Preference Criterion What?
Recently, I answered a question posted on the ICPA listserv. The question was interesting enough that I will review the substance of it here.
An alternative approach that avoids this problem, but has cash-flow implications, is to avoid making the claim at the time of entry. Instead, make a post-entry claim for a refund. That way, you don't have to assert a NAFTA country as the origin in the SPI column (although it can be argued that the SPI is not an origin claim but only a duty preference).
Most people generally think of the NAFTA preferences in terms of criteria A through D. These cover the vast majority of compliance issues with B being the leader. The ICPA question was about preference criterion E. What, you ask? Never heard of it.
Well, it is of limited use, but if you are in the IT sector, it is a terrific rule. Preference E states simply that certain goods listed in NAFTA Annex 308.1 are considered originating simply by virtue of having been imported duty paid into the NAFTA region. [If you struggle with tariff shifts and RVCs, pick your jaw up off the ground.] What this means is that a 100% Japanese content computer imported duty paid into Mexico, for example, is originating when it is later transferred to the United States or Canada. In other words, for the IT sector, NAFTA sets up a mini customs union.
That's all well and good but the devil is always in the details. The question presented in the ICPA question was about the documentation. Specifically, what origin to declare for the goods on the NAFTA CO and on the entry documents.
There are two rulings (NY R03125 and H005101) addressing preference criterion E and neither explains the procedure for making a claim at the time of entry. In both rulings, the real issue was the country of origin marking. Because the goods were further processed in Canada, the origin for marking purposes was found to be Canada. In addition, the August 20, 2009 Customs Bulletin (page 18) includes a notice saying the Customs is considering the status of an earlier related ruling.
When more than minor processing takes place in the NAFTA region, the NAFTA Preference Override (19 CFR 102.19(a)) kicks in and makes the origin the country of last processing. But is no processing occurs, the answer is unclear.
The HTSUS permits only two special program indicators to make a NAFTA claim: MX and CA. To make a legally valid preference criterion E claim at the time of entry, you have to use one or the other. But in the example of the Japanese computer, the CO must be accurate and valid. The CO, therefore, should probably correctly state the fact the origin is JP because the NAFTA marking rules don't result in a NAFTA country being the country of origin.
The HTSUS permits only two special program indicators to make a NAFTA claim: MX and CA. To make a legally valid preference criterion E claim at the time of entry, you have to use one or the other. But in the example of the Japanese computer, the CO must be accurate and valid. The CO, therefore, should probably correctly state the fact the origin is JP because the NAFTA marking rules don't result in a NAFTA country being the country of origin.
Further, the instructions on the NAFTA Certificate of Origin are a little squirrely on this point. The instructions seem to recognize that the goods are not actually originating but that the goods are only "considered" originating. Here is the language:
Certain automatic data processing goods and their parts, specified in Annex 308.1, that do not originate in the territory are considered originating upon importation into the territory of a NAFTA country from the territory of another NAFTA country when the most-favored-nation tariff rate of the good conforms to the rate established in Annex 308.1 and is common to all NAFTA countries.
That is different than criterion A through D which just define originating goods. So, this seems kind of like the NAFTA preference override, which assigns an origin for duty purposes only and leaves marking alone. Does criterion E work the same way?
An alternative approach that avoids this problem, but has cash-flow implications, is to avoid making the claim at the time of entry. Instead, make a post-entry claim for a refund. That way, you don't have to assert a NAFTA country as the origin in the SPI column (although it can be argued that the SPI is not an origin claim but only a duty preference).
So, here is a question for you. Am I over thinking this? Is there really no problem. Maybe one of the brokers out there will set me straight. Or, if you happen to work for an IT equipment importer, please drop a comment and let me know what is happening on the ground with respect to this issue.
Comments
The relevant portion of the 7501 instructions provide:
The country of origin is the country of manufacture, production, or growth of any article. If the article consists of material produced, derived from, or processed in more than one foreign territory or country, or insular possession of the U.S., it shall be considered a product of that foreign territory or country, or insular possession, where it last underwent a substantial transformation.
Thus, if the preference override is invoked in a particular fact pattern, does it necessarily mean that for 7501 purposes the origin declared is the country of last processing?
I was involved with one situation where a company produced a product in the U.S., sent the article to Canada for incidental addition of value not necessary for the completion of the article, and then returned. The article qualified under NAFTA when it left the U.S. The product returned as CA NAFTA for duty purposes, country of origin US on the 7501, and country of origin marking US.
The result is because NAFTA rules determine the special program qualification and the indicator that is to be used, not the country of origin. In most cases, except primarily preference override and preference criterion E, the result will be the same for all three.
My question has more to do with the SPI on the 7501 line item. Is it correct to use CA for a Japanese computer imported from Canada? HTSUS General Note 3(c) says the CA SPI is used to identify Goods of Canada. I think this computer is still a non-originating good of Japan that is "considered to originate" by virtue of being duty paid. But, I am willing to be wrong about this.
It strikes me that the only practical solution that provides the benefit preference E is clearly intended to convey is to use the CA or MX SPI as applicable to where the duty was originally paid.
In actuality, the best thing to do would be to dump the CA and MX SPI altogether. They used to have meaning when Canada and Mexico had different NAFTA rates. Today that is not the case (although there might be a few lingering exceptions). Why not just go with NA for North America? That would allow for preference criterion E to work without making an origin claim as GN 3(c) seems to imply. The bonus application would be to allow US originating goods back in based on a NAFTA CO rather than jumping through the 9801 hoops.
The only remaining benefit of claiming criterion E would be the benefit of avoiding MPF in the U.S. or DTA in Mexico. CFR 19 section 24.23(c)(3) exempts originating goods that meet the NAFTA marking defintion of country of origin under Annex 311. That issues was explained well by the original post above.
What do practical importers and exporters do? Many avoid the regulatory risk and administrative burden and simply do not claim NAFTA. For U.S. and Mexican imports they find paying MPF and DTA a small price to pay.
Of course manufacturers incorporating these materials into their goods may still want proof of E in order to counts such materials towards originating value.
Manufacturers of electronic goods relying solely on change in tariff rules will find that the NAFTA Annex 401 was structured quite liberally in this area and they will usually meet the rule if they create a new product in North America.
IMO Customs should just scrap Preference E altogether and program their systems to notice when any of the HTSUS numbers listed in Annex 308.1 are used and set those to duty and MPF FREE. Seems like this would eliminate any issues related to which origin to use.
It's confusing for all involved to have certificates and markings stating one origin (ex: JP) and entry documenation stating MX or CA which must be done in order to claim E.