Ascertaining NAFTA in motor vehicles is a complex process as referenced in the case of Duhamel & Dewar Inc. vs. the Department of National Revenue. Just because you have an NAFTA Certificate signed by the United States Exporter doesn’t ensure ‘duty free status’. When claiming NAFTA the importer is always in a position of ‘Buyer Beware’.
Importing a North American Made Vehicle – doesn’t mean it’s ‘Duty Free’
Ascertaining NAFTA in motor vehicles is a complex process as referenced in the case of Duhamel & Dewar Inc. vs. the Department of National Revenue. Just because you have an NAFTA Certificate signed by the United States Exporter doesn’t ensure ‘duty free status’. When claiming NAFTA the importer is always in a position of ‘Buyer Beware’, says Alan Dewar, Vice President Canadian Operations, GHY International
CBSA can request import duties up front or EVEN UP TO 4 YEARS LATER (perhaps after you no longer own the vehicle)
Importers should always exercise caution including a NAFTA indemnification clauses to minimize their risks on retroactive duty assessments
Be aware that when importing a vehicles there are 2 Canadian Government agencies that have regulations that must be met;
- Transport Canada – controlling the registration, recalls, etc. (which is really a hindrance to dealerships or organizations who buy vehicles for sale)
- Canada Border Services Agency (CBSA) import declaration purposes and taxation
Additional resources…….
We have worked with a partner who can add a LOT with respect to vehicles (challenges, regulatory elements, etc.) heading either north or southbound (including RIV process, Motorhomes, etc.) You can check out their offerings on this topic at:
Linkedin: Inspired Solutions International
Website: Inspired Solutions International
Key issue is global supply chains created intersection of compliance between sourcing for manufacturing purposes against export costing including declaration that goods were NAFTA qualifying.
Case in Point – NAFTA Regional Value Content
In North America the key event that started driving focus on Trade Agreements was the original Canada/USA Free Trade Agreement (FTA). That evolved into NAFTA which included Mexico along with Canada and the USA. One of the key components about declaring NAFTA status on goods that are imported or exported is the process of defining Regional Value Content (RVC)
Regional Value Content is simply the calculation of the percent of the value of a good that comes from manufacture/assembly in a NAFTA originating country. The are 2 methods to calculate the RVC; a Transaction Value Method or the Net Cost Method, but that is a topic for another day.
The case in point today relates to an aspect of why you need to consider an integrated trade compliance strategy. It comes from a North American manufacture of electrical transformers, Chapter 84 of the harmonized Tariff.
When this manufacture began exporting they went through the exercise and calculated their Regional Value Content. At that time the goods in question were 94% of RVC. Although the regulations suggest that you need to validate your RVC annually, the effort involved was extensive for this manufacture and they renewed for many years their NAFTA declarations by simply changing the date and providing it to their export clients.
Problem is they began to be challenged as all manufactures have been with global based sourcing in order to stay competitive, and this was never factored in to their NAFTA declarations. The risk of course is that by changing the sourcing or inputs they may no longer qualify for NAFTA benefits, thereby increasing their costs and potentially making their product non competitive in the markets the sell to.
To compound the risk, the issue only came to light when the US CBP requested a NAFTA verification audit. They have been doing this a lot lately because they know that manufactures are facing a global sourcing challenge and that leaves a large GAP in the past trade agreement declarations, especially when there are preferential duty rates as there are with the NAFTA program. This can lead to large financial penalties and other costs that the manufacture did not allow for on the original contract, thereby reducing or eliminating any profit related to that sale.
The risks are increased substantially if issues are found during an audit, especially with US CBP who take a rather black and white approach to mitigating the issues they find during an audit.
The outcome in this case is good news, but clearly a warning that something must change in the strategy used to manage global trade issues. The cut off for RVC content when declaring NAFTA preferential tariff’s is 60%, and while in this case the goods pre global sourcing started at 94%, the revised calculations came back saying the RVC was now 64%. So while the did not incur any financial issues related to RVC calculations on their NAFTA declarations, they are clearly very close to no longer qualifying for those extended trade benefits.
Bob Cowie, Vice President Consulting, GHY International says, “some products which seem very simple compared to an electrical transformer can be even less obvious if NAFTA benefits apply when you consider Regional Value Content.” He offers this advise, “as an example if you look at Chapter 39, Products made of Plastic as defined by the US HS Tariff, the regional value content rules are very clearly laid out for every product in that category, we find numerous mistakes because the assumption is made because a product was made in a NAFTA country from plastic pellets as an example, that it qualifies and the NAFTA benefits are built in to their costing, When doing a detailed evaluation it is often not applicable so caution should be used when making these declarations that you understand the RVC rules and how they apply to your products.”
Key issue is global supply chains created intersection of compliance between sourcing for manufacturing purposes against export costing including declaration that goods were NAFTA qualifying.
Does this sound like your organization? Could you use an integrated trade compliance strategy?
As a member of IE Canada we are pleased to share with you the following event that is coming to western Canada later this month, please read on for an outline of the event and registration information. Speakers for this event include Joy Nott, President of IE Canada, and Susan McDonald of Perseus Trade Solutions Inc.
Understanding Incoterms® 2010 & NAFTA Audit Workshops
IE Canada Incoterms 2010 & NAFTA Audit workshop Western Canada Series Brochure
As a member of IE Canada we are pleased to share with you the following event that is coming to western Canada later this month, please read on for an outline of the event and registration information. Speakers for this event include Joy Nott, President of IE Canada, and Susan McDonald of Perseus Trade Solutions Inc.
To raise your awareness before this event, Click here to watch a short video on these new Incoterms.
Sessions scheduled for the following dates and cities:
• November 15, 2010 – Winnipeg
• November 16 – Calgary
• November 18 – Vancouver
AM Session:
Effective January 1, 2011, Incoterms® 2000 will be replaced by Incoterms® 2010.
Incoterms® serve to allocate costs and responsibilities between buyer and seller and their use is expected to increase in drafting both international as well as wholly domestic contracts for the sale of goods. Incoterms® are considered by customs and tax authorities in conducting customs and tax audits and therefore a clear understanding of Incoterms and the implications of their use is critical by in-house counsel, CFOs, buyers, as well as those involved in customs, transportation and logistics functions. The changes from Incoterms® 2000 are intended to clarify the terms and the obligations they impose on the vendor and purchaser in each case and to expand the use of the terms for use in domestic transactions not involving any import/export of goods. Certain terms have been eliminated and new terms added. There are better distinctions between the terms, and cargo security obligations have been incorporated into the terms, among other changes. This workshop will: review the Incoterms® rules; review the changes; discuss best practices in using Incoterms® on contract negotiation and drafting; identify potential pitfalls; and discuss the interpretation of Incoterms® in Canadian law
PM Session:
Most importers and exporters are eager to take advantage of the duty relief granted under the North American Free Trade Agreement (NAFTA), but remain unaware of the risks and liabilities associated with claiming the NAFTA tariff treatment. Many still do not know that more than 50% of NAFTA Certificates of Origin either contain errors which render them invalid or are not supported with the necessary documentary evidence. With NAFTA origin audit activity on the rise, more importers are being shocked by assessments of financial penalties and/or retroactive duty and GST, while some Canadian manufacturers and exporters are losing their competitive advantage in the North American market. In this down to earth, easy to understand session, we’ll cover the following:
- What importers and exporters should expect during a NAFTA audit conducted by either the Canada or U.S. Customs Agencies.
- Learn from the mistakes of others – Common errors made on Certificates / Statements of Origin, and during NAFTA audits.
- Sharing NAFTA strategies used by manufacturers, exporters and importers.
- Do you really know how your Customs Broker is handling this issue? Are you at greater risk than you thought?
Registration Options:
Sessions scheduled for the following dates and cities:
• November 15, 2010 – Winnipeg
• November 16 – Calgary
• November 18 – Vancouver
Online: www.iecanada.com
By Phone: 416-595-5333 x 37 or 1-866-616-2243 x 37
By Fax: 416-595-8226 (attention: Jesse Arsenault)
By Mail: 160 Eglinton Ave. E, Suite 300, Toronto, ON, M4P 3B5 (attention: Jesse Arsenault)
John presented at at the 79th Annual Canadian Association of Exporters and Importers (CAIE) conference on the topic mentioned above. It was a 3hr session he co presented with John Priecko, President and Managing Partner of Trade Compliance Solutions.
What’s in a Tweet?
I received a tweet from John who tweets under the name @Tradelawyer that said, “Managing the Relationship Between Canadian and US Export Controls and Economic Sanctions http://ow.ly/31qpI Presentation to CAIE 79th Annual”
John presented at at the 79th Annual Canadian Association of Exporters and Importers (CAIE) conference on the topic mentioned above. It was a 3hr session he co presented with John Priecko, President and Managing Partner of Trade Compliance Solutions.
I recommend you follow John on twitter here.
The session was listed as a Canada and US Export Controls Workshop in the CAIE conference brochure:
The experts all agree, exports will help every nation rise out of the current economic slowdown. The Canadian government is encouraging Canadian companies to export and seek new markets abroad for their goods and services. The Obama administration has set a goal of doubling US exports over the next five years. One of the ways President Obama proposes to achieve this goal is to reform US export controls to reduce the regulatory burden in a manner consistent with national security. Exports and compliance with export regulations have never been in greater focus than they are right now. Many Canadian compliance mangers believe that the products they export are not covered by export controls, which can be true if you are only looking at Canadian regulations. What if the product you are exporting is of US origin, or contains components that are of US origin? You need to become familiar with the US re-export regulations or potentially find yourself facing an unexpected compliance issue with very serious consequences. This session will deal with issues such as:
- Today’s export control regimes and how they may affect your commercial activities
- The basics needed to assess the state of your export control compliance
- Effective solutions to bring a company into compliance
- The Canadian Export Controls Handbook 2009
- When US re-export rules apply to you
- What the US Export Administration Regulations (EAR) are
- The definition of “ECCN” and why you need to know what it means in relation to all US made goods you have in your inventory
While I was unable to attend the event, it was interesting to note that John attributes part of the reasons driving this to; “Canadian companies are now more concerned than ever before about whom they deal with, where their products and technology end up, and who uses their services.” In other words they understand that Trade Compliance is important. John does an excellent job in his slide deck outlining all the many export trade issues that a exporter must be concerned with in North America.
So Who is John W. Boscariol
John Boscariol is one of Canada’s leading trade attorneys and is ranked among the top 25 international trade lawyers in the world by Expert Guides to the World’s Leading Lawyers – Best of the Best and is recognized as a leader in the field of international trade law in numerous other legal directories, including Chambers Global (WTO/International Trade – Tier One) and others. He will walk you through the maze of Canadian export controls to help you better understand where your company stands. You can more information on John here.
Information Presented here with permission of John Boscariol.
Aberdeen Group’s survey of 136 global exporters and importers in August and September 2010 reveals that trade compliance teams are actively revamping and augmenting their Global Trade Management (GTM) and specifically their Global Trade Compliance (GTC) programs to stay current with supply and demand fluctuations, growing global operations, increasing operational complexity and risk, and trade lane changes.
(Courtesy of Supply Chain Brain)
Aberdeen Group’s survey of 136 global exporters and importers in August and September 2010 reveals that trade compliance teams are actively revamping and augmenting their Global Trade Management (GTM) and specifically their Global Trade Compliance (GTC) programs to stay current with supply and demand fluctuations, growing global operations, increasing operational complexity and risk, and trade lane changes.
The federal government has launched a $1.1 million lawsuit against Canadian clothing exporter, saying it illegally applied North American Free Trade Agreement exemptions to clothes that were actually made from Taiwanese fabric.
US Government Sues Company Over NAFTA Exemptions
In a recent article on the Canadian Apparel Federation website, they had a piece that emphasizes the impact of not considering the benefits of an integrated trade compliance strategy. Here is an excerpt of that article.
The Company exported to the U.S. clothes made from Taiwanese polyester…while claiming they “originated” in Canada. The alleged mis-classifications allowed The Company to completely avoid duties under a NAFTA provision that exempts Canadian goods“… The government asked the court to force the company to pay duties of $361,000, plus a penalty of about $766,000 … The suit was filed under 19 U.S.C. § 1592, which covers penalties for duties withheld by “fraud, gross negligence and negligence.”
“Textiles is one of the most complex areas of International Trade Compliance” says Bob Cowie, Vice President of Consulting at GHY International. ” It is hard to believe a firm with this type of volume is not aware of TPL (Trade Preference Levels) requirements. Somehow you would think their Canadian or USA international trade service providers would have made them aware of TPL since they need to file declarations (Multi Country Textile Declaration) indicating the steps and origin of production products.
Bob Cowie explains the process in this way, Textiles are very complex because the declarations require detail back to the origin of the fiber’s that fabric is made from. The fiber’s through to completed fabric is only part of the equation. The garments must be cut and sewn in a NAFTA (North American Free Trade Agreement) country to qualify. when exporting you have this audit trail and to qualify for TPL you must secure a Certificate of Eligibility.
The intersection of import requirements and export requirements are very clear in this issue. The use of an integrated trade compliance strategy would have ensured that the import requirements were understood in conjunction with the export requirements, thereby mitigating the potential risk of a $1.1 million dollar issue.
This is the first in a series of “case in point” articles that we hope to share and bring clarity in real terms to the case for an integrated trade compliance strategy.
