By Luis F. Martinez Serna, Basham, Ringe y Correa, S.C.
This essay will discuss a North American Free Trade Agreement (“NAFTA”) shortcoming that results in the unfair payment of import duties, fines, interest, and antidumping duties. Many times, funds for payment come from United States or Canadian companies with operations in Mexico. NAFTA´s flaw lies mainly in not contemplating legal-cultural differences between Mexico, the United States and Canada, which results in Mexican customs officials invalidating NAFTA certificates of origin for formalistic reasons. These certificates of origin are often completed by United States or Canadian company officers with practical, good-faith, business-oriented minds who are not accustomed to stringent formalistic interpretations of the law.
Preferential Import Duties for NAFTA Goods
NAFTA provides that goods that originate in any NAFTA country may be imported into another NAFTA country at preferential import duty rates. The preferential import duty for almost every type of product is currently 0%.
To obtain access to this preferential duty rate, the producer of the goods must comply with the NAFTA Rules of Origin set out mainly in Chapter Four. Rules of origin are the guidelines to consider when a good is “made, produced, or manufactured” in Canada, the United States or Mexico. Rules of origin vary depending on the type of product, and can be quite difficult to comply with, but in essence they are economic principles that oblige the producer of the good to source raw materials and/or manufacture the good within the NAFTA region.
Once the producer is certain that it complies with the rules of origin, it must complete and sign a NAFTA certificate of origin. A certificate of origin is a document attesting that the goods qualify as being of NAFTA origin. The exporter is also allowed to complete and sign a NAFTA certificate of origin, provided it has solid knowledge that the producer complied with the rules of origin.
For example, if a United States producer of bicycles wants to export bicycles to Mexico (under tariff classification 8712.00.04) with a 0% NAFTA import duty rate (instead of the normal rate of 20%), then the United States producer must meet the rule of origin for bicycles.[i] Once the United States producer is certain it complies with the rule of origin for bicycles, then it must complete a NAFTA certificate of origin correctly, stating the bicycles produced meet the economic criteria and comply. The Mexican importer will then use the certificate of origin at the time of importation into Mexico in order to request NAFTA treatment.
Regulations to properly complete and sign a NAFTA certificate were negotiated by the three NAFTA parties and are contained in the treaty itself, and in the case of Mexico, in the NAFTA Customs Rules published in Mexico´s Federal Gazette[ii].
What Happens if the Certificate of Origin is Invalid?
Article 502(2)(a) of NAFTA provides that any Party (the United States, Canada or Mexico) may deny preferential duty treatment if “the importer fails to comply with any requirement” under Chapter V. One of the requirements of Chapter V is to have a valid NAFTA certificate of origin if requesting preferential duty treatment. If a certificate of origin is, for whatever reason, invalidated by a customs authority then the importer must pay the normal duty rate, plus fines and interest, all in accordance with the domestic laws of the importing country.
In the case of Mexico, when the customs authority invalidates a NAFTA certificate of origin, officials try and collect the (i) normal duty rate, (ii) fines of 130% to 150% of unpaid duties, and, given the fact that the certificate is “invalid,” the authority argues that the goods originated from a country that has an antidumping duty[iii] (i.e. bicycles that originate from China) and (iii) impose the applicable antidumping duty (144% for Chinese bicycles), plus (iv) interest. As an example, if the bicycle was worth $100, then after invalidating a NAFTA certificate of origin Mexican officials would try and collect $20 dollars of normal import duty, $30 dollars of fines, $144 of antidumping duties, plus interest for late payment, and all for a simple formalistic error. Paying more than $194 dollars in duties for a $100 dollar bicycle is prohibitive, to say the least.
Although the rules for completing a NAFTA certificate of origin are the same in the three NAFTA countries, they have not been interpreted equally. Interpretations by United States and Canadian customs officials typically focus on the substance of the certificate, while in Mexico customs officials will focus on the formalities of the certificate of origin first, that is, they will first review whether the certificate of origin was completed properly, in that the information in the certificate is absolutely clear and complete. If for example, the certificate states it is valid from “January 1, 2008 to January 1, 2009,” then it would be invalidated by officials because certificates can only be issued for a period covering one year and this date is actually one year plus one day (in other words it should have stated January 1, 2008 to December 31, 2008).
Based on our experience, we have detected at least 31 document "errors" when the authority believes a certificate of origin is invalid. Some examples are an incomplete address (i.e. not including the postal code), not printing the tax identification number, a description of the goods in the certificate of origin that differs (even slightly) from the description of the goods in the invoice, not including the invoice number in the certificate if the certificate is good for one shipment, among others.[iv]
This formalistic mindset is mainly a result of the legal tradition in Mexico. While the United States and Canada have a common law tradition (except for Louisiana and Quebec), Mexico has a civil law tradition[v] which is based on written codes of law which state precisely the law for any given case. The common law tradition, on the other hand, can result in a somewhat more flexible approach. Explaining why countries with a civil law tradition are typically more formalistic is something beyond the scope of this article,[vi] but it is important to state that forgetting to put a postal code on a document should not mean that the goods do not comply with the rules of origin.
Once a certificate has been declared invalid, it will be the Mexican importer who will be fined. Conversely, if the certificate of origin is declared invalid in Canada or the United States, it will be the Canadian or American importer who will be fined. However, as is the case in much litigations, the funds to pay the: (i) normal duty rate, (ii) fines of up to 150% for unpaid duties, (iii) antidumping duties and (iv) interest, come from the parent company in the United States or Canada.
A considerable number of Maquiladoras in Mexico are having these difficulties where sister companies in the U.S. send raw materials, components or intermediate goods to Mexico to finish the assembly process. Many of the certificates of origin completed by the sister companies in favor of the Mexican subsidiary run the risk of being declared “invalid”.
A legal defense is available to the importer within the Mexican legal system, but it will be on the third, perhaps the forth tier of litigation that a Mexican judge or tribunal will hear the case and, if properly litigated, rule in favor of the importer. This means that the importer will have to spend perhaps three years litigating, and pay unrecoverable legal fees in trying to prove that forgetting to print the tax identification number on a document, for example, does not mean the merchandise is automatically Chinese in origin.
What to Do
The best way to reduce the exposure to risk is to show company employees in charge of completing certificates of origin the rules how to complete a NAFTA certificate. These rules are contained in Chapter V of NAFTA, the NAFTA Customs Rules[vii] and the instructions on the back of the certificates of origin and are the same in all three countries. It is also important to be very precise when completing the certificate and basically to cross all the “Ts” and dot all the “Is.” To be on the safe side, contact your customs lawyer or your customs broker when completing certificates of origin as they can help you avoid a legal nightmare.
Luis F. Martinez Serna
Basham, Ringe y Correa, S.C.
[i] The rule of origin for 8712.00.04 bicycles requires a tariff shift from any heading to heading 8712 (except from 8714), or a shift from heading 8714 to 8712, provided there is a regional value content (meaning value done within the countries of North America) of 60% under the transaction value method or a value of 50% under the net cost method.
[ii] “Resolución por la que se establecen las reglas de carácter general relativas a la aplicación de las disposiciones en materia aduanera del Tratado de Libre Comercio de América del Norte”, DOF September 15, 1995, as ammended.
[iii] Article 66 of the Foreign Trade Law.
[v] Some common law countries include Canada, India, Nigeria, and the United Kingdom, while civil law counties include Austria, Brazil, Netherlands, and Japan, to name a few.
[vi] For an excellent explanation on how a civil law system works refer to “The Civil Law Tradition; An Introduction to the Legal Systems of Western Europe and Latin America” by John Henry Merryman, Stanford University Press (1985).
[vii] For a complete version of the NAFTA Customs Rules published in the Federal Gazette of Mexico, contact the author.