Tales from the Dark Side of NAFTA (True stories) April 12th, 2017 Adrienne Braumiller www.BraumillerLaw.com

Agenda Introduction NAFTA Rules of Origin Examples and cases NAFTA documentation Recordkeeping and Compliance Takeaways

Introduction NAFTA provides for duty free benefits but the cost to administer it isn’t free Biggest Lie It’s NAFTA qualifying if it’s made in Mexico, the US or Canada Much more is required Doesn’t it qualify if the majority of the value that’s added during processing is in a NAFTA country? Not necessarily – most rules are tariff shift rules

NAFTA Verifications CBP viewpoint: NAFTA verifications 80% - 90% of NAFTA Certificates of Origin are erroneous Claiming NAFTA is an area of risk (audit bait) NAFTA verifications US, Canadian and Mexican Customs have authority to verify certificates from the exporting country Can be done by questionnaire or on-site audit NAFTA claims may be included in a Focused Assessment

NAFTA Rules of Origin “Wholly obtained or produced” Tariff shift rule What this means Can be wholly originating in a single NAFTA country or combination of NAFTA countries Usually does not apply to manufactured articles Tariff shift rule Used where article is not wholly obtained or produced and required by the HTS used Requires a specific change in HTS classification for parts and materials of non-NAFTA or unknown origin

NAFTA Rules of Origin (Cont’d) Regional Value Content (RVC) Used where not wholly obtained or produced and required for the HTS being used Requires that a minimum of 50% or 60% (depending on the valuation method used) of the Customs value consist of originating materials and fabrication Tariff Shift and RVC Required for certain HTS classifications Means article must satisfy both rules Contrast “Substantial Transformation”

NAFTA Rules of Origin -TALE “Substantial Transformation” Tale NRI had a NAFTA verification; filed a PD Asserted that the sauces in question qualified based on being substantially transformed in a NAFTA country vs applicable tariff shift rule Incorrect application of the Marking Rules in 19 CFR 102.20 instead of the tariff shift rule in GN 12 Failed to clearly communicate that a one year 100% review would be used as a sample to quantify any LOR for subsequent years for the PD CBP disagreed with the definition of “sample” – thought the NRI wanted CBP to review the method used for the 1 year to approve it for the remaining years.

NAFTA Certification NAFTA Certificate of Origin Standardized between US, Canada and Mexico Completed by the producer or exporter Includes a specific description, HTS classification (min. 6 digits), and the applicable rule of origin Signed by knowledgeable person – customs broker probably won’t and shouldn’t sign Typical Nightmare – CHB prepares entries stating the goods qualify for NAFTA because he sees they are purchased from a Canadian or Mexican supplier

NAFTA Certification (Cont’d) Broker Tale Almost 100% of all imports from Mexico were claimed to be NAFTA – client never requested CHB to claim NAFTA Had more than 20 million dollars in additional liability Is valid if it is dully completed, signed and dated Consider having a third party audit the NAFTA qualification analysis – whether you are the importer or the exporter Di minimis example where the goods were excluded

NAFTA Certification (Cont’d) If you are the exporter: Don’t sign if you are not sure Obtain supporting information from supplier Caution: They may not be actual producer Always check the date the NAFTA CO is signed Maintain audit trail of documents for 5 years CBP has right to question the certificate or audit your program Foreign Customs can also do verification

NAFTA Certification (Cont’d) Related Party Tale US and MX sister companies more than a billion dollars in NAFTA imports over 5 years CF 28 verification performed MX Co. did not understand how NAFTA works and did not keep good records How to handle?

NAFTA Certification (Cont’d) What if you are the Importer but you don’t have a Certificate of Origin? Can not make claim – but can request a refund up to one year if obtain it later Pay duty and MPF – make post entry claim if certificate obtained Do the savings justify the effort and risk? If not – forget it and pay

NAFTA CO Due Diligence What importers should do: Go beyond the certificate – obtain production information from manufacturer Verify the important details on the certificate – producer/exporter, description, HTS classification, preference criterion, signature Review all Certificates of Origin – are they complete and accurate? Perform post-entry review and corrective actions

Additional Options Conferring Origin A good that fails to meet any of the forgoing rules, may, qualify as originating by using other options: Intermediate materials Accumulation De Minimis – Be sure to look at GN12 for exclusions Fungible goods and materials

What if the Goods Fail to Originate? Then the goods will not qualify for the NAFTA preferential tariff rate. Thus, the Normal Trading Relations (NTR) Rate Applies. Each NAFTA country will continue to assess duty on non-NAFTA goods.

Obligations and Penalties Recordkeeping Obligations and Penalties

Recordkeeping and Compliance What records? NAFTA certificate of origin plus supporting records kept for a minimum of 5 years: Purchase of, cost of, value of and payment for all materials, including indirect materials used in the production of the good that is exported from the U.S. What’s required? Accurate claims Readily available and retrievable records

Recordkeeping Obligations In Mexico, importers must: Keep documentation about the origin, description, classification, value, payments, supplier, etc. of the imported goods Have an automated inventory control system Pay the applicable customs duties and fees Not have any pending payments or tax reports More...

Administrative Irregularities Common irregularities considered a violation of Mexican laws: Failure to keep complete and accurate records Incorrect classification Incorrect marking/labeling Fraudulent NAFTA Certificates of Origin Non payment of the correspondent duties and fees Others…

Fiscal Crimes and Felonies In Mexico: Fiscal fraud Not paying applicable duties or taxes Smuggling into Mexico Not paying applicable taxes and duties Incorrect description or classification codes

Common Sense Approach Keep very good records of all NAFTA records to show that any mistakes made were not the result of carelessness on your part. Failure to produce a NAFTA Certificate on demand can lead to some high civil penalties. Ask a professional to help you if you are overwhelmed with NAFTA. Consultants and brokers are there to help you, just remember that you will still be ultimately responsible for accuracy. Remember that misclassification, regardless of duty impact, can result in a penalty. Do not “guess” on your classification in order to clear items through the supply chain, even if it seems the path of least resistance.

Takeaways The content and documentation requirements for FTAs can vary from one to the next Never make (or allow your broker to make) automatic claims Do a post entry review of NAFTA claims Include NAFTA requirements in purchase orders CBP views use of NAFTA as a risk area Foreign Customs has a right to verify NAFTA documents If you are not certain – don’t certify Free trade agreements are not necessarily free!

Questions? Adrienne@BraumillerLaw.com (214) 348-9306, Ext 201