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

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

3. 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

4. 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

5. 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

6. 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”

7. 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 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.

8. 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

9. 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

10. 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

11. 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?

12. 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

13. 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

14. 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

15. 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.

16. Obligations and Penalties
Recordkeeping
Obligations and Penalties

17. 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

18. 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...

19. 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…

20. 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

21. 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.

22. 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!

23. Questions?
(214) , Ext 201