin; will not originate and should be included in the VNM of the automotive good.

v) Determine whether all costs incurred in transporting materials have been identified and correctly reported (i.e. freight, insurance, packing, etc.). i) Test the method used by the company when identifying these costs, by selecting a sample of transactions involving purchases of material from the territory of the NAFTA countries and those from outside the territory of the NAFTA countries. ii) Identify any assumptions made by the company. Test these assumptions to ensure that they are valid (i.e. if the company is using a standard cost system ensure that they follow the correct procedures for updating or revising the standard cost values). iii) Prepare adjustments as required as a results of this testing. (keeping in mind materiality and risk) w) Determine whether duty, taxes and brokerage fees with respect to the purchase and importation of materials have been identified and correctly reported, making adjustments as required. (keeping in mind materiality and risk) x) Ensure that the total VNM is adjusted for any variances that affect individual values of non-originating materials.

11.5 Review of the Supplier VNM Statements: y) During the verification of origin of a heavy duty automotive good where the producer has a supplier statement in accordance with s)ii) which states the acquired material (if an automotive component assembly; automotive component; or sub-component referred to in the statement) is an originating material, and during the course of an origin verification of the heavy duty automotive good the acquired material is found not to be an originating material, the VNM of the heavy duty automotive good with respect to the acquired material shall be determined in accordance with Subsection 10(2) of the NAFTA regulations with respect to the transaction in which the producer acquired it. z) Where any person has information with regard to statements covering: 1) a non-originating material that is acquired and incorporated into a non-originating

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listed material referred to in verification procedure q) ii) of this verification procedure; 2) non-originating materials incorporated into an originating automotive component assembly; automotive component; or sub-component referred to in verification procedure s) i) of this verification procedure; and 3) non-originating material incorporated into a non-originating automotive component assembly, automotive component; or sub-component referred to in verification procedure t) i) of this verification procedure; and does not allow the customs administration to verify the information during a verification of origin, the VNM shall be determined in accordance with Subsection 10(2) of the NAFTA regulations with respect to the transaction in which the producer acquired it.

11.6 Comparing the Verified VNM With the Producers Figures aa) Sum the values of the non-originating materials determined in verification procedure p) through u) subtracting any adjustments as a result of verification procedure y), z), or other reductions., Compare the results of the sample to the VNM initially determined by the heavy duty automotive goods producer for the sample. bb) Explain any discrepancies between the audit derived figure and the figure initially reported by the heavy duty goods producer cc) Reconcile the materials making up the VNM determined as a result of this Sub-objective with the producers list of non-originating items; reconcile the VNM to the list of materials. Note any excess (unreconciled) non-originating materials in the VNM or on the list of materials.

12 RVC- VALUE OF COSTS OTHER THAN MATERIALS


To verify that the Regional Value Content (RVC) requirement with respect to costs other than materials (labor, overhead, excluded costs, and other costs), as required by the NAFTA Rules of Origin Regulations, has been met where the Net Cost Method has been used.


a) Trace the details of the net costs reported with the RVC information to the exporter/producer's working schedules of cost. Trace these working schedules to the books and records. b) Identify the potential for Excluded Costs including: sales promotion, marketing and after-sales service costs; royalty; shipping and packing costs; and non-allowable interest costs; being included in the net cost of the good. Consider whether these costs are attributable to the good, or to qualifying intermediate materials. c) Ensure that period costs, product costs, and other costs incurred in the territory of one or more of the Parties are included in the net cost figure by scanning the detail in support of the net cost values reported in the RVC

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information. Ensure that the net cost does not include: i) corporate or personal taxes on income; ii) capital gains taxes, dividends, or other accounts that should be classified as assets or reductions to income accounts; iii) profits that are earned by the producer of the good, regardless of whether they are retained or paid out to other persons as dividends; iv) gains related to currency conversion that are related to the production of the good. Losses are included in the net cost. v) costs of a service provided by a producer of a good to another person where the service is not related to the good; vi) gains or losses resulting from the disposition of a discontinued operation; vii) Cumulative effect of accounting changes reported in accordance with a specific requirement of the applicable Generally Accepted Accounting Principles; viii) gains or losses resulting from the sale of a capital asset of the producer. d) Review the amounts of labor and overhead included in the RVC calculation. Trace the labor, overhead and general and administrative costs included in the RVC calculation to supporting documentation for the good under review. Ensure none of the costs include excluded costs. e) Obtain copies of agreements related to sales promotions and marketing. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation. f) Obtain copies of contracts related to shipping and packing costs. Review the terms of the contracts and ensure that they were properly taken into account in the net cost calculation. g) Refer to 7. BILL OF MATERIALS verification sub-program to identify any materials considered to be packing materials and containers for shipment purposes. Ensure that the value for packing materials is not included in the calculation of the net cost of the good. h) Obtain copies of royalty agreements, technical assistance agreements, and other similar documents. Review the terms of the agreements and ensure that they were properly taken into account in the net cost calculation. Not included as an Excluded Cost are payments under technical assistance agreements or similar agreements that can be related to specific services such as personnel training, engineering, tooling, etc., i) Obtain copies of loan agreements. Review the terms of these agreements, particularly the interest rates charged and ensure that any non-allowable interest costs have been properly taken into account in the net cost calculation. j) Review the chart of accounts and trial balance to identify accounts which appear to be included costs but that the company has ignored in the net cost calculation. List these accounts for further testing to supporting documentation and discussion with company personnel. k) When the heavy-duty automotive goods are motor vehicles which are produced in a new plant , obtain the value of machinery from 2. RVC REQUIREMENTS FOR HEAVY-DUTY AUTOMOTIVE GOODS sub-program. n) Prepare a working paper to adjust the net cost figure on the RVC information for any excluded costs, or not allowable costs not deducted by the

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exporter/producer. (Remember that excluded costs attributable to qualifying intermediate materials remain in the calculation of net cost of the good) o) Conclude on the verification sub-objective.

13. ACCUMULATION



General

For purposes of determining whether a good is an originating good, an exporter or producer of a good may choose to accumulate the production of one or more producers, in the territory of one or more of the NAFTA countries, of materials that are incorporated into that good so that the production of the materials shall be considered to have been performed by that exporter or producer, provided that: -all non-originating materials used in the production of the good undergo an applicable tariff classification change and the good satisfies any applicable RVC requirement, entirely in the territory of one or more of the Parties; and -the good satisfies all other rules of origin requirements.

Requirements

-In order to accumulate the production of a materials, i) where the good is subject to an RVC requirement, the producer of the good must have a certification as described below that is signed by the producer of the material, and ii) where an applicable change in tariff classification is applied to determine whether the good is an originating good the producer of the good must have a statement signed by the producer of the material that states the tariff classification of all non-originating materials used by that producer in the production of that material and that the production of the material took place entirely in the territory of one or more of the NAFTA countries. -a producer of a good who chooses to accumulate is not required to accumulate the production of all materials that are incorporated into the good; -any information contained in the certification that concerns the value of materials or costs shall be in the same currency as the currency of the country in which the person who provided the statement is located.

Statement Needed

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Non-Averaging of costs from accumulated production Where a good is subject to a RVC requirement and an exporter or producer of the good has a statement signed by a producer of a material that is used in the production of the good that: a) states the net cost incurred and the value of non-originating materials used by the producer of the material in the production of that material; i) the net costs incurred by the producer of the good with respect to the material shall be the net costs incurred by the producer of the material plus, where not included in the net cost incurred by the producer of the material the costs referred to in paragraphs 7(1)(c) through (e) of the Regulations (i.e., freight, insurance, packing, transport to location of producer, duties and taxes, customs brokerage fees); and ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of non-originating materials used by the producer of the materials or b) states any amount, other than an amount that includes any of the value of non-originating materials, that is part of the net cost incurred by the producer of the material in the production of that material, i) the net costs incurred by the producer of the good with respect to the material shall be the value of the material determined in accordance with subsection 7(1) of the Regulations (this is covered in 14. VALUE OF MATERIALS sub-program), and ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of the material, determined in accordance with subsection 7(1), minus the amount stated in the statement. Averaging of costs from accumulated production

Where an exporter or producer of a good does not have a statement as provided in (a) or (b) above, but does have a statement signed by a producer of the material that is used in the production of the good that c) states that sum of the net costs incurred and the sum of the values of non-originating materials used by the producer of the material in the production of that material and identical materials or similar materials, or any combination thereof, produced in a single plant by the producer of the material over a month or any consecutive three, six or twelve month period that falls within the fiscal year of the producer of the good, divided by the number of units of materials with respect to which the statement is made, i) the net cost incurred by the producer of the good wit respect to the material shall be the sum of the net costs incurred by the producer of the material with respect to that material and d the identical materials or similar materials, divided by the number of units of materials with respect to which the statement is made, plus, where not included i the net costs incurred by the producer of the material, the costs referred to in paragraphs 7(1)c) through (e) of the Regulations, an d ii) the value of non-originating materials used by the producer of the good with respect to eh material shall be the sum of the values of non-originating materials

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used by the producer of the material with respect to that material and the identical materials or similar materials divided by the number of units of material with respect to which the statement is made; or d) states any amount, other than an amount that includes any of the values of non-originating materials, that is part of the sum of the net costs incurred by the producer of the material in the production of that material and identical materials or similar materials, or any combination thereof, produced in a single plant by the producer of the material over a month, or any consecutive three, six or twelve month period that falls within the fiscal year of the producer of the good, divided by the number of units of materials with respect to which the statement is made, i) the net cost incurred by the producer of the good with respect to the material shall be the value of the material, determined in accordance with subsection 7(1), and ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of the material, determined in accordance with subsection 7(1), minus the amount stated in the statement.


a) Determine that only the net cost method has been used to calculate the RVC requirement where the producer has chosen to use accumulation. b) Review the information received from the producer, that has accumulated the production, to ensure that it is mathematically correct and ensure that it has been correctly included in the RVC calculation. c) Evaluate the quality of the certifications and ensure that they contain all of the required information as stated above. d) Ensure that the profit component of the material being accumulated is not included in the net cost information by examining the supplier information and by comparing the price paid by the producer to the cost information provided by the supplier, if possible. e) Use the following verification sub-programs (only the applicable verification procedures) in order to evaluate the information received: 8. TARIFF CLASSIFICATION; 9. SOURCE OF MATERIALS;10.INVENTORY MANAGEMENT SYSTEM; 11. VALUE OF MATERIALS; 6. INTERMEDIATE MATERIALS DESIGNATION; 14. CALCULATION OF REGIONAL VALUE CONTENT. NOTE: Consideration should be given to the use of supplier confirmations and visits to the supplier to verify the authenticity of the information reported to the exporter/producer.


VERIFICATION SUB-OBJECTIVE To determine whether the good satisfies the NAFTA Regional Value Content requirement.

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VERIFICATION PROCEDURES a) Obtain the value of all materials to be included in the net cost and the value of non-originating materials. See verificationsub-program 11. VALUE OF MATERIALS. b) Add to the value of all materials to be included in the net cost, labor, overhead, period costs, and other costs, to be included in the net cost of the good being verified. See verificationsub-program 12. RVC-COSTS OTHER THAN MATERIALS. c) Subtract the value of all non-originating materials from thenet cost of the good. d) Divide the difference in verification procedure c) of this verification procedure by the net cost (determined in b) of the good. e) Multiply the result obtained in d) by 100. f) Conclude on the sub-objective.





a) Determine whether the goods subject to verification originate under the NAFTA by documenting whether the tariff classification change and/or RVC requirements in the Specific Rule of Origin have been met. Refer to the 9. SOURCE OF MATERIALS and 14. CALCULATION OF THE RVC verification sub-programs. Prepare a working paper to document which goods originate and which goods do notoriginate under the NAFTA. b) Conclude on the sub-objective.



To ensure that the goods do not qualify as originating only by reason of a production or pricing practice, of which the object is to circumvent the rules of origin as set out in Chapter 4 of the NAFTA. Note: A good shall not be considered to be an originating good where there is a preponderance of evidence that the object of a production or pricing practice was to circumvent the Rules of Origin. In regard to unacceptable production practices, circumvention consists of any alteration or process performed on goods for the purpose of circumventing the rule of origin requirements. For example, when the processing or assembling performed in the territory of one Party of the NAFTA is reversed or substantially altered after the goods have been imported into the territory of another Party, and such processing or assembly was not performed for any

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commercial purpose other than to qualify the goods for the NAFTA tariff treatment, then this will be considered circumvention.


16.1 Non-qualifying Production/Assembly Operations a) During the on-site visit, interview personnel in order to understand the production/assembly operations of the entire plant(s) where the good is produced. Document any concerns with respect to possible non-qualifying production/assembly operations. b) Review the previously obtained bill of materials and any product literature for the good. Document any concerns with respect to non-qualifying production/assembly operations. c) Review verification sub-program 5 of this verification program entitled the PLANT TOUR. Identify any concerns noted during the tour with respect to non-qualifying production/assembly operations. d) Review documents related to transportation (consider documents obtained in the

17. TRANSSHIPMENT verification sub-program)and document any concerns with respect to the finished good being altered subsequent to importation. e) Prepare a written evaluation of the possible non-qualifying production/assembly operation and assess the evidence gathered.


16.2 Non-qualifying pricing practices f) When completing the remaining verification procedures for the goods subject to averaging, are there any practice(s) that could be construed as a pricing practice that has been implemented by the company for the purpose of circumventing the rule of origin requirements so that the exported goods can qualify as originating. g) Identify major adjustments made as a result of the 11. VALUE OF MATERIALS verification sub-program, and document any concerns. h) Review adjustments made to the purchases accounts. Identify any concerns. i) Prepare a written evaluation of the non-qualifying pricing practice(s) and assess the extent of the evidence gathered. 16.3 Conclusion on Non-Qualifying Operations j) Conclude on the Non-qualifying Operations Sub-objective.

17. TRANSSHIPMENT


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To verify that the originating good, by reason of having undergone production that satisfies the requirements of section 4 of the NAFTA Rules of Origin Regulations, (1) is not withdrawn from customs control outside the territories of the NAFTA countries; and (2) does not undergo further production or any other operation outside the territories of the Parties, other than unloading, reloading, or any other operation necessary to preserve it in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur dioxide or other aqueous solutions, replacing damaged packing materials and containers and removal of units or of the goods that are spoiled or damaged and present a danger to the remaining units of the good or to transport the good to the territory of the Party.

VERIFICATION PROCEDURES a) Obtain and review copies of the invoices, bills of lading or waybills for the goods subject to verification for a sample period. Document the shipping route and all points of shipment and transshipment prior to the importation of the good. Determine if the good was conveyed directly on a through bill of lading from the exporter to a consignee. Consider gathering information from the importer. b) If the good was not been shipped directly on a through bill of lading, they may be transshipped through an intermediate country, provided that: i) the good remains under Customs transit control in the intermediate country; and ii) the good undergoes no operations in the intermediary country other than the unloading, reloading, or operations necessary to preserve the goods in good condition such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulfur or other aqueous solutions, replacing damaged packing materials and containers and removal of units of the good that are spoiled, or damaged and present a danger to the remaining units of the good or any other operation necessary to transport the good to a NAFTA country. In order to substantiate the above, request documentation from the exporter and/or importer. Documents include, but shall not be limited to: 1) customs receipts and release documents; 2) exporter/ producer shipment/production records; 3) list of serial numbers or lot numbers of the goods; 4) temporary import and corresponding export documentation; 5) research material explaining the non-NAFTA customs operations and procedures. c) Determine whether the good shipped was not produced by the producer. Consider the potential for fungible goods. If fungible goods are found, refer to the 10. INVENTORY MANAGEMENT SYSTEM verification sub-program. d) Conclude on the verification sub-objective.

1. 1 CICA Handbook Section 5100.02 2. 2 CICA Handbook Section 5100.02 3. 3 CICA Handbook Section 5100.02

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4. 4 CICA Handbook Section 5100.02 5. 5 CICA Handbook Section 5815.11

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