WCO Revenue Conference Mexico’s 20 years experience of implementing the NAFTA agreement, Rules of Origin July 1st, 2014

CONTENTS GENERAL INFORMATION NAFTA TRADE VOLUME AND TRENDS - GDP VERIFICATION SYSTEMS VERIFICATION PROCEDURES VERIFICATION CASES COMMON IRREGULARITIES DETECTED

GENERAL INFORMATION Until today, Mexico has signed 11 Free Trade Agreements with a total of 45 countries, containing each of the agreements their own verification of origin procedures . No. TREATY DATE OF SIGNATURE 1 NAFTA 12/17/1992 2 Colombia 06/11/1994 3 Chile 04/17/1998 4 EU-Mexico Free Trade Agreement (TLCUEM) 03/23/2000 5 Israel 04/10/2000 6 European Free Trade Association (TLCAELC) 11/27/2000 7 Uruguay 11/15/2003 8 Japan 09/17/2004 9 Peru 04/06/2011 10 Costa Rica, Salvador, Guatemala, Honduras y Nicaragua (Central America-Mexico) 11/22/2011 11 Panama 03/04/2014

Commercial Flows and its relation to GDP (2003-2013) GENERAL TRADE VOLUME AND TRENDS - GDP Mexico relies on international commerce to sustain its economic stability. The imports combined with the exports form a core component of our economy. Trade transactions in Mexico accounted for 63.1% of the GDP 2013. Commercial Flows and its relation to GDP (2003-2013) (billions USD) Source: INEGI data (2013) - http://www.inegi.org.mx/sistemas/bie/

NAFTA TRADE TRENDS Within the block of North America, Mexico's trade, along with its partner countries, went from 30.7% of the region's total in 1993 to 46.9% in 2013, reflecting the importance of Mexico as a trading partner of Canada and the United States. In 2013 the imports from the NAFTA region represent 53% and exports 81% of the total, (the USA accounts for 96% of the commercial flows). Imports and Exports from the NAFTA Region (USA and Canada) (1993 – 2013) (billions USD) Source: Ministry of Economy. 2014

Imports and Exports from the NAFTA country’s (1993 – 2013) NAFTA TRADE TRENDS In 2013, the trade flows between Mexico and Canada presented a decrease of 2.5%, reaching $20,299 million USD. This value represents a growth of 741% in trade since NAFTA came into force, translating into an annual growth rate of 11.3% between 1993 and 2013. Regarding trade statistics between Mexico and the USA, in 2013 the exchange of goods presented an increase of 2.9% reaching $486,790 million USD. This represents a growth of 552% since NAFTA came into force; reflecting an annual growth rate of 9.6% between 1993 and 2013. Imports and Exports from the NAFTA country’s (1993 – 2013) (billions USD) Source: Ministry of Economy. 2014

NAFTA TRADE TRENDS During 2013, over 75% of NAFTA’s commercial flows concentrated in three sections: 31.78% correspond to section XVI-Machinery, 25.10% to section V-Animal products and 21.57% to section XVII-Transport equipment. NAFTA trade flows in 2013 Percentage Source: Ministry of Economy. 2014

TOP FIVE COUNTRIES BY IMPORT & EXPORTS VALUE In 2013, the United States remains our top trading partner (in terms of imports and exports) with 78.7%. During 2013, 77% of the total imports originated from 5 countries, the U.S.A. represented 49.1% of the total imports, followed by China and the European Union (16.1% and 11.2% respectively). Exports Imports Source: Ministry of Economy 2013 - http://www.economia.gob.mx/comunidad-negocios/comercio-exterior/informacion-estadistica-y-arancelaria

NAFTA’S JURISDICTION- VERIFICATIONS OF ORIGIN The Jurisdiction on NAFTA Origin Verifications is exclusive to the Tax Administration Service (SAT for its acronym in Spanish) Within SAT, NAFTA Origin Verifications are the responsibility of the General Administration for Foreign Trade Audit (AGACE for its acronym in Spanish)

VERIFICATIONS OF ORIGIN Verification of origin procedure according to NAFTA: : The processes are carried out in accordance with Article 506 are questionnaire and verification visits. The questionnaire is sent in English, as well as an official document in Spanish, accompanied by a courtesy translation(this document has no legal effect) SAT’s contact information of who is in charge of conducting the audits is contained within the official document, including email, phone number, address and fax numbers. There is no specific time frame for Origin Verifications, it can take up to 4 months average. However, this depends on products, number of transactions subject to the audit and the complexity of the rule of origin. Verifications can take up to 10 months. For more information in English on origin verifications can be found on www.sat.gob.mx.

Manufacturer and/or Exporter VERIFICATION SYSTEMS NAFTA IMPORT PROCEDURES Manufacturers Manufacturer and/or Exporter Signs a C.O. Goods are imported to Mexico subject to a 0% import tax Mexican importer receives the C.O. and files it before Mexican Customs NAFTA provides a preferential tariff treatment for goods which originated from Mexico, Canada and the United States.

VERIFICATION PROCEDURES In order to determine the goods to which a preferential tariff treatment applies to, NAFTA provides the following set of rules: Uniform Regulations, which will reassure the application, administration and coherent interpretation of chapter IV and V. A uniform certificate of origin, including the requirements of certification and procedures which will need to be followed by importers and exporters who claim a preferential tariff treatment. Importers and exporters appeal rights are common. Advanced rulings issued by the National Customs Authority of the importing country. A tri-national group that will be in charge of any modifications to the rules of origin as well as uniformed regulations. Specific timeframes to provide a prompt solution to the controversies which emerge between the signatory countries, regarding the rules of origin.

VERIFICATION PROCEDURES VERIFICATION OF ORIGIN PROCEDURES IMPLEMENTED BY FREE TRADE AGREEMENTS TO WHICH MEXICO IS SIGNATORY Types of Verification of Origin: VO questionnaire addressed to the exporter/producer: Written questionnaires are conducted to collect information and documentation related to the origin of goods and later sent through a special courier. (For instance, NAFTA, Chile and Colombia) VO visits to the exporter/producer facilities: The factory or plant where goods are produced receive a visit intended to acquire all the necessary documentation. (For instance, NAFTA, Chile and Colombia) VO applications to the authority of the country of exports or production: the VO is executed by the authority of the exporter or producer and the results are sent to the importer’s authority. (For instance, NAFTA, Chile and Colombia)

VERIFICATION PROCEDURES QUESTIONNAIRE TO THE EXPORTER AND/OR PRODUCER A sample of documents can be filed within 30 days, followed by the rest on a negotiated date The questionnaire is notified By courier (DHL, FEDEX, UPS, etc.) 30 days to respond No answer Answer Subsequent questionnaire notified (Denial intent of Preferential tariff treatment) Additional information request (Denial intent of Preferential tariff treatment) Information or documents not accurate or insufficient OK Final resolution of origin ( 4 to 10 months) 30 days to respond 30 days to respond

VERIFICATION PROCEDURES 98% of the total procedures completed in the NAFTA region during the fiscal year of 2013, where executed on imports from the USA. Year VO Questionnaires VO Visits USA CANADA 2008 86 5 25 2009 148 7 35 2010 253 18 28 2011 267 4 20 2012 245 22 2013 158 3 2014 55 44 Sensitive industry sectors: TEXTILE - FOOTWEAR – ELECTRONICS - STEEL

e.g. Crude polyester staple fiber, is not required to be originating. VERIFICATION CASES Analysis on Rules of Origin Annex 401 of NAFTA provides the specific rule of origin which is applied to determine whether a good qualifies as an originating good under the terms of NAFTA. Most of NAFTA rules of origin for Textile and Apparel goods are “Yarn Forward” and “Fiber textiles Forward” meaning that depending on the case the fabric must come from NAFTA yarn or NAFTA Synthetic or natural Fibers Textiles, and the good must be cut (or knit to shape) sewn or otherwise assembled within NAFTA territory. e.g. Crude polyester staple fiber, is not required to be originating. Synthetic textile fibers as well as yarn for fibers, shall be NAFTA originating. Cutting and sewing of the fabric, shall be done within a NAFTA country. The producer and/or exporter that signs a Certificate of Origin shall have the knowledge and necessary documents in order to proof all prior conditions.

EXPORTER / PRODUCER RESPONSIBILITIES DURING AN ORIGIN VERIFICATION VERIFICATION CASES EXPORTER / PRODUCER RESPONSIBILITIES DURING AN ORIGIN VERIFICATION Exporters/producers must cooperate with authorities during the procedures and send complete and accurate information. Exporters/producers must have the documents and necessary information to demonstrate their knowledge regarding the origin of goods. In a timely manner, exporters/producers must answer the questionnaire or visit proposal as well as inform importers regarding any change that might affect the certification.

Exporters lack of knowledge regarding their NAFTA obligations. MOST COMMON IRREGULARITIES DETECTED DURING ORIGIN VERIFICATIONS Exporters lack of knowledge regarding their NAFTA obligations. Both importers and exporters commonly mistake the concept of “NAFTA ORIGINATING” and “MADE IN USA”, which are not necessarily the same. Exporters frequently forget that before releasing a certification of origin, goods must comply with rules of origin established by NAFTA. Exporters often change their addresses or other relevant information which affects their status on the certificates already issued and forget to notify the importer (article 504). The exporter does not posses the accurate information related to the origin of the goods.

Thank you! General Administration for Foreign Trade Audit International Affairs Central Administration