Trade of goods among North American countries must contain a predetermined threshold of North American value for duty-free treatment. The amount of North American value required is contained in the rules of origin of the new treaty (USMCA). Once compliance with the rule of origin is verified, the producer of the product, the exporter or the importer must issue a certification attesting that the origin is North American. This certification can be printed on the invoice, or any other document attached to the entry.
Most rules of origin in the USMCA are the same as NAFTA, however some products do require more North American value. Most rules of origin are easy to understand, but others require complex value calculations to verify they meet the threshold. Verifying compliance with rules of origin is mainly done by trade attorneys, customs brokers, and/or accountants. But defending your compliance before government authorities and courts should be headed by a trade attorney.
International audits to verify compliance with rules of origin are called “Origin Verifications”. This essay will focus on origin verifications done by the Mexican government. In Mexico, the authority in charge of doing these investigations is the Tax Administration Service (SAT for its acronym in Spanish). SAT may physically visit facilities in the U.S. and Canada, while American and Canadian officials may do likewise. An optimal scenario is to have a trade attorney in the United States or Canada working with a trade attorney in Mexico.
How do origin verifications begin?
They may start with a written request or a questionnaire asking the importer, exporter or producer for information, or with a visit to the facilities by government officials. SAT typically begins with a questionnaire sent via courier and in some cases via email. If the producer or exporter do not reply, the investigating authority will continue the process and will make a determination of the origin without the assistance of the American or Canadian company. As a result, it is important to review what is in your mailbox, attend government requests on time and look for professional advice quickly. Although most of the time questionnaires sent by SAT to Canadian and American companies are in English, questionnaires may be in Spanish or French, and not knowing any one of these languages is not a legal defense.
Documents proving origin
An exporter or an importer may have a certification of origin from the producer attesting that the product complies with the rules of origin, but eventually the producer will need to prove this assertion. Origin verifications are commonly started against the three companies, either in the same procedure or against each individually.
To assist in proving this, we recommend the producer keeps records relating to (1) government authorisations and permits to operate the facility, (2) purchase orders to suppliers, (3) material receipts, (4) invoices, (5) proof of payment to suppliers, (6) production records [such as balances, production process including made components or intermediate goods, charges and discharges of inventory], (7) BOMs, (8) tariff classification of raw materials, (9) data sheets of the raw materials, (10) bank records, (11) import and export records, (12) origin analysis from qualified professional, (13) list of suppliers and their contact information, (14) evidence of having an inventory control system license, (15) origin analysis of the finished product, etc. The volume of the documentation will vary mostly depending on how many components the goods being verified have. We also recommend that clauses are drafted in your purchasing contracts obligating assistance from you supplier to prove origin and that they will in turn keep records. Although this information is required by the treaty to be kept for 5 years, we recommend keeping it for longer, and include this obligation in your purchasing contracts.
“Although most of the time questionnaires are in English, they may be in Spanish or French. Not knowing these languages is not a legal defense.”
Denial of preferential duty treatment
In the event SAT believes the importer, exporter or producer did not provide sufficient evidence to prove the goods complied with the rules of origin, then the government will collect import duties at the normal rate, plus adjustment for inflation and interest, plus fines of 130% to 100% of duties not paid, from the importer, and the importer in turn may try and collect from the exporter and/or producer.
The companies that are subject to the origin verification have the right to an administrative appeal called a motion for reconsideration. It is important to keep in mind that all of the evidence will have to be filed in Spanish at this first tier of litigation and that the time to do so is very short. Also, some pieces of evidence may need to comply with certain formalities (for example, having notarial certification and apostille). If the result of this appeal is not favourable, then the interested party may file a defense before the Federal Tax Court. Finally, if not satisfied with the ruling from the Tax Court the company may file a constitutional challenge before the Federal Judicial Branch.
In the case of Mexico, we strongly recommend getting assistance from a Mexican trade attorney during the investigation phase of an origin verification procedure and not waiting until the matter is litigated. This is because the Mexican Supreme Court decided that new evidence may not be filed during the litigation before the Federal Tax Court and before the Judicial Tribunals. This means that only evidence filed during the investigation phase and during the Motion for Reconsideration may be used in the trial.
Takeaways
- To obtain preferential duty rate, producers must comply with rules of origin under the USMCA.
- After complying with rules of origin, a certification of origin must be issued.
- Rule of origin compliance can be audited via an origin verification.
- Origin verifications may be initiated against the importer, exporter and/or producer.
- Origin verifications may begin with a questionnaire sent via courier or even email.
- Proper paper trail proving origin compliance is critical.
- Keep records for more than five years.
- Hire a trade attorney during the investigation phase.
