North America: Game On! USMCA Preferential Tariff Treatment: Are You Ready?

In brief

Pursuant to formal notifications issued by Mexico, Canada and the United States ("Parties"), the United States-Mexico-Canada Agreement, referred to as the USMCA in the United States, the CUSMA in Canada, and the T-MEC in Mexico, will enter into force on July 1, 2020. The USMCA (for brevity we refer to the agreement only as the USMCA) will replace the North American Free Trade Agreement (NAFTA), a free trade agreement that has been in place among the Parties for more than 25 years.


Contents

Most provisions in the USMCA will take effect upon entry into force. Consequently, it is important that businesses take immediate steps to review and understand the implications of the implementation of the USMCA, and the termination of the NAFTA, effective 1 July 2020. While many of the principles and rules in the USMCA are similar to those found in the NAFTA, there are important differences that must be taken into account to ensure that the benefits of the USMCA can be maximized. Furthermore, given the significant disruptions to businesses and their supply chains caused by the COVID-19 pandemic, immediate action is required by businesses to assess the impact of the implementation of the USMCA taking into account such supply chain changes.

As of the date of publication of this client alert, the USMCA uniform regulations have not been published by the parties. The uniform regulations, which will need to be adopted by the laws or regulations of each Party, will be a comprehensive and detailed set of rules that are agreed to by all parties. The uniform regulations will provide further guidance as to how the USMCA rules of origin are to be applied.

This client alert focuses on the implications of the USMCA that relate to the importation of goods. Set forth below are some common questions and their answers, which are worthy of your immediate attention:

My goods qualify as originating under the NAFTA. Does it mean my goods will automatically qualify as originating under the USMCA? 

Businesses cannot assume that goods that were originating under NAFTA will continue to originate under the USMCA. While broadly the USMCA rules of origin are similar to the NAFTA rules of origin, there are important differences that will impact whether or not a good is originating under the USMCA. For example, significant changes have been made to the rules of origin applicable to the automotive and textile sectors.

Should I conduct a rules of origin analysis for goods previously determined are not originating under the NAFTA and can you give examples of how changes to the rules of origin might change origination status? 

Yes, in certain circumstances goods that were not originating under the NAFTA may be originating under the USMCA rules of origin.

One key change is with respect to the de minimis rule, which provides that if the value of all the non-originating materials used in the production of a good that do not undergo the specified change in tariff classification is less than a specified percentage, the good nevertheless is deemed to be an originating good. The de minimis threshold of 7% under the NAFTA has been raised to 10% in the USMCA. This increase by three percentage points will mean that certain goods that did not qualify as originating under the NAFTA could qualify as originating under the USMCA.

The USMCA also clarifies that when performing a regional value content (RVC) calculation, the originating content in a non-originating material and the value of processing that non-originating material in one of the parties can be taken into account. While the uniform regulations have not been released, it is expected that specific tracing and documentation requirements will have to be met in order to rely on this rule.

Even if the relevant rules of origin have remained unchanged, certain facts related to your supply chain, such as the location and identities of your suppliers, might have changed, which could result in a change to the originating status of the goods. For many businesses, a comprehensive review of the originating status of its goods under the NAFTA may not have been done for years. Further, many businesses recently had to implement, or are considering implementing, changes to their supply chains due to the COVID-19 pandemic. These changes to your supply chain must be taken into account to determine the originating status of your goods under the USMCA.

Even if my goods are duty free under the Most-Favoured-Nation Tariff, is there a benefit to claiming the goods originate under the USMCA rules of origin?

Yes, there is a benefit. Goods that originate under the USMCA rules of origin and are imported into the United States where a claim for preferential tariff treatment is made, may be imported without the payment of the US merchandise processing fee. Similarly, where originating goods are imported into Mexico where a claim for preferential tariff treatment is made, the goods may be imported without the payment of the Mexican customs processing fee.

Can I continue to issue or rely on NAFTA Certificates of Origin?

NAFTA Certificates of Origin (e.g., CBP Form 434 in the United States) cannot be used to certify that goods qualify as originating under the USMCA. Therefore, importers, exporters, and producers must obtain or prepare new USMCA certifications of origin such that importers can start making preferential tariff treatment claims as early as July 1, 2020.

The USMCA does not prescribe or require a specific format for the certification of origin. However, the USMCA states that a certification of origin for USMCA purposes must have certain minimum data elements and can be an invoice or other document. While under the NAFTA only the exporter could issue a certificate of origin, under the USMCA, any of the importer, exporter, or producer can issue a certification of origin on the basis of information, including documents, that demonstrate the good is originating. The USMCA provides that Mexico has up to three years and six months from the date of implementation (that is, until January 1, 2024) to allow importers to issue the certification of origin.

However, documentation requirements to support a certification of origin have changed from the NAFTA. An importer, if it wishes to issue the certification of origin, cannot certify that the goods originate on the basis of a certification from the producer; it must have "information, including documents, that demonstrate the good is originating," essentially a rules of origin analysis. However, an exporter can issue a certification of origin based on the "information, including documents, that demonstrate that the good is originating" or the producer's written representations, such as a certification of origin. Therefore, in order for an importer to issue its own certification of origin, which the importer would rely upon when claiming preferential treatment, the importer must have the documentation to support the rules of origin analysis, and cannot simply certify the goods originate based on a certification from the producer or exporter. Unless the importer is related to the producer, it may be very difficult for the importer to obtain the details of the rules of origin analysis. This means, as a practical matter, for most importers, a certification of origin from the exporter or producer will still be required.

Therefore, importers who wish to claim preferential tariff treatment under the USMCA should begin to obtain the requisite supporting documents from their suppliers as soon as possible. Producers who wish to certify the goods they produce are originating should begin the process of obtaining certifications from their suppliers for the materials they acquire, which they use to produce the finished goods, so that they can begin to conduct and complete the USMCA rules of origin analysis before July 1, 2020 and be able to issue certifications of origin for USMCA purposes. 

We make preferential claims after importation (and not at the time of importation). Would the same rules apply?

US importers might want to consider making preferential tariff treatment claims at the time of importation (instead of after importation) under the USMCA. Similar to the NAFTA, the USMCA permits retroactive claims to be filed after importation. However, unlike under the NAFTA, only duties are refunded, and not the US merchandise processing fees, for claims filed after importation.

Can I continue to rely on NAFTA Advance Rulings?

The NAFTA rulings will no longer be valid and cannot be relied upon for USMCA purposes. You should consider applying for USMCA advance rulings.

I have contracts with suppliers which contain indemnity provisions should goods certified as originating under the NAFTA actually do not qualify as originating. Can I continue to rely on such contract provisions?

Importers and producers, in certain instances, were able to obtain contractual indemnifications from
their suppliers with respect to the originating status of the goods purchased. These contractual indemnifications should be revised to reflect the USMCA rather than the NAFTA. Importers and producers who have never obtained these indemnifications may also wish to consider requesting these indemnifications for USMCA purposes.

For imports into Mexico and Canada made via courier or postal services, I have been claiming preferential treatment for de minimis value imports. Will the de minimis rules change as a result of the USMCA?

Under the USMCA, the thresholds that apply to allow the imports of certain goods into Canada and Mexico on a duty and value added ("VAT") free basis are increasing:

  • Currently, most goods that have a value for duty not exceeding CDN $20 may be imported into Canada through the postal or courier streams from any jurisdiction without the payment of customs duties and the Canadian VAT, the Goods and Services/Harmonized Sales Tax (GST/HST). As a result of the USMCA implementation, goods exported from the United States or Mexico to Canada via courier, regardless of their origin (provided the goods have entered into the commerce of the United States or Mexico prior to exportation to Canada), may be imported into Canada duty-free if the value for duty does not exceed CDN $150, free of GST/HST if the value for duty does not exceed CDN $40, and certain requirements are met.
  • Similarly in Mexico, goods that are shipped via courier or postal services may be imported duty and VAT free, regardless of the country of origin, if the value does not exceed USD $50 and certain requirements are met. As of July 1,. 2020, imports via courier from the United States or Canada, regardless of their origin, may be imported into Mexico duty and VAT free if the value of the goods per consignee does not exceed USD $ 50 and duty-free if the value does not exceed USD $117.

Therefore, exporters who are shipping goods via postal services to their customers in Canada and Mexico from the other Parties may wish to consider switching to using couriers to be able to realize the duty and VAT savings given the higher qualifying thresholds implemented as a result of the USMCA.

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We hope this is helpful. Since the initial NAFTA negotiations began over twenty-five years ago, Baker McKenzie has had a unique, multi-disciplinary and multi-jurisdictional team in place to assist clients with NAFTA (and now USMCA) issues. If you have any questions, please contact one of the individuals listed in this page, or your primary Baker McKenzie contact.
 

 


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