Thursday, April 12, 2007

Fungibles (For Nick)

Corrected for typos:

This is in response to Nick who wants to know how disjunctive marking of some goods will fit with a claim under an FTA. My short answer is that Nick is opening up a big can of worms, but there are answers in the FTAs.

NAFTA is pretty clear that where fungible goods are commingled before entry, the importer can still make a claim for the originating parts of it if the importer applies one of several acceptable accounting systems to determine origin. Those systems are:

Direct Identification: That means, effectively, not commingling the goods and somehow physically segregating (or at least identifying) the originating and non-originating materials. So, you need your supplier to divide the car load of wheat into Canadian wheat and everything else. The Canadian wheat gets NAFTA treatment (including origin marking) and everything else gets non-NAFTA treatment (although you might have to run through the NAFTA marking rules to make sure that the other wheat is not "goods of a NAFTA country.").

LIFO or FIFO: Got a big tank of crude oil in Mexico? If you want to make NAFTA claims on the content, you can apply the "last in first out" rule or the "first in first out" rule. Basically, this requires that you track the origin of your additions to and subtractions from the tank and treat the origin of what you ship according to your records. You also need to account for your opening inventory. Assume you start with 100 originating gallons in a tank and later add 25 non-originating gallons. If you ship 50 gallons, under LIFO 25 gallons are originating (because the last in are the first out) and 25 gallons are non-originating. Again, you certify, mark, and enter accordingly. [Yes I know you don't mark crude oil. I'm just making a point here.] Under FIFO, all 50 gallons are originating because the 100 first gallons of crude in were all originating so the first 50 out will be as well.

Averaging: What I am about to do is a gross oversimplification. You get what you pay for. Say your opening inventory is 75% originating and 25% non-originating. The next time you make a shipment, it is considered to be 75% originating and 25% non-originating. Over the course of the next few months, you sell some stuff and you buy some stuff. You have to track the origin of what you put in the mix and then, at the end of the quarter, you reset your ratio of originating to non-originating. Let's say it is now 60% originating and 40% non-originating. You apply that ratio going forward for the next quarter. And so it goes. Lovely. Enjoy the record keeping.

CAFTA-DR has similar language but only specifies segregation, LIFO, and FIFO. Beyond that, the certifier can use an accounting system that is consistent with GAAP.

So, it is not impossible to handle mixed fungible goods from both an origin and marking perspective. It is just a pain.

1 comment:

Nick said...

Larry, thanks for the illuminating post. Direct Identification is self-explanatory, and I'll have to read up and learn more about Averaging.
The FIFO/LIFO accounting method seems to be the most popular within the petroleum industry. There is going to be an increased push to relax the NAFTA rules around origination so that a shift in the last two digits of the HTS number confer origin. Seems unlikely, but this is a reaction to the shortage of Canadian condensate that is used as a diluent in moving heavy crude oils via pipeline into the US. It will be interesting to see if the industry can successfully convince the legislation to carve out a narrow exception to the tariff-shifting rules.