NAFTA Verification in the United States

This entry examines the verification process under the North American Free Trade Agreement (NAFTA).

Verifications

Verifications is the process used to by the customs authorities to determine whether a good qualifies as NAFTA originating when a preferential duty rate has been claimed.

Main rules:

• Article 505: Records
• Chapter 8 – Origin Verifications
• 19 CFR 181.54 – Verification of claim for drawback, waiver or reduction of duties.
• 19 CFR 181.71-76 – Denial of preferential tariff treatment dependent on origin verification and determination.

Authority to Conduct Verifications

Article 506 of the North American Free Trade Agreement (NAFTA) sets out the authority for each Party to the Agreement (Canada, Mexico and the United States) to conduct verifications of the books and records of exporters and/or producers located in the territory of another Party. The exporters and/or producers that may be subject to such a review are those whose goods have been certified as originating by means of a Certificate of Origin and for which preferential duty treatment has been claimed.

Objective of NAFTA Verifications

The overall objective of an exporter or producer verification is to confirm that products covered by a Certificate of Origin completed by the exporter or producer qualify as originating in accordance with the NAFTA.

The NAFTA allows each Party’s customs administration various methods for determining if a good certified as originating qualifies by meeting the NAFTA rules of origin requirements. Such methods may include written questionnaires to be completed by the exporter or producer, verification letters requesting information from the exporter or producer and visits to the exporter’s or producer’s premises. A verification could be conducted by any or all of these methods.

Verification Program Objectives

The verification program objectives are as follows:

• Non-qualifying operations – To ensure that a good is not considered to be originating, because of mere dilution with water or another substance, or because of a production or pricing practice designed to circumvent the rules of origin as set out in Chapter 4 of the NAFTA.
• Transshipment – To verify that an originating good (1) is not withdrawn from customs control outside the territory of the NAFTA countries, and (2) does not undergo further production or any other operation outside the territory of the Parties other than unloading, reloading, or any other operation necessary to preserve it in good condition, such as inspection, removal of dust that accumulates during shipment, ventilation, spreading out or drying, chilling, replacing salt, sulphur dioxide or other aqueous solutions, replacing damaged packing materials and containers and removal of the units of the good that are spoiled or damaged and present a danger to the remaining units of the good, or to transport the good to the territory of the importing Party.
• Tariff classification change – To ensure that all non-originating materials used in the production of a good are sufficiently transformed in the NAFTA territory so as to undergo the necessary tariff classification change as required by the specific rule of origin applicable to a good, and to ensure that the finished good and the non-originating materials are properly classified.
• Regional value content – To verify that the regional value-content requirement, calculated using either the transaction value method or the net cost method, has been met.
• Tariff Treatment – To verify that the rate of duty applied to importations of a good is correct.

Verification Scope

The scope includes: a) the verification period, and b) the goods subject to verification.

The verification period is established upon initiation of the verification. The exporter is responsible for keeping the records relating to the origin of goods for at least 5 years after the date the Certificate of Origin was signed. The scope of the verification will be those goods certified as originating by the exporter, for which NAFTA preferential tariff treatment was claimed upon importation into the territory of the Party.

Location

The location(s) of the verification(s) may include the site where the goods or materials were produced, the place where the records are stored, and/or the site from which the goods or materials were distributed.

Observers

The NAFTA stipulates that the exporter or producer who is subject to an origin on -site verification visit, has the right to designate two observers to be present during the visit. The designation of observers is permitted provided that the observers do not participate in the verification other than as observers and that the failure of the exporter or producer to designate observers does not result in the postponement of the visit.

Determinations

The exporter and/or producer will be provided a written origin determination as to whether the good reviewed qualifies as originating based on the results of an origin verification, in accordance with Article 506(9) of the NAFTA. If it is determined that the good does not qualify as an originating good, the written determination will include a statement of the right of the exporter and/or producer to submit a response to the determination within a specific period of time before the determination will take effect.

Confidentiality of Business Information

Article 507 of the NAFTA requires that confidential business information collected from the exporter and/or producer be regarded as protected, and be used only for the administration and enforcement of determinations of origin, and of customs matters.

NAFTA Verification Audit Manual

Introduction

The NAFTA Verification/Audit Manual is developed to support the verification of goods for which NAFTA preferential tariff treatment has been claimed comply with the rules of origin.

This trilateral guide details the recommended technical verification framework to be observed by each party when conducting NAFTA verifications. This trilaterally agreed upon manual also provides significant automobile information.

Scope

This manual covers subjects which are related to the process and the recommended procedures pertinent to conducting verifications under the provisions of the NAFTA. The manual does not deal specifically with interpretations and rulings on origin, as these subjects are covered by other directives issued by each Customs Administration. This manual explains the use of various reports, forms, and working papers that are required for the audit activity.

Purpose

With the entry in force of the North American Free Trade Agreement (NAFTA), the Parties have experienced a significant increase in the trade of goods and services between them. The three Customs Administrations have agreed that the Rules of Origin as set out in Chapter Four of the NAFTA and the NAFTA Rules of Origin Regulations (the Regulations), define the framework to be observed by exporters/producers in order to have their goods qualify as “originating goods”, and be eligible for a NAFTA preferential tariff treatment when imported into the territory of any of the other Parties to the Agreement.

As a result, it has become important for the Customs Administration of each Party to verify that the goods for which NAFTA preferential tariff treatment has been claimed comply with the Rules of Origin.

In this respect, the three Customs Administrations (Mexico, Canada and the United States) have considered that the establishment of verification guidelines is important and useful. The Customs Administrations of all Parties have consulted during the development of this manual and these guidelines include general, examination and reporting standards for NAFTA origin verifications.

This manual is intended to be used by: Origin Audits Unit of Revenue Canada (Canada); Direction of International Audit of the Ministry of Finance and Public Credit (Mexico); and, the offices of Regulatory Audit and Field Operations, U.S. Customs Service (United States). However, portions of this manual may also be used by other areas within each Customs Administration as deemed appropriate.

The main purpose of this document is to establish the recommended technical verification framework to be observed when conducting NAFTA verifications. The application of the provisions included therein should take into consideration the circumstances involved in each verification and be adapted accordingly. It is understood that this document will be updated on a continual basis.

This verification manual presents the audit process and the recommended verification procedures with which an auditor or officer must be familiar in order to conduct a verification and perform other related tasks for the North American Free Trade Agreement (NAFTA). This manual is intended to provide the user with a clear understanding of the verification function. Reference to, or usage of, the manual in daily activities will result in verifications and other related tasks being done in an efficient and uniform manner, that is consistent with established policies and procedures.

The Customs Administration of each Party has consulted in the writing of this manual, and a similar manual has been developed for their own Customs Administration. It is expected that by having a similar verification manual for all Customs Administrations there will be a uniform and consistent application of verification procedures when conducting rule of origin verifications under the NAFTA.

Chapters

This manual considers all types of verifications, but focuses on the on-site audit process for exporter verifications where the regional value content requirement, tariff change requirement, or both, must be met. It should be noted that this manual provides verification procedures that are recommended by all Parties.

There are seven chapters contained in this manual. Included is an annex at the end of most chapters. The Annex contains information for the particular chapter that may differ among the Parties. The chapters within this U.S. version of the NAFTA Verification Manual includes information unique to the U.S. Information differing in Mexico and/or Canada, is included at the end of the chapter in the Annex.

The highlights for each chapter are as follows:

• Chapter 1, Purpose of the Manual and Legislative Framework, points out the need for this audit (verification) manual, and refers to the legal framework by which NAFTA verifications are conducted.
• Chapter 2, Co-operation Among the Parties, discusses the exchange of information and communication between Customs Administrations subject to NAFTA.
• Chapter 3, Auditing Standards, demonstrates how the Generally Accepted Auditing Standards have been incorporated into each Party’s audit (verification) process.
• Chapter 4, Objectives of NAFTA Audits (Verifications), outlines the objectives of NAFTA exporter on-site verifications as well as the verification program objectives for this type of verification.
• Chapter 5, Scope of the NAFTA Audits (Verifications), describes the parameters of coverage for NAFTA exporter verifications including the verification period, coverage, importer identification, and assessment/liquidation period. This Chapter also includes recommended verification procedures that are identical and uniform for all Customs Administrations.
• Chapter 6, Methodology for Rules of Origin Audits (Verifications), explains the verification process for NAFTA exporter verifications.
• Chapter 7, NAFTA Working Groups, refers to the contact areas within the Customs Administration of each Party with respect to verification issues and their relationships with the NAFTA Working Groups.

Origin Verifications

Generally

The NAFTA authorizes the importing country’s customs administration to conduct verifications of the exporter or producer to determine whether goods qualify as originating as certified by the Certificate of Origin. Verifications are principally conducted by written questionnaires and verification visits. Other methods of verification can be done by telephone, facsimile or other means.

Questionnaires

Questionnaires may be sent by the importing country to an exporter/producer who executed a Certificate of Origin. They are used to help determine if the exporter’s/producer’s goods meet the NAFTA rules of origin. The information requested on the questionnaire should be information used by the exporter/producer to determine whether its goods qualify for NAFTA preferential treatment before signing the Certificate of Origin. If insufficient information is provided on the questionnaire to make a determination of origin, a Customs officer may obtain additional information by undertaking a customs verification visit. After the customs authority of the importing country establishes whether the good originates, it must issue a written determination to the exporter/producer indicating its findings.

Verification Visits

Verification visits are performed by the customs administration of the importing country in the territory of the exporting country, and are used to verify that the exporter’s/producer’s goods meet the NAFTA rules of origin.

Prior to conducting a verification visit, the customs administration must provide written notification of its intention to conduct the visit to the exporter or producer whose premises are to be visited, and to the customs administration and the embassy of the NAFTA country in whose territory the visit will occur. Written consent from the exporter or producer whose premises are to be visited must be obtained prior to conducting the visit. The exporter or producer whose goods are the subject of a verification visit has the right to designate two observers to be present during the visit.

If an exporter or producer of goods that are subject to a verification of origin does not consent to the verification visit within 30 days of receiving notification of the proposed visit, or does not cooperate during the visit, preferential NAFTA tariff treatment may be withdrawn from the goods. The exporter or producer will still have the right of review and appeal against this determination.

An origin determination is made upon completion of a verification visit. This determination can be reviewed and appealed in the importing country. Any confidential business information that is collected may only be disclosed to authorities who are responsible for the administration and enforcement of determinations of origin, and of customs and revenue matters.