Friday, October 06, 2006

Greetings, Finland

Today's Friday question comes from Jyvskyl, Finland. That's great. I love having visitors from far away lands. But, here is the odd part: the search this visitor used to get to my blog was "transaction value method NAFTA ppt." So, someone in Finland want to know how to certify goods for duty free treatment in trade between Mexico, the U.S., and Canada. There is something odd in that transaction, but who am I to judge?

Under NAFTA, goods can be certified as originating in North America (and, therefore, entitled to preferential treatment) if they satisfy detailed rules of origin. Some of these rules are based on the percentage of North American value in the finished product. The regulations provide for two ways of calculating regional value content ("RVC"). My friend in Finland is interested in the transaction value method.

Under this method, the RVC is calculated as follows:

RVC=(TV-VNM)/TV x 100

TV stands for transaction value, which is the adjusted price of the finished good. It is adjusted take into account all the proper elements of value (e.g., assists and indirect payments) but exclude costs not related to the value of the good (e.g., the value of transportation). For imports, it is close to customs value. The details of that are set out in Schedule II.

VNM is the sum of the values of non-originating materials used in the production of the goods.

You do the math. Take your adjusted selling price and your VNM and plug them into the formula. You end up with the RVC, your percentage value of North American content.

There is not much to it. Here are some pointers on the use of the transaction:

  • If you have a lot of related party transactions, you probably can't use it. The trigger is 85 percent of sales by volume in the past six months.
  • If there is no real sale, there is no transaction value.
  • Transaction value may be harder to use than the net cost alternative. TV often changes by customer, volume, delivery point, etc. Net cost tends to stay fixed.
  • Sometimes, people suggest adjusting TV to a higher price to increase RVC. Don't do that. An adjustment to price to create a NAFTA originating good probably violates the provision on non-qualifying operations (sec. 17), which says the following will not result in an originating good:
any production or pricing practice with respect to which it may be demonstrated, on the basis of a preponderance of evidence, that the object was to circumvent this appendix.
There you have it, Finland. What you wanted to know about NAFTA. Now, my friend Jose in Cancun has a question about those reindeer in Lapland . . . .

1 comment:

Larry F. said...

One more thing, most OEM automotive goods are prohibited from using TV. Net cost only in those cases.