Tax & Accounting Blog

The NAFTA “Marking Rules” and Their Pesky Hierarchy

Blog, Global Trade, ONESOURCE November 6, 2015

A recent General Notice issued by Customs and Border Protection (CBP), (see CUSTOMS BULLETIN AND DECISIONS, VOL. 49, NO. 39, SEPTEMBER 30, 2015) reminds us that under NAFTA (North American Free Trade Agreement) there is a difference between the rules of origin that determine whether a product qualifies for reduced duty benefits, and the rules that dictate what the country of origin marking should be.

The Notice proposes to revoke two Customs Rulings that had granted an importer the right to mark their imports of solar panels with the language “Made in Mexico” and later “Components from Japan, Assembled in Mexico.” CBP now says the solar panels are a product of Japan.  The public has until October 30, 2015 to provide comments.

In this particular case the issue wasn’t that the importer failed to consider the NAFTA marking rules, but that the rules had been misapplied by CBP in the previous two rulings for the importer.  Nonetheless, it gives us an opportunity to highlight the differences in the two sets of rules, and hopefully drives home the point that both sets of rules must be considered.

First let’s describe the production process that transpires in Mexico on behalf of the US importer.  According to the proposed revocation, the solar panels are assembled using solar cells manufactured in Japan.  The solar panels are classified under the HTSUS (Harmonized Tariff Schedule of the United States) 8541.40.6020.  The solar cells are classified under 8541.40.6030.  All other components are classified outside of the 8541.40 subheading and are brought in from Japan, except the glass panel which is made in the United States.

The NAFTA rule of origin for preferential duty purposes is:
“No required change in tariff classification to any of subheadings 8541.10 through 8542.90” (see General Note 12 of the HTSUS).

This rule is simple to apply and appears to indicate that the solar panel industry in the US, to the extent that it exists, is not protected.

On the other hand, as pointed out by CBP, the relevant clause of the NAFTA “marking rules” for the origin of the product is (see 19 C.F.R. 102.20 of the regulations):

“A change to heading 8541 through 8542 from any other subheading, including another subheading within that group; or….”  (Emphasis added and the remaining “or” part is not relevant to the situation).

The tricky part of applying the NAFTA rules has to do with the hierarchical approach that must be taken.   The rules have to be applied in order and you don’t stop until you reach the part that applies to your situation.  That is, the country of origin of the good is the country in which:

  • The good is wholly obtained or produced;
  • The good is produced exclusively from domestic materials; or
  • Each foreign material incorporated in that good undergoes an applicable change in tariff classification set out in section 102.20…

The mistake CBP made in the first two rulings is that they stopped at this point saying that a tariff shift occurred from 8541.40.6030 to 8541.40.6020.  As CBP points out in the proposed revocation, the change occurs at the statistical level and not at the subheading level as required in 102.20.  (Upon reflection, it is interesting to think about how many people consider the statistical suffixes to be additional “sub-headings”.)

Therefore, the marking rules dictate that the hierarchy continue to be followed.  When the country of origin cannot be determined under the three methods described above, the next clause 102.11(b) provides that “…the country of origin of the good is the country or countries origin of the single material that imparts the essential character to the good.”

In this case, CBP feels there is a material that imparts the essential character, that is, the individual solar cell.  Therefore, the completed solar panels are goods of Japan.  At this point, it’s time to exit the hierarchy according to CBP.

So what are the implications for the importer other than having to update the country of origin labeling on the solar panels?  The importer may not be claiming NAFTA duty preference at all since the general rate of duty for the product anyway is “free”.  They may want to claim NAFTA regardless in order to save on Merchandise Processing Fees (MPF), but that may present a problem since to claim the MPF exemption, the goods have to qualify as being marked as Mexican origin (see 19 CFR 181.21).

In summary, we do not know the full implications of the proposed ruling revocation for this particular importer, but we know that the NAFTA marking rules should not be taken for granted.  Included in a company’s already significant requirements for taking advantage of NAFTA benefits (proper tariff classification, rule of origin maintenance and computation, supplier verifications, and record management) there should be a step to ensure the NAFTA marking rules for one’s products have been fully analyzed.

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