Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Verifications Under NAFTA Article 506 Are All The Rage

Recently, I have been informed of two NAFTA verifications being conducted by the Canadian Government in order to verify the correctness of NAFTA certificates of origin provided by U.S. companies and one NAFTA verification being conducted by the U.S. Government in order to verify the correctness of NAFTA certificates of origin provided by a Canadian company. This is a good mechanism to ensure the proper information has been provided in certificates of origin and to collect duties where NAFTA preferential treatment was claimed by mistake. It is acceptable for governments to ensure compliance with trade laws and make assessments where the laws have not been followed.

NAFTA negotiators agreed to the NAFTA verification process so that the other NAFTA parties could ensure that the goods receiving NAFTA preferential treatment are truly originating in the NAFTA territory. If NAFTA certificates of origin are incorrectly provided, the importers of the offending goods will be denied preferential NAFTA tariff treatment.

Based on my experience, if improper certificates have been provided and the errors are discovered during a verification, the customers (importers) are negatively affected. The government officials conducting the verification will use the information obtained in the verification process to assess the importers.

Also, based on experience, often the verification process results in the identification of improperly provided certificates of origin. Many companies just do not undertake the proper analysis or make incorrect assumptions. Sometimes the NAFTA rules of origin analysis was done years ago and processes changed over time --- resulting in the company falling outside the rules at some point in time. In one recent case, the importer filed blanket certificates of origin without seeking confirmation on a case-by-case basis. In an older file, the U.S company followed the marking rules that allowed the company to say the goods were "Made in the USA" when the NAFTA rules of origin did not result in NAFTA originating treatment --- it was an honest mistake that resulted in negative consequences. There is no due diligence defence --- sorry to say.

If the manufacturer does not permit the government officials to be conducted, the NAFTA beneficial treatment will be cancelled for past importations and will not be permitted in the future.

If a company receives the request for a "visit" by the foreign officials, they should get organized and review the records in order to know what problems they may have. I always recommend that the company ask a NAFTA expert to be at the company during the verification process to monitor the process so that there aren't any misunderstandings that could lead to a public relations nightmare with customers.

The most important thing to remember about NAFTA Article 506 is that without NAFTA Article 506, the foreign government officials could not go onto the soil of another NAFTA Party and look through records. NAFTA Article 506 provides:

1. For purposes of determining whether a good imported into its territory from the territory of another Party qualifies as an originating good, a Party may, through its customs administration, conduct a verification solely by means of:

 

    a) written questionnaires to an exporter or a producer in the territory of another Party;

    b) visits to the premises of an exporter or a producer in the territory of another Party to review the records referred to in Article 505(a) and observe the facilities used in the production of the good; or

    c) such other procedure as the Parties may agree.

2. Prior to conducting a verification visit pursuant to paragraph (1)(b), a Party shall, through its customs administration:

 

    a) deliver a written notification of its intention to conduct the visit to

      (i) the exporter or producer whose premises are to be visited,

      (ii) the customs administration of the Party in whose territory the visit is to occur, and

      (iii) if requested by the Party in whose territory the visit is to occur, the embassy of that Party in the territory of the Party proposing to conduct the visit; and

    (b) obtain the written consent of the exporter or producer whose premises are to be visited.

3. The notification referred to in paragraph 2 shall include:

 

    a) the identity of the customs administration issuing the notification;

    (b) the name of the exporter or producer whose premises are to be visited;

    c) the date and place of the proposed verification visit;

    d) the object and scope of the proposed verification visit, including specific reference to the good that is the subject of the verification;

    e) the names and titles of the officials performing the verification visit; and

    f) the legal authority for the verification visit.

4. Where an exporter or a producer has not given its written consent to a proposed verification visit within 30 days of receipt of notification pursuant to paragraph 2, the notifying Party may deny preferential tariff treatment to the good that would have been the subject of the visit.

5. Each Party shall provide that, where its customs administration receives notification pursuant to paragraph 2, the customs administration may, within 15 days of receipt of the notification, postpone the proposed verification visit for a period not exceeding 60 days from the date of such receipt, or for such longer period as the Parties may agree.

6. A Party shall not deny preferential tariff treatment to a good based solely on the postponement of a verification visit pursuant to paragraph 5.

7. Each Party shall permit an exporter or a producer whose good is the subject of a verification visit by another Party to designate two observers to be present during the visit, provided that:

 

    a) the observers do not participate in a manner other than as observers; and

    b) the failure of the exporter or producer to designate observers shall not result in the postponement of the visit.

8. Each Party shall, through its customs administration, conduct a verification of a regional value-content requirement in accordance with the Generally Accepted Accounting Principles applied in the territory of the Party from which the good was exported.

9. The Party conducting a verification shall provide the exporter or producer whose good is the subject of the verification with a written determination of whether the good qualifies as an originating good, including findings of fact and the legal basis for the determination.

10. Where verifications by a Party indicate a pattern of conduct by an exporter or a producer of false or unsupported representations that a good imported into its territory qualifies as an originating good, the Party may withhold preferential tariff treatment to identical goods exported or produced by such person until that person establishes compliance with Chapter Four (Rules of Origin).

11. Each Party shall provide that where it determines that a certain good imported into its territory does not qualify as an originating good based on a tariff classification or a value applied by the Party to one or more materials used in the production of the good, which differs from the tariff classification or value applied to the materials by the Party from whose territory the good was exported, the Party's determination shall not become effective until it notifies in writing both the importer of the good and the person that completed and signed the Certificate of Origin for the good of its determination.

12. A Party shall not apply a determination made under paragraph 11 to an importation made before the effective date of the determination where:

 

    a) the customs administration of the Party from whose territory the good was exported has issued an advance ruling under Article 509 or any other ruling on the tariff classification or on the value of such materials, or has given consistent treatment to the entry of the materials under the tariff classification or value at issue, on which a person is entitled to rely; and

    b) the advance ruling or consistent treatment was given prior to notification of the determination.

13. If a Party denies preferential tariff treatment to a good pursuant to a determination made under paragraph 11, it shall postpone the effective date of the denial for a period not exceeding 90 days where the importer of the good, or the person who completed and signed the Certificate of Origin for the good, demonstrates that it has relied in good faith to its detriment on the tariff classification or value applied to such materials by the customs administration of the Party from whose territory the good was exported.

If you would like more information, please contact Cyndee Todgham Cherniak at 416-307-4168.

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