Export
101 – NAFTA
Frequently Asked Questions (FAQs)
- How are the tariffs going to be
phased out?
- Are the NAFTA rates of duty the
same?
- What are the NAFTA Rules of
Origin?
- What is so important about
"Article 401"?
- What defines "Wholly Obtained or Produced"?
- What is "Annex 401 Origin
Criterion"?
- What is a "Tariff
Change"?
- What defines "Regional Value
Content"?
- How do you define
"Transaction Value Method"?
- What defines "Net Cost
Method"?
- How does one interpret "Produced in the NAFTA
Territory Wholly of Originating Materials"?
- What about Unassembled Goods and Goods Classified
with their Parts?
- What is the NAFTA Certificate of
Origin?
(from Sept. 2001 MIATCO newsletter)
- Does a producer who is not an exporter have an
obligation to fill out this form?
- What are the exporter's and/or
producer's obligations using NAFTA Certificates of Origin on shipments in NAFTA?
1. How are the tariffs going to be
phased out?
The NAFTA will eliminate tariffs on
almost all goods that originate in the United States, Canada, and Mexico. Origination is
an important term in regards to duty free status. Origination within the Free Trade Area
means that the product in question has been determined to have been manufactured within
the NAFTA Area.
The United States and Canada, at
NAFTA's inception, were already well into their own tariff elimination process as part of
the U.S. Canada Free Trade Agreement. This process will continue as planned so that all
U.S. and Canadian trade will be duty free by 2003. For most Mexican, Canadian, and U.S.
trade, the NAFTA either eliminated existing customs duties on January 1, 1994, or will
eliminate them in the next five to ten years after this date. (On some tariff sensitive
food items, the Agreement will phase out tariffs over fifteen years.) The NAFTA countries
may agree to either slower or faster phase-outs of tariffs as the Agreement progresses.
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2. Are the NAFTA rates of duty the
same?
Rates of duty will vary depending
upon in which NAFTA country the goods were produced during the transition period. For
example, the United States may apply a different rate of duty on a product entering from
Canada than it would on the same product from Mexico. There are three NAFTA rates of duty
for goods entering into Canada. The rates of duty will depend on whether the goods are of
United States origin, Mexican origin, or are the result of a joint venture between the
United States and Mexico. In order to find out which rate of duty applies, exporters and
importers must first establish whether the goods meet the NAFTA Rules of Origin and then
use the tariff rules found in annex 302.2 of the NAFTA. The Rules of Origin are the
exercises one must use to test whether or not the product qualifies as originating in the
North American free trade area. If originating, the product qualifies for preferential
treatment from duties and taxes.
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3. What are the NAFTA Rules of
Origin?
NAFTA grants preferential status to
a variety of goods within the region. Maximum benefits are reserved for goods that qualify
as originating within the region. Originating is a technical term used to describe
those goods that meet the requirements of Article 401 of the NAFTA. Article 401 of
the Agreement establishes which goods originate in the region and prohibits similar goods
from other countries from obtaining preferential duty status by being shipped through
Canada, Mexico, or the United States.
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4. What is so important about
"Article 401"?
Article 401 of the agreement
defines originating in four ways:
1. Goods wholly obtained or
produced in the NAFTA region.
2. Goods produced in the NAFTA
region wholly from originating materials.
3. Goods meeting the Annex 401
origin rule.
4. Unassembled goods and goods
classified with their parts which do not meet Annex 401 rule of origin but contain 60
percent regional value content using the transaction method, or 50 percent regional value
using the net cost method.
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5. What defines
"Wholly Obtained or Produced"?
Goods wholly obtained or produced
entirely in Canada, Mexico, or the United States contain no foreign materials or parts
from outside the NAFTA territory. Article 415 of the NAFTA defines goods wholly produced
in the region as:
A. Mineral goods extracted in
Canada, Mexico, or the United States. For example, silver mined in Mexico is originating
because it is extracted in the territory of one of the parties.
B. Vegetable goods are defined in
the Harmonized System as goods harvested in Canada, Mexico, or the United States. For
instance, wheat grown in Canada is considered originating because it is harvested in the
territory of one of the parties. The Harmonized System (HS) is the harmonized
commodity description and coding system and its legal notes, which has been adopted and
implemented by the parties in their respective tariff laws, providing measures for any
law, regulation, procedure, or requirement in practice.
C. Live animals born and raised in
Canada, Mexico, or the United States.
D. Goods obtained from hunting,
trapping, or fishing in Canada, Mexico, or the United States.
E. Fish, shellfish, and other
marine life taken from the sea by vessels registered or recorded with Canada, Mexico, or
the United States and flying its flag.
F. Goods produced on board factory
ships from fish, shellfish, and other marine life provided such ships are registered with
and flying the flag of a NAFTA country.
G. Goods taken by Canada, Mexico,
or the United States, or a person of these countries from the seabed or beneath the seabed
outside territorial waters, provided that Canada, Mexico, or the United States has the
right to explore such a seabed.
H. Waste and scrap derived from
production within the Free Trade Area or used goods collected in the region, provided such
goods are fit only for the recovery of raw materials.
I. Goods produced in Canada,
Mexico, or the United States exclusively from any of the goods listed in paragraphs A
through I or from their derivatives at any stage of production. For example, silver
jewelry made in the United States from silver mined in Mexico is wholly obtained or
produced in NAFTA territory because it is made exclusively of mineral goods extracted from
Mexico.
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6. What
is "Annex 401 Origin Criterion"?
Article 401(B) indicates that goods
may originate in Canada, Mexico, or the United States, even if they contain
non-originating materials. The materials must only satisfy the rule of origin specified in
Annex 401 of the agreement, which has been established for each Harmonized Tariff number.
The Annex 401 rules of origin are
commonly referred to as specific rules of origin and are based on a change in Harmonized
Tariff classification, a regional value content requirement, or both. Since Annex 401 is
organized by the Harmonized Tariff Schedule (HTS) number, an exporter or importer must
know the HTS number of a good, and the HTS numbers of all the non-NAFTA materials used to
produce the good. The specific rule of origin must be interpreted to determine if the rule
has been met. Annex 401 provides the applicable rule of origin opposite each HTS number.
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7. What is a "Tariff
Change"?
When a specific rule of origin is
based on a change in tariff classification, each of the non-originating materials used in
the production of the good must undergo the applicable change. This means that the
non-originating materials are classified under one HTS number prior to processing and
classified under another after the processing is completed. The specific rule of origin in
Annex 401 defines exactly what change in tariff classification must occur for the goods to
be considered "originating."
Example: Frozen
pork meat (HTS 02.03) is imported into the United States from Hungary and combined with
spices imported from Jamaica (HTS 09.07-09.10) and cereals grown and produced in the U.S.
The resulting product is pork sausage (HTS 16.01). The Annex 401 rule of origin for
HTS 16.01 states: "A change to heading 16.01 through 16.05 from any other
chapter". Since the imported meat is classified in chapter 2, and the spices are
classified in chapter 9, these non-originating materials meet the required tariff change.
You don't need to consider whether the cereal meets the applicable tariff change since it
is originating. Only non-originating materials must undergo the tariff change. |
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8. What
defines "Regional Value Content"?
Some of the Annex 401 specific
rules of origin require that the goods in question have a minimum regional value content. Regional
value content (RVC) is defined as a percentage of the value of the goods that must be
from North America. Article 402 provides dual formulas for calculating the regional value
content, which may also be referred to as the RVC. In general, the exporter or producer
may choose between the transaction value method formula and the net cost method formula.
Having two RVC options allows
producers or exporters the opportunity to satisfy the rule of origin when goods are not
wholly obtained or produced within the free trade region. The transaction value method is
generally simpler to use but a producer may choose whichever method is more advantageous.
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9. How do you define
"Transaction Value Method"?
The transaction value method
calculates the value of the non-originating material as a percentage of the General
Agreement on Tariffs and Trade (GATT) transaction value of the good. GATT is a
postwar international organization created to set rules on trade to ensure
non-discrimination, settlement of disputes, and the participation of less developed
countries in international trade. The main tools GATT uses to increase trade consist of
tariff concessions in which member countries agree to limit the level of tariffs they will
impose on imports from other GATT members.
In addition, the Most Favored
Nation (MFN) clause calls for each member country to grant every other member country
the most favorable treatment it accords to any country with respect to imports and
exports. The GATT transaction value of the good is based on the principles of the
GATT customs valuation code with adjustments for packing and other items. The essence of
this method is that the value of the non-originating materials can be calculated as a
percentage of the invoice value, which is usually the actual price paid for the goods.
Under the transaction value method, the producer is allowed to count all of its costs and
profit as territorial, which is why the required percentage of RVC is higher (60%) than
under the net cost method (50%).
Due to variables including the
higher percentage of RVC, there are situations where the transaction value cannot be used
and the net cost method is the only alternative. The net cost method must be used when
there is no transaction value, in some intercompany transactions, for certain motor
vehicles and parts. The transaction value method results in an unfavorable result for
preferential treatment under the NAFTA.
The formula for calculating the RVC
using the transaction value (TV) method is:
RVC = TV - VNM x 100
TV
RVC is the regional value content
expressed as a percentage.
TV is the transaction value of the
good adjusted to an F.O.B. (free on board) basis. Free on Board (FOB) means
regardless of the mode of transportation, at the point of direct shipment by the exporter
to the importer.
VNM is the value of non-originating
materials used by the producer in the production of the good.
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10. What
defines "Net Cost Method"?
The net cost method
calculates the regional value content as a percentage of the net cost to the manufacturer
of the product. Net cost represents all of the costs incurred by the producer minus
expenses for sales promotion (including marketing and after sales service), royalties,
shipping and packing costs and non-allowable interest costs. The percentage content
required for the net cost method is lower than that of the transaction value method
because of the exclusion of certain costs from the net cost.
The formula for calculating the
regional value content using the net cost method is:
RVC = NC - VNM x 100
NC
RVC is the regional value content
expressed as a percentage.
NC is the net cost of the good.
VNM is the value of non-originating
materials used by the producer in the production of the good.
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11. How
does one interpret "Produced in the NAFTA Territory Wholly of Originating
Materials"?
Goods also originate if they are
produced entirely in Canada, Mexico and/or the United States exclusively from materials
that are considered to be originating according to the terms of the agreement.
Example: Company A imports
raw bovine skins (HTS 41.01) into Mexico from Argentina. There, they are processed into
finished leather (HTS 41.04). Then, the finished leather is purchased by company B to make
leather eyeglass cases (HTS 4202.31). The rule of origin for HTS 41.04 states:
"A change to heading
41.04 from any other heading, except from heading 41.05 through 41.11."
The finished leather
"originates" in Mexico because it meets the Annex 401 criteria. Assuming the
eyeglass cases do not contain any non-originating materials, they originate since they are
made wholly of a material that is originating (because it satisfied the Annex 401
criterion). |
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12. What
about Unassembled Goods and Goods Classified with their Parts?
There are two circumstances where
the provision may be used when goods do not undergo the tariff change required by Annex
401:
- The goods are imported into Canada, Mexico, or the
United States in an unassembled or a disassembled form but are classified as assembled
goods pursuant to general rule of interpretation 2A of the Harmonized System, or
- The goods produced use materials imported into a
NAFTA country that are provided for as parts, are classified in the same subheading or
undivided heading as the finished goods.
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13. What is the NAFTA Certificate of
Origin?
The NAFTA Certificate of Origin, also known as Customs Form
434, is required of all exporters
to Canada or Mexico in order to claim preferential tariff treatment under the
North American Free Trade Agreement (NAFTA). The document, which is presented to
customs, helps the buyers avoid paying tariffs (duties) or pay the lowest tariff
available under the agreement.
The NAFTA Certificate of Origin may be completed in English,
French or Spanish. At the exporter's discretion it should be completed in the language of
the origin or destination country. Importers shall submit a translation of the certificate to
their own customs administration when requested. An understanding of and competency in the harmonized system
and the NAFTA Rules of Origin are imperative for an exporter to legally and correctly
prepare the documents.
Exporters can prepare
a blanket certificate, as long as the products that are being exported in a
12-month period are listed. The Certificate of Origin must be signed and
completed by the exporter of the goods. When the exporter is not the
producer, the exporter can complete the certificate on the basis of:
knowledge of the goods' origin; reasonable reliance on the producer's
written representation; or a Certificate of Origin signed by the producer
and voluntarily provided to the exporter.
The NAFTA Certificate or Origin
is not required when the goods do not qualify for
NAFTA, based on the Rules of Origin or the fact that the goods were made
outside North America. The certificate is also not required
when a commercial importation value is less than $1000. However, if
this is the case, companies still need to place a qualifying
statement on their invoice that indicates that the goods are "originating"
under NAFTA and that they are qualified under Annex 401.
Copies of
the document are available, complete with instructions, from
http://www.customs.ustreas.gov/travel/forms.htm. You can also look at our "List of
Important Tips" to help you more accurately complete the Certificate of
Origin.
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14. Does a producer who is not an
exporter have an obligation to fill out this form? The NAFTA does not obligate a
producer who is not an exporter to provide the ultimate exporter of a product with a NAFTA
Certificate of Origin. Many exporters, however, may request such documentation from their
producers as proof that a good they sell to Canada or Mexico meets the Rules of Origin, or
that input used in a good produced by the exporter meets a NAFTA Rule of Origin. If the
non-exporting producer does complete the NAFTA Certificate of Origin, the producer is
subject to the same obligations regarding record keeping etc., as the exporter.
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15. What are the exporter's and/or
producer's obligations using NAFTA Certificates of Origin on shipments in NAFTA?
Exporters or producers that
prepare Certificates of Origin are obligated to provide them to their own customs
administration upon request. Exporters and producers that complete a Certificate of Origin
should also notify all parties to whom the certificate was given of any changes that could
affect its accuracy or validity.
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