On July 1, 2020, the Canada-United States-Mexico Agreement (“CUSMA”) will come into force. This bulletin looks at changes to the origin rules under CUSMA, and how companies can begin to understand the impact of those changes on their operations.
Origin rules determine which products qualify for preferential rules under trade agreements, and how exporters and manufacturers certify goods as qualifying. In both areas, CUSMA brings changes that importers and exporters need to understand and plan for.
There is a significant liability associated with getting things wrong. Exporters and manufacturers who improperly certify goods for preferential treatment risk being held liable for the additional duty cost their customers will face if the goods don’t qualify. Similarly, importers who rely on a certification of origin to claim preferential treatment will be liable for retroactive duties and taxes if the goods are found to be non-qualifying. Given the potential liability for improper certification, it is crucial, not only to understand the certification process, but to have contract clauses that clearly allocate that risk.
Understanding the Changes
Given the number of origin rule changes from NAFTA to CUSMA, one should not assume that if goods qualified under NAFTA, they will still qualify under CUSMA. There have been significant changes in the rules affecting products in sectors such as automotive, pharmaceuticals, health care, information technology, cosmetics and chemicals. Some changes are industry specific, such as the new labour value content requirement for automotive vehicles. Other changes are across the board, such as the new provision regarding “recovered materials”. Further, in certain circumstances, the method by which regional value content is calculated has changed.
CUSMA contains new origin rules for goods that are imported as sets and are classified as sets through the application of rule 3 of the General Rules for the Interpretation of the Harmonized System. In addition there are new rules governing the calculation of regional value content, accumulation, and recovered materials.
As one of the first steps in preparing for CUSMA, companies that have either certified their goods as originating under NAFTA, or who have made NAFTA preferential claims when importing goods, should review the new rules of origin under CUSMA for the specific goods in question. You do not need to become a CUSMA expert, but you do need to understand how the new rules affect your products. In some cases, the rule changes may be so significant that internal costing or accounting systems need to be adjusted to meet the new requirements. System changes are never simple, and the time period in which businesses have to make changes in advance of the new CUSMA rules is short.
Under NAFTA, a formal Certificate of Origin, completed by the manufacturer or the exporter, was the only acceptable way of certifying the origin of qualifying goods. CUSMA has replaced that requirement with a broader range of options where the certifying company provides a minimum set of data elements that may be contained in any document. In addition, an importer may now certify the origin of goods it imports. The required data elements are as follows:
- Statement of whether the certifier is the exporter, producer, or importer;
- Certifier’s name, title, address, telephone number, and email address;
- Exporter’s name, address (must be in the country of export), e-mail address, and telephone number if different from the certifier (not required if the producer is the certifier does not know the identity of the exporter);
- Producer’s name, address (must be the place of production of the certified goods), e-mail address, and telephone number, if different from the certifier or exporter. Can put “various if there are multiple producers. If the producer information is confidential, state “Available upon request by the importing authorities”;
- The importer’s name, address (must be in a Party’s territory), e-mail address, and telephone number, if known to the certifier;
- Description and HS tariff classification of the good to the 6-digit level;
- If the certification of origin covers a single shipment of a good, the invoice number related to the exportation, if known;
- The origin criteria under which the good qualifies;
- Include the blanket period if the certification covers multiple shipments of identical goods for a specified period of up to 12 months; and
- Certifier’s authorized signature and date accompanied by the following statement: “I certify that the goods described in this document qualify as originating and the information contained in this document is true and accurate. I assume responsibility for proving such representations and agree to maintain and present upon request or to make available during a verification visit, documentation necessary to support this certification”.
The abandonment of the need for a formal certificate makes life easier for the customs authorities, but creates serious issues for importers and opens the door to more disputes involving responsibility for improper certification.
Should Importers Certify Origin?
While CUSMA states that an importer may certify goods as CUSMA eligible, we would not recommend they do except in the most exceptional circumstances. Importer’s will not normally be able to support their certification of origin without access to the manufacturer’s and/or the exporter’s books and records. As a result, while the importer may be able to “certify” that goods qualify, it will likely be impossible to prove that qualification in an audit situation without the full cooperation of the manufacturer and/or exporter, and there is no guarantee that cooperation will be extended.
Consequently, and except for the most exceptional cases, importers should decline, to certify the origin of products they import.
Draft Better Contracts
Under NAFTA, a manufacturer or exporter who issued a formal Certificate of Origin was engaging his liability in a clear and undisputable way. He was certifying that the goods described qualified for NAFTA tariff treatment in accordance with the NAFTA rules. If the certificate was later rejected by customs, and additional duties and taxes were assessed, the importer had an almost cast-iron argument that the exporter had failed to deliver what he had promised. In those circumstances, the exporter rarely had any choice but to compensate the importer for the additional duties and taxes.
Under CUSMA, the minimum data set for certification can appear on “an invoice or any other document”. The combination of a minimum data set and no requirement that the data set be on any specific document imposes an additional burden on importers to ensure all the required information has been provided. It is also likely to lead to an increase in incomplete certification. Importers can protect themselves from the consequences of improper certification by insisting on a stand-alone certification from the exporter combined with contract language that clearly places responsibility for improper certification on the manufacturer or exporter, the entities best able to manage that risk.
Importers and exporters should resist the temptation of thinking that CUSMA is simply business as usual under a new name. There are enough differences between NAFTA and CUSMA to raise important issues both in terms of qualifying for preferential treatment under the new agreement and in terms of new area of potential liability.
With less than two months before CUSMA comes into force, importers and exporters should be seeking to understand how the changes set out in CUSMA will affect their businesses.