NAFTA 2001

What is NAFTA? n North American Free Trade Agreement n A preferential agreement among Canada, the US and Mexico n Reduces the taxes the importer pays

NAFTA

Misnomer The NAFTA isn’t really a free trade agreement; calling it a FTA is a misnomer. The NAFTA is a preferential trade agreement. A free trade agreement makes a common customs territory. Once a good enters that territory, it can transit freely - that isn’t the case with NAFTA. The NAFTA is a PREFERENTIAL TRADE AGREEMENT. It provides reduced duty rates for qualifying merchandise.

What is Qualifying? n Just because your product is made or assembled in the U.S. does not mean that it qualifies for NAFTA tariff reductions

Can I still send my product if it doesn’t qualify for reduced rates? n Yes, but you can’t use the NAFTA Certificate of Origin n Your customer can not claim reduced NAFTA tariffs

How do I qualify? n Find your harmonized number for trade n MFN vs NAFTA n Look up the appropriate rule of origin n Interpret the rule of origin for your product n Perform necessary qualifying steps

Harmonized Schedule n HS# n Schedule B n Harmonized tariff schedule #

What is the HS number? n Like a Social Security number for a product n HS# is used because custom officials around the world don’t speak the same language. n Chapter: 85 (two digits) n Heading: 8539 (four digits) n Subheading: (six digits) n The first six digits are the same worldwide n The last two to four digits, following the first six, differ from country to country.

Where to find the HS Code n U.S. Dept of Commerce Schedule B classification of exports - can be purchased at the gov’t bookstore n U.S. Census Bureau tel: fax: 1158 n On-line: trade/schedules/b/ trade/schedules/b/ –on the next page select “Search” and type in a key word(s)

Ultraviolet lamp 8539Electronic filament or discharge lamps, including sealed beam lamp units and ultraviolet or infrared lamps; etc Ultraviolet or infrared lamps; arc lamps: Arc lamps……………………… Other: ………………………… Ultraviolet lamps……… Other…………………………… Parts……………………………………… The Chapter is 85; the heading is 8539 and the subheading is ; is specific to the U.S. The digits for Canada are ………..

Tariff# and rates for Canada Option 1 n Go to n register, select the country, in this example, Canada, and search by HS# or description and scroll through until you find the right description. Tariff information is also available here. Option 2 n Call USA-Trade and follow the prompts for the US Department of Commerce Trade Information Desk. You’ll need your HS # to identify tariff rates n a trade specialist at with specific questions n call Canada Revenue (Canada Customs) at

MFN vs NAFTA MFNNAFTA (Most Favored Nation) For Lamp: freeFor Lamp: free For parts: 7.5%For Parts: free For use in measuring, checking or testing instruments of chapter 90 (optical, photographic, cinematographic, measuring, checking, precision, medical, or surgical instruments and apparatus.) or for indicating intervals of time; Ultra violet hollow-cathode lamps, for use in instruments and apparatus for measuring or detecting noxious gases Parts This is Canadian specific

If MFN = zero then NAFTA = zero Remember, NAFTA is a preferential agreement, with preference over MFN. Therefore, you can type on your invoice: Since MFN is zero for HS# , no NAFTA Certificate of Origin is necessary. However, for the sake of this presentation, let’s pretend that MFN is greater than zero and NAFTA is zero. You want to use a NAFTA Certificate of Origin to give your Canadian customer the lowest possible tariff, the difference between MFN and NAFTA.

If the NAFTA rate is lower than MFN n Find the General Note 12 (GN12) formerly known as the 401 Annex at n12t1-29.html n12t1-29.html n This is organized by chapter headings (the first two digits of you HS code tell you the chapter). Scroll through until you find the applicable rule.

Example of the General Note 12 page: (B) A change to heading 8537 from tariff items , or , whether or not there is also a change from any other heading, provided there is a regional value content of not less than: (1) 60 percent where the transaction value method is used, or (2) 50 percent where the net cost method is used 122. A change to heading 8538 from any other heading. Subheading rule: The underscoring of the designations in subdivision 123 pertains to goods provided for in subheadings or for use in a motor vehicle of chapter (A) A change to subheadings through from any other heading; or (B) A change to subheadings through from subheading , whether or not there is a change from any other heading, provided there is a regional value content of not less than: continued

General Note 12 example continued (1)60 percent where the transaction value method is used, or (2)50 percent where the net cost method is used A change to subheading from any other heading 125. A change to tariff item or from any other subheading, except from more than one of the following: (A) tariff , (B) tariff item

Example….again, on one page 123 (A) A change to subheadings through from any other heading; or (B) A change to subheadings through from subheading , whether or not there is a change from any other heading, provided there is a regional value content of not less than: (1)60 percent where the transaction value method is used, or (2)50 percent where the net cost method is used. THIS IS OUR RULE!!!

Your Company MX #6000Ultra-violet lampsHS# ZB-100 Blacklight (115/60/1 Costed Bill of Materials ComponentsPrice/unitHS#NAFTA Cert? 1) plastic lamp body$ No (imported from Asia) 2) electric cord$4.26Yes 3) paint$.20Chpt.32No 4) light bulb$ Yes 5) nuts/bolts/screws$.50No 6) metal stem of lamp$ No (imported from Asia) Total cost of parts: $18.22

What does this really mean? (A) A change to subheading through from any other heading…. Okay, so if the components that go into the ultraviolet lamp come from outside of heading 8539 the lamp qualifies for NAFTA. But, we can be 99% sure that some of the components can only be classified as parts of the ultraviolet lamps. Since parts of the lamps are classified as the lamp would not qualify because the heading of the parts is the same as the heading of the lamps, 8539, there is no change to heading So we must try the B rule for a regional value content

Rule B of 123 (B) A change to subheadings through from subheading (parts), whether or not there is a change from any other heading, provided there is a regional value content of not less than: 1) 60 percent where the transaction value method is used 2) 50 percent where the net cost method is used Since parts that can only be classified as parts of an ultraviolet lamp are classified as and are part of the components for the final product, we must attempt to prove regional value content.

What is Regional Value Content (RVC)? The idea behind Regional Value Content is to prove that a percentage of the content is actually from within the NAFTA territory. Not from Asia Not from Europe Not just distributed from a NAFTA country Rather, made in a NAFTA country

Regional Value Content (RVC)

Net Cost Method (NC) Under the net cost method, up to 50% of the net cost of the good may be foreign-originating components. NC is defined as the total cost of production, including overhead and labor (but not profit) less sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs NC formula: RVC = NC-VNM* x 100 NC * VNM (value of non originating material)

Transaction Value Method (TVC) Up to 40% of the transaction value of the good can be non originating. Under this method, the transaction value (TV) is defined as the price actually paid for the good. TVM formula: RVC = TV - VNM* x 100 TV * VNM (value of non originating material)

Let do an example of TVM Here is what you need: Costed bill of materials Selling price/transaction value

Calculations of TVM Selling price is $40 for the model MX#6000 ZB-100 Blacklight (115/60/1) The formula is: TV-VNM x 100 TV Lets make it simple first try. Rather than figuring the cost of all the non-originating material, lets save time and simply add all the components (not just non-originating) and plug it into the formula x 100 = 54.45% This is under the 60% RVC 40 requirement and doesn’t pass for NAFTA

Bill of Material Costed Bill of Materials ComponentsPrice/unitHS#NAFTA Cert? 1) plastic lamp body$ No (imported from Asia) 2) electric cord$4.26Yes 3) paint$.20Chpt.32No 4) light bulb$ Yes 5) nuts/bolts/screws$.50No 6) metal stem of lamp$ No (imported from Asia) Total cost of parts: $ (4.26) - (1.30) = $12.66 This is the cost of non- originating parts.

TVM take two... The second time we’ll reconsider and calculate the actual value of non-originating material: $12.66 We have subtracted the components of which we are sure originate because we have NAFTA certificates for them. TV(40) - VNM (12.66) x 100 = 68.35% TV (40) Therefore, we exceed 60% RVC and can qualify for NAFTA