Mexico Customs International Trade Basics

1. International Trade Basics FOCUS Business Solutions, Inc. Offshore Manufacturing Summit San Carlos, MX As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

2. Topics • Overview of importing process • Customs implications • Assigning task of customs compliance • Moving raw materials and goods • Southbound • Northbound • Customs Border & Protection (CBP) • Harmonized tariff classification • NAFTA • ADW’s • Country of origin marking • Communications • Fixing mistakes As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

3. Executive Level View of an Importation • Foreign purchase • Purchase order issued • Goods are shipped • Goods are received • Payment made to foreign supplier • Finished goods shipped to customer Departments involved: Engineering, purchasing, logistics, shipping/receiving, accounts payable… As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

4. Customs Implications • Foreign purchase • Trade program requirements must be met • Purchase order issued • Dutiable assists must be declared • Goods are shipped • Freight charges can reduce duties owed • Importer must hire a customshouse broker • Goods are received • Overages/shortages • Payment made to foreign supplier • Amount paid or payable • Finished goods shipped to customers • Duty Drawback As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

5. Assigning the Task of Customs Compliance • Knowledge is required for other disciplines: • Engineering • Purchasing • Logistics • Accounting/Finance • Knowledge required for Customs compliance: • Experience, Experience, Experience • Customs laws and regulations • Harmonized tariff classification • Trade programs As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

6. Moving Raw Materials and Goods • Southbound to Mexico • Raw materials are consolidated by The Offshore Group • Offshore prepares necessary paperwork to submit to Mexican customs broker • Offshore in conjunction with Mexican broker assign harmonized tariff classifications • Mexican broker prepares the Mexican entry (Import Pedimento and Export Pedimento) and submits to Mexican Customs As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

7. Moving Raw Materials and Goods • Southbound to Mexico • Duty Implications • Definitive Importations – 10 -15% duty rate • Temporary Importation • PROSEC rate: 0-5% • NAFTA rate: Usually duty free (0%) • Offshore can advise PROSEC status • To obtain NAFTA rate, customer must obtain/supply NAFTA certificates to Offshore • Importer of record into Mexico: • Maquilas Tetakawi • Manufacturas Zapaliname As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

8. Moving Raw Materials and Goods • Importer of Record – Northbound from Mexico • As Importer of Record, responsibilities include: • Exercise of reasonable care • Determination of harmonized tariff classification number • Duties, taxes, fines & penalties • Selection of U.S. Customsbroker • Transmission of packing slip data to Offshore • Prepare Assembly Worksheet Descriptions (ADW’s) As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

9. Moving Raw Materials and Goods • Importer of Record – Northbound from Mexico (cont’d) • As Importer of Record, responsibilities include: • Obtain NAFTA certificates for raw materials moving southbound • Qualify finished goods for NAFTA treatment • Respond to requests from CBP • Participate in Reconciliation program • Compliance with all other CBP laws and regulations • CBP is enforcing agency for over 60 other governmental agencies As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

10. Customs Border & Protection (CBP) • U.S. Customs and Border Protection’s top priority is to keep terrorists and their weapons from entering the United States. While welcoming all legitimate travelers and trade, CBP officers and agents enforce all applicable U.S. laws. CBP prevents narcotics, agricultural pests and smuggled goods from entering the country and also identifies and arrests those with outstanding criminal warrants. On a typical day last year, CBP officers welcomed 1.2 million people at the nation’s 314 land, air and seaports while denying entry to more than 3,000 inadmissible visitors. As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

11. Harmonized Tariff Classification • One of the most critical and complex components of an import transaction • Knowledge needed to classify properly: • Fit, form, function, material, and General Rules of Interpretation • Determines duty rate • Critical for NAFTA determination and support • CBP offers a “Binding Ruling” program • CBP issues definitive opinion on tariff classification As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

12. Harmonized Tariff Schedule Classification Valves for Aircraft Engines Other Parts of Aircraft 8803.30.0030 FREE Hydraulic Valve 8481.20.0040 2% Check Valve 8481.30.2090 5% Brake Caliper Pin Other Non-Threaded Articles 7318.29.0000 2.8% Other Articles of Metal 7326.90.8587 2.9% Brakes and Parts Thereof 8708.39.5050 2.5% As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

13. NAFTA • Important to understand NAFTA rules of origin and how they impact: • NAFTA qualification process • Sourcing decisions • Tariff shift vs. Regional Value Content (RVC) percentage • Importance of correct HTS numbers • NAFTA Audits As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

14. NAFTA vs. Unconditionally Duty Free HTS Numbers • Unconditionally duty free Items are free of duty regardless of NAFTA or other trade agreements • Merchandise Processing Fee (MPF) is assessed on shipments from Canada or Mexico, unless NAFTA is claimed • MPF amount: .21% of Entered Value • MPF minimum : $25.00 per Entry • MPF maximum: $485.00 per Entry • Refunds for duty and MPF can be obtained one year from date of import As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

15. Assembly Description Worksheets (ADW’s) • ADW’s are similar to production Bills of Material • Important to keep ADW’s updated to reflect changes in values • Changes could alter NAFTA declaration • ADW’s should reflect all costs associated with raw materials and production of finished good • ADW’s should be reviewed on annual basis As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

16. Country of Origin Marking • Every article imported into the USA must be marked to indicate it’s country of origin, unless excepted by law • If excepted by law, the outermost container must be marked to indicate the country of origin of the contents • NAFTA marking rules of origin apply to articles produced in Mexico or Canada and shipped to the USA • With regards to articles to be further processed in the USA, the Federal Trade Commission governs use of “Made in the U.S.A.” As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

17. Advance Notices and Communications • Important to notify Offshore, customs broker, and NAFTA provider of new part production • Offshore can advise dutiable status on importation of raw materials into Mexico • NAFTA provider can advise of NAFTA eligibility • Both of above require time and usually can’t be done on moments notice • Duties can quickly accrue before it’s realized that a part is crossing the border without benefit of NAFTA As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

18. Advance Notices and Communications • Communicate, Communicate, Communicate • Offshore • Broker • NAFTA/Customs provider • Use caution in communicating with CBP • Understand purpose of any request for information • Understand impact of duty on prior shipments As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

19. Fixing Mistakes • Fixing mistakes require amendment to Customs entry • Be aware of time constraints • Method of amendment depends on liquidation status of entry • SIL/PEA: Prior to liquidation • Protests: 180 days from liquidation • 520(d) 1 year from date of importation • Prior Disclosure: Anytime prior to commencement of formal investigation As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

20. Summary • As importer of record company is subject to legal requirements • Classification of materials and finished Goods should be as accurate as possible • NAFTA can be complex and has potential to expose company to penalty actions • Keep ADW’s updated • Communicate with appropriate parties • Fix mistakes when discovered • Make conscious decision who should handle Customs responsibilities As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com

21. Additional Information • Contact: Steve Haywood (734) 362-1000 ext. 224 FOCUS Business Solutions, Inc. 2674 W. Jefferson Ave. Suite 100 Trenton, MI 48183 shaywood@focus-solutions.net Also: http://www.cbp.gov/ As presented at The Offshore Group’s Manufacturing in Mexico Summit. www.offshoregroup.com