During the past decades, retailers through the North America Free Trade Agreement (NAFTA) region have established significant supply chains benefiting from the NAFTA provisions: mainly from the fact that products originated in the region of the treaty (United States of America, Mexico and Canada) may be distributed by applying preferential duties upon its importation into the three countries.

Preferential duties (either tariff reductions or exemptions) established under NAFTA have allowed retailers to significantly offer a wider variety of products reducing their production and importation costs. Ultimately, NAFTA region consumers have benefited from lower prices when purchasing final products. 

However, it is not that simple. The tariff reductions or exemptions mechanism (referred to as preferential tariff treatment) only works when authorities in each one of the NAFTA countries get evidence to verify that products entering into their countries from another country within the NAFTA Region are originating from such country.

Rules of origin

As it is established under NAFTA, certain rules apply to qualify a product as originating from the region upon its importation into the NAFTA countries. Such rules are known as rules of origin. NAFTA provides for general rules of origin and specific rules of origin. Only when a product complies with such rules, importers may benefit from tariff reductions or exemptions upon the importation of the product. 

Applicable rules of origin could be easy or complex, depending on whether a product is wholly obtained in a NAFTA country (products extracted from the soil, as minerals; or harvested as agricultural products) or result of a production process that might either result from the use of wholly obtained products, non-originating materials, or a combination of both. Rules become more complicated and stringent when it comes to protecting certain productive sectors within each NAFTA country. 

Only when a particular product complies with such a set of rules, it might be considered that such good qualifies as a NAFTA originating product, and the importer of such good might benefit from tariff exemptions or reductions upon its importation into one of the three countries.

NAFTA provides, as an obligation of the importer, to have at the moment of importation a NAFTA certificate of origin issued by the exporter of the products (an exporter might be a producer or have acquired the NAFTA products from a third producer). The certificate of origin will prove the NAFTA origin of the goods upon importation. There is a specific format established under NAFTA for the issuance of a certificate of origin.

Although it seems pretty easy to issue a certificate of origin to distribute products within the NAFTA region, so the distributor may apply preferential duty rates upon their importation into one of the three countries, interested parties must be aware that NAFTA requires not only the completion and delivery of a certificate of origin but for such a certificate to be valid. 

Record keeping

An exporter or a producer that completes and signs a NAFTA certificate of origin shall maintain in its territory, for at least five years after the date on which the certificate was signed, all records relating to the production and origin of a good for which preferential tariff treatment was claimed by an importer in the territory of another NAFTA country.

Records to be kept by exporters or producers that are requested by customs authorities when conducting a NAFTA origin audit include evidence associated with: (i) the purchase of, cost of, value of, and payment for, the product that is exported; (ii) the purchase of, cost of, value of, and payment for, all materials, including indirect materials, used in the production of the product that is exported; (iii) the production of the product; and (iv) compliance with the applicable rules of origin.

An importer claiming preferential tariff treatment for a good imported into a NAFTA country shall maintain, for at least five years after the date of importation of the good, all the documents relating to the importation of the good including the certificate of origin.

Verification of origin

It is worth noting that under NAFTA, the customs authorities of any of the three countries have faculties to conduct verifications to confirm the origin of goods imported to their country, solely by means of: (i) written questionnaires to an exporter or a producer, (ii) visits to the premises of an exporter or a producer to review the records referred and observe the facilities used in the production of the good, (iii) written requests for particular information or documents; or (iv) such other procedure agreed to by the NAFTA countries.

The way customs authorities conduct their NAFTA origin verification faculties may vary in each one of the NAFTA countries. In the case of Mexico, since NAFTA entered into force and effect, the origin verifications conducted by the Mexican customs authorities have evolved into more strict and formalistic procedures. 

What to expect

Currently, Mexican customs authorities would only confirm that a particular product is NAFTA originating if exporters or producers deliver evidence demonstrating not only the origin of the materials used in the production process and the compliance with rules of origin (tariff code shift or regional value content), but that such specific materials purchased from a particular supplier with certain characteristics and price were the ones incorporated in the products sold and exported to Mexico for which a preferential tariff treatment was granted to the importer or distributor.

During the verification procedure, Mexican authorities would request not just records pertaining to the purchase of materials and to the sale of the finished products to an importer in Mexico, but also records pertaining to the inventory of materials, purchase orders of Mexican importers, production orders related to such production orders including consumption reports of the materials, production costs, as well as a detailed explanation of the production process.

Therefore, it is highly recommendable that upon the establishment of sophisticated supply chains of materials and finished products destined to retail within the NAFTA region, producers, exporters and distributors take care of incorporating NAFTA compliance clauses into their manufacturing and distributorship agreements, obligating themselves to issue valid certificates of origin only when there is evidence to support their NAFTA originating character and to keep the proper records available upon request of the competent customs authorities. 

The foregoing since whether not proving that certain imported goods into Mexico are NAFTA originating, customs authorities might determine as a consequence of their verification faculties that the importer omitted importation duties, importation value added tax and customs processing fees. Some other fines might apply if the goods are subject to antidumping quotas and NAFTA origin is not proven. In Mexico, the assessment may include operations for the previous 5 years (statute of limitations).

What about the revised text of the USMCA?

For purposes of this note, it is relevant to inform that under the revised text of the United States-Mexico-Canada Agreement (USMCA), certificates of origin will not have to comply with a prescribed format as happens currently with NAFTA. Certificates of origin may be provided in an invoice or in any other document (i.e. transportation bill, packing list, etc.). Even certificates of origin may be completed not only by exporters or producers, but also by importers.

Such provisions may facilitate the process of issuing a certificate of origin and to provide a document at customs, but interested parties must not set aside their obligation to demonstrate such origin upon verification of the customs authorities. In the particular case of importers issuing the certificates of origin, such importers will be the ones obligated to keep the proper records to prove the NAFTA origin of the products; meaning that they will have to gather such information and documents from the producers of the products. It is worth mentioning that the revised text of the USMCA accepts the use of electronic records, provided that such records can be promptly retrieved and printed.

Moreover, when the certificate of origin is issued by a producer that is not the exporter of the product, importers may be required to demonstrate that the products certified as originating did not undergo further production or any other operation other than unloading, reloading or any other necessary to preserve the product in good condition or to transport such product.

In addition, importers may be required to demonstrate that a product in transit or transhipment through a third country was kept under customs controls with the corresponding transportation, storage and/or customs control documents.

More relevant modifications are included in the text of the revised USMCA that producers, distributors and retailers may find worthwhile to further analyze to determine the effect such changes might have on their current supply chain.