‘The Importance of NAFTA in an Era of Increased Compliance’

1. ‘The Importance of NAFTA in an Era of Increased Compliance’ Presented by: Ron Ubels A & A Contract Customs Brokers Ltd. in partnership with U.S. Commercial Service.

2. The Customs Clearance Process and NAFTA NAFTA does not allow for the unchecked movement of goods into Canada The Customs Clearance Process: Order in Council (OIC) Shipments with a value of CDN $20.00 or less Low Value Shipments (LVS) Courier shipments where the value is greater than CDN $20.00 but less than CDN $1600.00 High Value Shipments Any shipment valued at more than CDN$1600.00; courier and other modes of transport, require formal clearance before release. There are a number of Customs initiatives that can expedite the clearance of these shipments. * A Canada Customs Invoice or Commercial Invoice is required to clear goods through Customs. The NAFTA Certificate of Origin will not expedite your goods through Customs or delay the process – The NAFTA Certificate is a post release document..

3. The NAFTA Certificate of Origin Only importers who possess a valid Certificate of Origin can claim preferential tariff treatment • Low Value Shipment requirements: For goods which are valued at less than CDN$1,600.00, customs will accept an informal statement of origin which may be handwritten, typed or otherwise indicated on the paperwork.

4. The NAFTA Certificate of Origin (Continued) Example of statement: STATEMENT OF ORIGIN FOR COMMERCIAL IMPORTATIONS OF LESS THAN CDN $1,600.00 I certify that the goods referenced in this invoice/sales contract originate under the rules of origin specified for these goods in the North American Free Trade Agreement (NAFTA), and that further production or any other operation outside the territories of the Parties has not occurred subsequent to production in the territories. NAME:__________________________________________________________________ TITLE:__________________________________________________________________ COMPANY______________________________________________________________ STATUS: EXPORTER________PRODUCER__________OF THE CERTIFIED GOODS TELEPHONE_________________________FAX________________________________ COUNTRY OF ORIGIN_________________________________ (For purposes of determining the applicable preferential rate of duty as set out in Annex 302.2, in accordance with the marking rules or in each Party's schedule of tariff elimination.)

5. The NAFTA Certificate of Origin - (Continued) • High Value Shipment requirements: For goods that are valued over CDN$1600.00, a formal NAFTA Certificate is required  • NAFTA Certificate per shipment • Blanket NAFTA Certificate – covering one calendar year

6. The Importance of the NAFTA Certificate “Why does it matter? It’s all duty free anyway, right?” • Importers using an invalid NAFTA Certificates of Origin, will be denied NAFTA origin duty free status, and duties will be applied retroactively. Duty rates will apply, based on the classification number declared at time of import. • Exporters are responsible for determining qualification under NAFTA, and for completing an accurate certificate. The importer of record is ultimately responsible for un-remitted duty and GST on imported goods, as well as applicable penalties. • Periodic Verification Audits: With the introduction of Periodic Verification Audits by Canada Customs, NAFTA Certificates are coming under greater scrutiny. • AMPS (Administrative Monetary Penalty System): AMPS was introduced in the fall of 2001 as a penalty regime to be used in case of intentional, or negligent misclassification, where there is no difference in rates between the MFN rate and the NAFTA rate (UST). AMPS imposes a graduated corrective approach, starting with warnings and escalating to higher penalties if non-compliance continues.

7. NAFTA: Article 401 The Rules of Origin For a good to originate it must meet the requirements set out in the Rules of Origin - Article 401 of the NAFTA Agreement • The NAFTA grants benefits to a variety of goods from the region (Canada, United States, and Mexico). For a good to “originate”, it must meet the requirements set out in the Rules of Origin – Article 401 of the Agreement. • Within the context of NAFTA the words origin, originate, or originating are used differently than in the context of determining country of origin.

8. NAFTA: Article 401 – The Rules of Origin – (Continued) • Article 401 of NAFTA defines originating in four ways: • Wholly obtained or produced in the NAFTA region  • Goods produced in the NAFTA region wholly from originating materials Goods taken from the seabed, the soil or the air in the NAFTA territories • Goods meeting the Annex 401 origin rule • Unassembled goods, and goods classified with their parts, which do not meet the Annex 401 rule of origin, but contain 60% regional value content using the transaction method, or 50% using the net cost method Goods can originate in Canada, Mexico, or the United States, even if they contain non-originating materials, as long as the materials satisfy the rules of origin specified in Annex 401 of the Agreement

9. NAFTA The Keys to a “True and Accurate” Certificate

10. TariffClassification If your goods are initially misclassified, all work done to establish eligibility will be meaningless. • The rules of origin ensure that parts and materials that do not originate in the NAFTA territory undergo a sufficient amount of processing which then transforms into qualifying products. • The rules of origin are based on tariff classification, therefore it is important that you have the correct HS tariff classification for the finished product, and any non-originating parts and materials. • In most cases the HS tariff classification is required to the six digit level only. For the purposes of the Rules of Origin, it is important to understand the structure of the tariff. Example: Tariff classification: 2007.99 20 - First two digits are the chapter 2007 - Third and fourth digits are the header 2007.99 -Fifth and sixth digits are the subheader

11. Tariff Classification – (Continued) Example 1 – Tariff Change Strawberry jam is manufactured in the United States from sugar that is the product of Jamaica, and strawberries that are the product of Mexico. The tariff of the finished product, Strawberry Jam is: 2007.99 The tariff for the sugar (Jamaica):  1701.99 The tariff item for the strawberries does not need to be determined, since they originate in one of the NAFTA territories. The rule of origin for tariff 2007.99 reads as follows: 20.01 – 20.07 A change to heading Nos. 20.01 through 20.07 from any other chapter. Since the sugar (Jamaica), is from outside of headings 20.01 through 20.07; the jam is originating and qualifies under the NAFTA duty free tariff.

12. Tariff Classification (Continued) Regional Value Content As well as a required tariff change, the specific rules of origin may ask that a Regional Value Content (RVC) be met. The RVC, which is always expressed as a percentage, may be determined by using one of the following two formulas: RVC = Transaction Value – Value of Non-Originating Materials X 100 Transaction Value OR RVC = Net Cost – Value of Non-Originating Materials X 100 Net Cost • It is the exporters choice to use either the Transaction Value or Net Cost • The transaction value must be at least 60% of the value • The net cost must be at least 50% of the value

13. Tariff Classification (Continued) Example 2 – Regional Value Content Goods of tariff (subheading) 8703.10, are shipped to Canada from Mexico. The transaction value of the goods is $3,600.00; the net cost of the good is $3,500.00; and the value of the non-originating material is $1,495.00. The Specific rule of origin for 8703.10 states: 8703.10 A change to subheading No. 8703.10 from any other heading number, provided there is a regional value content of not less than: • 60 percent where the transaction value method is used, or • 50 percent where the net cost method is used

14. Tariff Classification (Continued) Assuming the first specific rule of tariff change has been met, the RVC calculation is as follows: Transaction Value: RVC = $3600.00 - $1495.00 X 100 = 2105.00 X 100 = 58% 3600.00                3600.00 Must be at least 60%, so it doesn’t qualify under this method Net Cost RVC = $3500.00 – $1495.00 X 100 = 2005.00 X 100 = 57% 3500.00 3500.00 Must be at least 50%, so the goods qualify under this method

15. Determining Origin Criteria All goods which qualify under the NAFTA rates of duty, must fall into one of six criteria (must be indicated on field 7 of the Certificate of Origin). Criterion A – Goods must be “wholly obtained or produced entirely in the territory of one or more of the NAFTA countries”. No foreign materials. For goods of Criterion A, there is no tariff change or Regional Value requirements that must be met. Criterion B – Goods which are produced entirely in Canada, the United States, or Mexico, and satisfy one of the rules set out in the annex 401 of the Agreement (change in tariff or regional value content requirements; or combination of thetwo). Criterion C – Goods must be produced entirely in the territory of one or more of the NAFTA countries using only originating materials. In this case some of the materials are originating due to the fact that they have undergone a tariff and/or RVC. NOTE: Criterion D, E and F are rarely used or used in very specific cases only

16. North American Free Trade AgreementCERTIFICATE OF ORIGIN For confidential reasons always state “Available to Customs upon request” if the producer is different from the exporter. If same as exporter state “SAME” if the producer is unknown state “UNKNOWN”. To be completed for Blanket Certificates only “FROM” is the date upon which the Certificate becomes applicable to the good covered by the Certificate. “TO” is the date upon which the blanket period expires. The importation of a good for which a good for preferential tariff treatment is claimed based on this Certificate must occur between these dates. 1 2 Blanket Period Exporter’s Name and Address: ABC Exports 1550 Executive Drive San Diego, CA 92101 D D M M Y Y D D M M Y Y To To 0 1 1 2 0 5 From 3 0 1 1 0 6 If the exporter is established as a Non-Resident Importer show exporter name and address. If Canadian company is the importer and there are multiple importers state “VARIOUS”. Tax Identification Number: Full legal name and address and the legal tax ID (employer’s Id or Social Security) number of the exporter. 3 4 Importer’s Name and Address: Producer’s Name and Address: Available Upon Request ABC Exports 1550 Executive Drive, San Diego, CA 92101 Tax Identification Number: Tax Identification Number:

17. For each good described in Field 5, state what criterion (A through F) is applicable. The key ones used are A, B, or C. (1) your knowledge of whether the good qualifies as an originating good; Provide a full description of each good. The description should be the same as that shown on the subsequent invoices and be in a generic language. For each good described in Field 5, state “YES” if you are the producer of the good. If you are not the producer of the good, state “NO” followed by (1), (2), or (3), depending on whether this certificate was based on: North American Free Trade Agreement CERTIFICATE OF ORIGIN Show the name of the Country of Origin (ie: US for originating goods from the US). For each good described in Field 5, identify the HS tariff classification to the six digit level. (2) your reliance on the producer’s written representation that the goods qualify, or 6 8 9 5 7 10 HS Tariff Classification Number Preference Criterion Country of Origin Producer Net Cost Description of Goods For each good described in Field 5, where the good is subject to a regional value content (RVC) requirement, indicate “NC” if the RVC is calculated according to the net cost method; otherwise indicate “NO”. No US B Yes Strawberry Jam 2007.99 (3) a completed and signed Certificate for the good voluntary provided by the producer.

18. North American Free Trade AgreementCERTIFICATE OF ORIGIN 11 I certify that: __ the information on this document is true and accurate and I assume the responsibility for proving such representations. I understand that I am liable for any false statements or material omissions made on or in connection with this document; __ I agree to maintain, and present upon request, documentation necessary to support this Certificate, and to inform, in writing, all persons to whom the Certificate was given of any changes that would affect the accuracy or validity of this Certificate; __ the goods originated in the territory of one or more of the parties, and comply with the origin requirements specified for those goods in the North American Free Trade Agreement, and unless specifically exempted in Article 411 or Annex 401, there has been no further production or any other operation outside the territories of the Parties; and __ this Certificate consists of _____ pages, including all attachments. To be completed, signed and dated by the exporter on the date the Certificate was completed.    1  Authorized Signature: Company: ABC Exports Name: Title: Mr. Smith President Telephone: FAX: Date: (800) 555 - 0398 (800) 555 - 8300 05/10/00

19. Exporter’s Responsibilities NAFTA records must be kept for a period of six years • Exporters or producers that prepare Certificates of Origin must maintain records pertaining to the exportation for 6 years. • Exporters or producers must notify all parties to whom the certificate was given of any changes that could affect its accuracy or validity • Exporters or producers must provide copies of the NAFTA Certificate to their own customs administration on request.

20. Customs Verification Audits NAFTA authorizes the importing country’s customs administration to conduct verification of the exporter or producer to determine whether the goods qualify as originating as certified on the Certificate of Origin • Verifications are usually done by questionnaire or verification visit • Questionnaires are usually sent to the exporter or producer, who completed the Certificate of Origin and are used to determine if the goods in fact qualify.The information should be readily available to the exporter or producer as it would be the information they used to determine qualification under NAFTA before the Certificate was signed.If insufficient information is available a verification audit will be considered.

21. Customs Verification Audits – (Continued) • Verification visits are conducted by the importing countries customs administration. Before conducting a verification visit, customs must provide written notification of their intention to conduct a visit to the exporter or producer. The exporter or producer can have their customs broker present during the audit

22. Customs Verification Audits – (Continued) Simplifying the Canada Customs Invoice

23. Customs Verification Audits – (Continued) Eliminate Additional Documentation • The perception that shipping international packages can be more cumbersome because of documentation requirements is simply that...a perception. Done properly shipping internationally can be as easy as shipping domestically. • Use existing documents - The key document to clear goods into Canada is the Canada Customs Invoice. Using this form can create additional work for your shipping department and may in fact slow down the shipping process and create opportunity for error in the transposing of invoice information.

24. Customs Verification Audits – (Continued) Eliminate Additional Documentation cont. • This can be replaced by your commercial invoice which is usually generated through your computer system and is a document that is required on domestic as well as international sales. Use of the commercial invoice for customs clearance is perfectly acceptable as long as the information customs require is shown on the invoice. This results in very minor changes to your invoice. • NAFTA Certificate of - For product that qualifies under NAFTA a Certificate of Origin is required. A Blanket Certificate of Origin, valid for one year, can be completed by U.S. shippers and kept on file for goods frequently imported into Canada. A Blanket Certificate will eliminate the need to provide a certificate with each shipment.

25. Customs Verification Audits – (Continued) Eliminate Additional Documentation cont. The following information is required on your commercial invoice to make it acceptable for clearance through Canada Customs. This can be in any format. • Vendor • Purchaser • Importer of Record • Description • Number of Packages • Number of Units in Shipment • Unit Price • Value • Country of Origin • Country of Settlement • Conditions of Sale

26. Customs Verification Audits – (Continued) Opening Up the Canadian Market Using the Border as an Advantage to Grow your Business.

27. Customs Verification Audits – (Continued) What is a Non Resident Importer? • When you pay all the charges into Canada, including any duties and/or taxes you can clear the goods into Canada in your name as a Non-Resident Importer. • You become the importer of record even though you are not physically located in Canada.

28. Customs Verification Audits – (Continued) Duplicate Analysis – To US Vendors • Product sales are the same as domestic. Goods are sold on a delivered price basis • Makes the border transparent • Controls the timely delivery of product • Creates a level playing field with Canadian firms • Uses the trade process to gain advantage over US competitors • Eliminates the need for warehouse, distribution points • Provides complete control over sales, pricing and profits • Empowers company sales team • Unprecedented success at trade shows • Opens door to larger retailers • Expand the Canadian market

29. Customs Verification Audits – (Continued) Duplicate Analysis – To Canadian Purchaser • Creates a domestic purchase environment • The border becomes transparent • Goods are ordered and delivered • Easier to compare price with Canadian competition • They know the bottom line – price to shelf • Consistent delivery

30. Customs Verification Audits – (Continued) NRI – FAQ’s What does it cost?Nothing. All that is required is to set up an account with a broker of your choice. Who can become and NRI?Any firm is eligible. No special requirements. Can a firm become an NRI for select shipments ?Yes some firms are NRI just for warranty goods or commercial. samples.

31. Customs Verification Audits – (Continued) Tools for Canadian Market Success

32. Exporters Compliance Program • As you expand your business to Canada, being customs-compliant is a critical component of any successful trade strategy. Ensuring your Canadian customers realize a efficient and compliant release through customs while taking full advantage of trade concessions can come own to how you complete your export paperwork. Non Resident Importer Program Have you examined all of your options for increasing your company’s Canadian market share? The Non-Resident Importer Program can help you increase sales of your products into Canada. Sell your product in a domestic purchase environment while virtually eliminating the border for both current and prospective customers.

33. Consolidated Program As your cross-border package volume grows it is important to look at way to streamline your processing, improve your time to market and create cost savings that can reduce the delivered price of your product.

34. Direct to Market Program For U.S. companies who import product from overseas into the U.S. market and then export some of these goods to Canada is it time to look at the benefits of shipping direct to the Canadian market. Consider the benefits: • Elimination of the need to pay duty twice (U.S. and Canada) • Possible reduction in the duty payable when entering Canada • Product strategically located in Canada to create quicker access to market • No international freight costs, creation of documents or customs issues for each order.

35. Returns Management Program When dealing with returns in the domestic market most companies have designed a simple and customized return program. Unfortunately it isn’t always that easy when dealing with cross-border returns. Having to deal with customs documentation, arranging shipping and other uncertainties can create an unmanageable returns program at best

36. ‘The Importance of NAFTA in an Era of Increased Compliance’ Presented by: Ron Ubels A & A Contract Customs Brokers Ltd. in partnership with U.S. Commercial Service.