North American Free Trade Agreement
Federal RegisterSep 6, 1995
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SUMMARY: This document adopts as a final rule, with some changes,
interim amendments to the Customs Regulations which were published in
the Federal Register on December 30, 1993, as T.D. 94-1 to implement
the preferential tariff treatment and other Customs-related provisions
of the North American Free Trade Agreement entered into by the United
States, Canada and Mexico.
EFFECTIVE DATE: October 1, 1995.
FOR FURTHER INFORMATION CONTACT: Operational Aspects: Joyce Metzger,
Office of Field Operations (202-927-0792).
Audit Aspects: William Inch, Office of Strategic Trade (202-927-
1100).
Legal Aspects: Myles Harmon, Office of Regulations and Rulings
(202-482-7000).
SUPPLEMENTARY INFORMATION:
Background
On December 17, 1992, the United States, Canada and Mexico (the
``Parties'') entered into an agreement, the North American Free Trade
Agreement (NAFTA). The stated objectives of the NAFTA are to: Eliminate
barriers to trade in, and facilitate the cross-border movement of,
goods and services between the territories of the Parties; promote
conditions of fair competition in the free trade area; increase
substantially investment opportunities in the territories of the
Parties; provide adequate and effective protection and enforcement of
intellectual property rights in each Party's territory; create
effective procedures for the implementation and application of the
NAFTA, for its joint administration and for the resolution of disputes;
and establish a framework for further trilateral, regional and
multilateral cooperation to expand and enhance the benefits of the
NAFTA.
The provisions of the NAFTA were adopted by the United States with
the enactment of the North American Free Trade Agreement Implementation
Act (the ``Act''), Pub. L. 103-182, 107 Stat. 2057.
The principal role of the U.S. Customs Service is to administer the
provisions of the NAFTA and the Act which relate to the importation of
goods into the United States from Canada and Mexico. Those Customs-
related NAFTA provisions which require implementation through
regulation include certain tariff and non-tariff provisions within
Chapter Three (National Treatment and Market Access for Goods) and the
provisions of Chapter Four (Rules of Origin) and Chapter Five (Customs
Procedures).
The tariff-related provisions within NAFTA Chapter Three which
require regulatory action by Customs are Article 303 (Restriction on
Drawback and Duty Deferral Programs), Article 305 (Temporary Admission
of Goods), Article 306 (Duty-Free Entry of Certain Commercial Samples
and Printed Advertising Materials) and Article 307 (Goods Re-Entered
after Repair or Alteration). The non-tariff provisions of Chapter Three
requiring Customs regulatory action are Article 310 (Customs User
Fees), Article 311 (Country of Origin Marking) and Annex 300-B (Textile
and Apparel Goods).
Chapter Four of the NAFTA sets forth the rules for determining
whether an imported good qualifies as an originating good of the United
States, Canada or Mexico (NAFTA country) and, as such, is therefore
eligible for preferential tariff (duty-free or reduced duty) treatment
as provided for under Article 302(2) and Annex 302.2 of the NAFTA.
Under Article 401 within that Chapter, originating goods may be grouped
in two broad categories: (1) Goods which are wholly obtained or
produced entirely in one or more NAFTA countries; and (2) goods which
are produced entirely in one or more NAFTA countries exclusively from
materials that originate in those countries, or goods which are
produced entirely in those countries and which satisfy the specific
rules of origin in NAFTA Annex 401 (change in tariff classification
requirement and/or regional value-content requirement). Article 402
sets forth the methods for calculating the regional value content of a
good and the rules for determining the value of materials used in the
production of a good. Article 403 sets forth special rules for
calculating the regional value content in the case of automotive goods.
Article 404 provides for accumulation of production by two or more
producers. Article 405 provides a de minimis criterion. The remaining
Articles within Chapter Four consist of additional sub-rules,
applicable to the originating good concept, involving fungible
materials, packaging materials, packing materials, transshipment, and
non-qualifying operations.
Chapter Five sets forth the procedural and other customs
requirements which apply under the NAFTA, in particular with regard to
claims for preferential tariff treatment. Articles 501-506 of this
Chapter provide for use of a Certificate of Origin for purposes of
certifying that an exported good qualifies as an originating good under
the Chapter Four origin rules, set forth the rights and obligations of
importers regarding imported goods and of exporters and producers
regarding exported goods, and set forth the rights and obligations of
the customs administration of the importing country when conducting a
verification of the origin of a good and when denying a claim for
preferential tariff treatment. Article 507 sets forth confidentiality
principles regarding business information collected pursuant to Chapter
Five. Article 508 requires each Party to maintain penalties for
violations of its laws and regulations relating to Chapter Five.
Article 509 sets forth the obligations for the issuance and application
of advance rulings by the customs administration of the importing
country regarding whether a good meets the country of origin marking
requirements of Article 311 or the origin rules of Chapter Four or
other NAFTA requirements that apply to certain goods at the time of
importation. Article 510 extends to exporters and producers of goods
substantially the same rights of review and appeal accorded to
importers regarding advance rulings or marking determinations of origin
or country of origin determinations for purposes of preferential tariff
treatment. Article 511 requires the Parties to establish, and implement
through their respective laws or regulations, Uniform Regulations
regarding the interpretation, application and administration of Chapter
Four, Chapter Five and any other matter as agreed by the Parties.
Finally, Articles 512 and 513 set forth procedures for cooperation
between the Parties regarding the implementation and administration of
the customs-related aspects of the NAFTA.
Pursuant to Article 511 of the NAFTA, representatives of the
Parties engaged in a series of trilateral discussions for the purpose
of formulating uniform regulatory texts or principles in respect of
Chapters Four and Five and in respect of certain provisions within
Chapter Three. As regards Chapter Three, agreement was reached on
certain principles to be applied for purposes of implementing
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the drawback provisions of Article 303. With regard to the remaining
Chapter Three provisions, including the country of origin marking
provisions of Article 311 and its companion Annex 311 (which provide
for the establishment of ``Marking Rules'' for purposes of determining
whether a good constitutes, and thus may be marked as, a good of a
Party and which set forth disciplines on the methods and procedures for
the country of origin marking of goods), those provisions were to be
implemented by each Party independently and as appropriate within each
Party's statutory and regulatory structure; the U.S. Marking Rules,
contained in Part 102 of the Customs Regulations, were adopted on an
interim basis in T.D. 94-4 which was published in the Federal Register
on January 3, 1994 (59 FR 110). As concerns Chapter Four, the Parties
agreed, by an exchange of letters dated December 30, 1993, to implement
substantively verbatim texts of interim regulations covering all of the
provisions of that Chapter. Finally, in recognition of the different
existing customs legal and procedural requirements in the three
countries, in the case of Chapter Five and some provisions of Chapter
Three the Parties agreed, by an exchange of letters dated December 30,
1993, to use a standards approach whereby agreement was reached on
certain minimum principles to be reflected in each Party's regulations,
with each Party being left free to implement those principles, and any
other requirements not inconsistent therewith, in accordance with the
needs of the Party's particular statutory and regulatory framework. The
trilaterally-agreed standards are set forth in a document entitled
``Uniform Regulations for the Interpretation, Application, and
Administration of Chapters Three (National Treatment and Market Access
for Goods) and Five (Customs Procedures) of the North American Free
Trade Agreement''; the text of that standards document is reproduced
for the information of the public in a general notice also appearing in
this issue of the Federal Register.
On December 30, 1993, Customs published T.D. 94-1 in the Federal
Register (58 FR 69460) setting forth interim amendments to the Customs
Regulations to implement the preferential tariff treatment and other
Customs-related provisions of the NAFTA in accordance with the
implementation principles agreed to by the Parties as discussed above.
In order to provide transparency and facilitate their use, the majority
of the NAFTA implementing regulations set forth in T.D. 94-1 were
included within one new Part 181. However, in those cases in which
NAFTA implementation was more appropriate in the context of an existing
regulatory provision, the NAFTA regulatory text was incorporated in an
existing Part within the Customs Regulations. T.D. 94-1 also set forth
a number of cross-references and other consequential changes to
existing regulatory provisions to clarify the relationship between
those existing provisions and the NAFTA implementing regulations.
Although the interim regulatory amendments were promulgated pursuant to
the foreign affairs function exception to the general notice, public
comment, and delayed effective date requirements of 5 U.S.C. 553 and
took effect on January 1, 1994, in order to coincide with the entry
into force of the NAFTA, T.D. 94-1 nevertheless provided for the
submission of public comments thereon which would be considered before
adoption of the interim regulations as a final rule, and the prescribed
public comment period closed on March 30, 1994. In addition, two
correction documents pertaining to T.D. 94-1 were published in the
Federal Register, one on February 24, 1994 (59 FR 8852) and the other
on March 31, 1994 (59 FR 15047).
Discussion of Comments
A total of 15 commenters responded to the solicitation of comments
on the interim regulations set forth in T.D. 94-1. The comments
submitted, and the Customs responses thereto, are set forth below.
Part 12, Sec. 12.132 (Textile and Apparel Goods Under the NAFTA)
Comment: One commenter noted that whereas paragraph (b) of this
section provides only for preparation of the country of origin
declaration by the manufacturer or producer of the textile or apparel
goods, in the case of non-NAFTA goods the declaration may also be
prepared by the exporter or importer under Sec. 12.130(f). Since the
NAFTA provision imposes a more strict requirement, this commenter
suggested that the NAFTA text be aligned on Sec. 12.130(f) so as to
provide for preparation by the manufacturer, producer, exporter or
importer.
Customs response: The U.S. importer should not be allowed to
prepare the declaration in this context because the importer often
lacks sufficient knowledge of the actual production and origin of the
goods. However, when the importer cannot obtain a declaration from the
manufacturer or producer, Customs would be willing to accept a
declaration prepared by the exporter, and paragraph (b) (redesignated
in this document as paragraph (a)(2) as explained below) has been
modified accordingly.
Part 134, Sec. 134.22 (General Rules for Marking of Containers or
Holders)
Comment: One commenter expressed approval of the approach taken in
new Sec. 134.22(d) regarding the country of origin marking of usual
containers, in particular with reference to paragraph (d)(2) which, in
the case of a good of a NAFTA country, removes from consideration the
additional issue of whether a particular container is capable of reuse
in determining whether a container must be marked. Notwithstanding the
fact that this NAFTA rule was specifically intended to implement Annex
311(7) of the NAFTA, this commenter stated that this approach should
not be limited to NAFTA goods but rather should be applied universally.
In support of this suggestion the commenter argued that: (1) The
standards applicable to usual containers are regulatory rather than
specifically required by the marking statute (19 U.S.C. 1304) and thus
can be changed; (2) the NAFTA does not require that its provisions be
limited to NAFTA trade; and (3) no public policy purpose is served by
having different usual container marking rules because they create
confusion for importers and may mislead the consumer regarding the
origin of the product packaged in the container when it has a different
marking than that of the container.
Customs response: The definition of ``usual container'' provided in
Sec. 134.22(d)(1) applies to all containers, whether they are goods of
a non-NAFTA country or goods of a NAFTA country. However, different
regulatory requirements are provided in Part 134 of the Customs
Regulations for determining whether a usual container is excepted from
country of origin marking.
Section 304(b) of the Tariff Act of 1930, as amended (19 U.S.C.
1304(b)), states in part that:
. . . Usual containers in use as such at the time of importation
shall in no case be required to be marked to show the country of
their own origin.
Thus, although a container may not be a good of a NAFTA country, if it
is a ``usual container'' as defined in Sec. 134.22(d)(1) of the Customs
Regulations it may be excepted from marking pursuant to 19 U.S.C.
1304(b) provided that the conditions of that statutory provision are
satisfied, as
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Customs has ruled in HQ 735548 dated February 14, 1995.
The Part 134 regulations relating to marking of containers from
non-NAFTA countries (Secs. 134.23 and 134.24) generally draw a
distinction between reusable and disposable containers in determining
whether they must be marked to indicate their own country of origin. If
the containers are determined to be reusable, they are treated as
separate articles of commerce and are required to be individually
marked with their country of origin. However, if the containers are
determined to be disposable, they are not treated as separate articles
of commerce and are excepted from country of origin marking.
However, for containers which are determined to be ``goods of a
NAFTA country'', the distinction between reusable and disposable is not
applicable in determining the marking requirements for the containers.
The country of origin marking requirements for containers which are
``goods of a NAFTA country'' are based primarily on whether the
container is considered to be a ``usual container''. If it is
determined to be a ``usual container'', as defined in Sec. 134.22(d)(1)
of the regulations, the container is not required to be marked with its
own origin. The fact that a container is capable of repeated use does
not preclude it from being considered a ``usual container''.
Section 134.22(d) was included in the interim regulations solely to
implement Annex 311(7) of the NAFTA, which applies to containers which
are goods of NAFTA countries. Customs does not believe that the NAFTA
implementing regulations are the proper vehicle for effecting a change
in the marking requirements for containers which are goods of non-NAFTA
countries. Such a change (applying to imports from non-NAFTA countries
the Sec. 134.22(d)(2) NAFTA ``usual container'' marking exception)
should be the subject of a separate notice of proposed rulemaking to
amend Secs. 134.23 and 134.24, so as to give affected parties an
opportunity to submit any comments they may have.
Part 181, Subpart B (Export Requirements)
Section 181.11
Comment: With regard to the preparation and use of Certificates of
Origin in general, one commenter noted that the instructions for field
6 (Harmonized System tariff classification number) specify use of the
8-digit number of the country into which the good is imported if the
good is subject to a specific rule of origin that requires eight
digits. This commenter suggested that this creates an unnecessary
burden on exporters because it requires them to cross-reference and
cross-document the seventh and eighth digits of tariff numbers for each
NAFTA country and may mean in some cases that three separate
Certificates would have to be prepared for one part number. Since the
tariff numbers in field 6 simply identify the rule of origin that the
exporter used to certify the goods and because the seventh and eighth
digits in all three countries identify the same goods and the same rule
of origin, this commenter suggested the following alternative
solutions: (1) The three governments could publish a single conversion
list of the tariff numbers for each country for distribution to customs
officials and the public; or (2) the exporter could be allowed to
indicate with a ``U'', ``C'' or ``M'' prefix the country of the tariff
number used in field 6.
Customs response: Customs does not agree with the proposal of
allowing classification to be reported at the 6-digit level. Many of
the specific rules of origin were written at the 7th and 8th digit
level to capture a desired processing condition. Where this is the
case, a NAFTA claimant must indicate that the processing it performed
accomplished the required tariff shift. Reporting a classification
number at a lesser level would not satisfy this requirement.
The proposal for publishing a list of all of the rules together
with references to the 8-digit item numbers may have some merit. It
should be noted that the tariff items in these rules are reflected
either in the rules themselves or in the Appendix to Annex 401 of the
NAFTA. Currently, the NAFTA Parties are exploring within the trilateral
working groups created under the NAFTA the most appropriate means to
keep the trading public aware of the changes to the rules, including
those that involve changes at the 8-digit level. The commenter's
suggestion will be kept in mind in that context.
Finally, Customs is of the opinion that the suggestion of utilizing
a letter prefix to a 6-digit classification number to designate which
country's tariff schedule is being applied would not be workable. An
enterprise wishing to take advantage of NAFTA in any one of the NAFTA
countries must classify according to the actual tariff schedule of the
importing country at the 7th or 8th digit level as shown in that tariff
in any case in which the specific origin rule requires a change at that
level.
Comment: One commenter raised two issues regarding paragraph (d)
which provides that if a U.S. exporter or producer has reason to
believe that a Certificate of Origin completed and signed by him
contains incorrect information affecting its validity or accuracy, he
shall within 30 calendar days so notify in writing all persons to whom
the Certificate was given. First, this commenter suggested a problem
with the ``within 30 calendar days'' language in that significant
controversy could arise in trying to pin down exactly on which day the
exporter or producer had the requisite ``reason to believe''. Second,
the commenter expressed some confusion as to whether a Certificate
could be deemed to be incorrect if the information provided thereon was
accurate when the Certificate was signed, and in this regard the
commenter questioned whether the notice had to be provided in the
following circumstances: (1) Whenever there is a change in the product,
even if a recipient of the Certificate no longer receives the product;
and (2) where the exporter or producer is uncertain as to which of its
products the recipient intends to apply the Certificate. Stating that
the duty to ascertain inaccuracies and search for all Certificate
recipients is unrealistic and fraught with pitfalls for well-
intentioned exporters or producers, this commenter suggested that
paragraph (d) be redrafted to more specifically define the obligations
of Certificate creators.
Customs response: The comment with regard to the commencement of
the 30-day period appears to have merit. Accordingly, paragraph (d) of
Sec. 181.11, as set forth below, has been modified by inserting the
phrase ``after the date of discovery of the error'' immediately after
the phrase ``30 calendar days''. This additional language would
encompass the discovery of an error by any involved party: the
exporter, producer or verifying customs administration. The condition
that no formal investigation be begun should be unaffected by the
addition of this phrase. For purposes of consistency and based on the
same considerations, a similar modification has been made to the text
of Sec. 181.21(b) regarding the correction of a declaration.
With regard to the issue of the specific circumstances in which
notice of an incorrect Certificate of Origin must be provided, Customs
would first point out that where information believed by the preparer
of the Certificate to be accurate is found to be incorrect by a
verifying customs administration, such information constitutes
incorrect information which might affect the granting of preferential
tariff treatment. Accordingly, all recipients of the
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Certificate must be notified of the incorrect information so that a
NAFTA claim is not made based on erroneous information.
Where there is a change to a product and the recipient of the
Certificate covering that product no longer receives the product, it is
the position of Customs that if the product change affects the
eligibility of the product retroactively and if the recipient based its
claim of NAFTA treatment for that product on an incorrect Certificate,
the recipient must be sent a corrected Certificate so that it might
correct its entry. Prospective shipments of the product should be
covered by a new Certificate given to current importers of the product.
Finally, as regards a case in which the exporter or producer is
uncertain as to the specific products to which the recipient intends to
apply the Certificate, it is the position of Customs that an exporter
or producer must assume that each recipient of its Certificate intends
to utilize it for all products listed thereon and thus must be notified
of any incorrect information appearing on the Certificate.
Section 181.12
A commenter stated that this section imposes overly broad and
burdensome recordkeeping requirements on U.S. exporters and producers
whose goods qualify as originating goods under an origin criterion that
does not involve a regional value-content requirement. Since in such a
case data as to cost, value and payment are irrelevant in qualifying as
an originating good, this commenter states that Sec. 181.12 should be
written so as to require only that recordkeeping which is necessary to
demonstrate the correctness of the basis upon which originating status
is claimed.
Customs response: The recordkeeping requirements contained in
paragraph (a) of this section, including the specific types of records
to be maintained, reflect the provisions of Article 505 of the
Agreement which was implemented by an amendment to 19 U.S.C. 1508
effected by section 205 of the Act. Moreover, this comment fails to
recognize a basic problem that could arise from use of the suggested
minimalist approach: a customs administration may have no choice but to
deny a claim for preferential tariff treatment if the claimed basis for
originating status is not valid and no records have been maintained to
support an applicable alternative basis involving a regional value-
content requirement.
Part 181, Subpart C (Import Requirements)
Section 181.21
Comment: With regard to the requirement under paragraph (a) that
the claim for preferential tariff treatment be based on a Certificate
of Origin in the possession of the importer, one commenter stated that
the regulatory provision is unclear as to whether possession of a copy
of the Certificate would satisfy this requirement. This commenter
stated that permitting use of copies of a Certificate is necessary
where there are multiple importer customers, where goods are exported
to two NAFTA countries, and where a supplier provides a Certificate to
a central location of a producer which has subsidiaries operating in
more than one NAFTA country.
Customs response: Customs believes that this commenter makes a
valid point. Accordingly, paragraph (a) of Sec. 181.21, as set forth
below, has been modified to provide for possession of a copy of a
Certificate of Origin.
Comment: With regard to the written declaration under paragraph (a)
and the written correction of a declaration under paragraph (b), a
commenter suggested that additional provision should be made for
effecting both actions by electronic means in order to reflect the
Customs Modernization provisions of the Act.
Customs response: Although the suggestion has some merit in
principle, Customs believes that it would be premature at this time to
revise these paragraphs to provide for electronic means for complying
with their provisions. As Customs implements the Customs Modernization
provisions of the Act, it will identify which regulatory activities may
be performed electronically and will amend the regulations accordingly.
At that time, these NAFTA provisions will be reviewed and, if
necessary, brought into line with whatever changes are made elsewhere
in the Customs Regulations with respect to the electronic filing of
entry information.
Comment: One commenter stated that paragraph (b) should require
that Customs send to the importer's surety a copy of the importer's
corrected declaration because, if the importer fails to pay the
required duties, the surety will not be aware of this circumstance
until the entry is liquidated and demand is made upon the surety.
Customs response: Customs does not now notify sureties during the
entry process, and that policy should continue to be applied in the
context mentioned by this commenter.
It should also be noted that the failure to deposit estimated
duties when due is a bond breach, and Customs may make an immediate
demand in the event of a breach. There is no basis for a different
procedure when the bond principal breaches that provision at the time
of entry or when the bond principal breaches that provision at the time
of filing a corrected declaration.
Section 181.22
Comment: For purposes of submitting a Certificate of Origin to
Customs under paragraph (b), one commenter stated that, by referring to
a Certificate ``signed by the exporter or producer'', the regulation
appears to permit the exporter to simply provide the producer's
Certificate to the importer. This commenter suggested that, if this is
so and if the producer were allowed to execute a single Certificate and
provide copies thereof to its customer exporters who then could provide
copies to their customer importers, the following benefits could be
realized: (1) A producer Certificate would not have to be re-executed
by exporters; (2) a possessor of a Certificate would always know who
the producer of the goods was; and (3) administrative effort would be
reduced by requiring creation of only a single Certificate.
Customs response: While the commenter's suggestion has some logic
and merit under the regulatory text as written, Article 501(3) of the
Agreement (and Sec. 181.11(b) in a U.S. export context) are quite clear
that an importer's claim for preferential NAFTA tariff treatment can
only be based on a Certificate of Origin prepared by the exporter of
the good. Moreover, any Certificate completed by a producer is done
voluntarily whereas that prepared by the exporter is a requirement for
claiming NAFTA treatment. In order to remove any ambiguity and ensure
consistency with the terms of the Agreement, paragraph (b)(2) of
Sec. 181.22, as set forth below, has been modified by removing the two
references to ``or producer''.
Comment: One commenter stated that this section should be modified
to require that Customs provide notification to the importer's surety
whenever the importer fails to comply with a request for submission of
a Certificate of Origin. This would enable a surety to minimize its
risk in cases involving a series of related importations which result
in denial of preferential tariff treatment and issuance of a claim for
increased duty under the surety's bond.
Customs response: The comment response under Sec. 181.21 above
regarding
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notice to a surety applies equally to this comment. Moreover, the
principal may pay the duty so that no bond breach would occur. In any
event, the requested change would inject Customs into the contractual
relationship between the surety and its bond principal. The submission
of document copies is a matter that is best resolved between the
principal and its surety.
Part 181, Subpart D (Post-Importation Duty Refund Claims)
Section 181.31
Comment: One commenter stated that this section should be amended
to expressly permit sureties to submit post-importation NAFTA claims so
that sureties may protect their interests, for example in a case where
the importer is out of business and the surety has a liability on the
transaction. This commenter argued that this would be a logical and
much needed extension of surety rights under the administrative
process, noting in this regard that sureties presently can file
protests, petitions for relief from liquidated damage claims and
petitions under 19 U.S.C. 1520(c).
Customs response: Both Article 502(3) of the Agreement and the U.S.
implementing statute specifically provide for the filing of a post-
importation claim by the importer. While 19 U.S.C. 1514(c) expressly
provides for the filing of a protest by a surety in its own right, no
corresponding surety right is reflected in 19 U.S.C. 1520(d) which was
added by section 206 of the Act. Of course, a surety or any other party
acting as a duly authorized agent may file a post-importation claim on
behalf of its importer principal.
Section 181.32
Comment: One commenter complained of the post-importation refund
claim documentary requirements in paragraphs (b)(3)-(5) of this
section, pointing out that the written statements specified therein
constitute added and burdensome requirements that are not applied
either in the case of a NAFTA claim made at the time of entry or in the
case of any other post-importation claim procedure under Part 173 or
174 of the Customs Regulations. This commenter therefore suggested
removal of these requirements.
Customs response: The written statement requirements for post-
importation claims are designed to prevent an overpayment of a duty
refund such as drawback. Customs notes that there are parallel NAFTA
requirements for drawback and duty deferral program participants under
Part 181 (see Secs. 181.47 (b) and (c) and Sec. 181.53(a)(3)).
Accordingly, Customs believes that these requirements must be retained.
Section 181.33
Comment: Two commenters referred to paragraph (d)(3) which provides
that where the entry covering the good has been liquidated, whether or
not the liquidation has become final, a post-importation refund claim
may be denied without reliquidating the entry. One of these commenters
stated that this section and Part 174 of the Customs Regulations should
include the right to file a protest within 90 days of the denial of the
claim whether or not the liquidation has become final. The other
commenter stated that the regulations do not, but should, provide for
an administrative appeal process in the case of a denial issued more
than 90 days after liquidation of the entry.
Customs response: Customs agrees that a claimant has a right to
file a protest based on a denial of a NAFTA post-importation claim,
including in cases in which the claim is denied more than 90 days after
liquidation of the entry and without reliquidation of the entry, and
Customs also agrees that the regulations should explicitly reflect this
right. Accordingly, Sec. 174.12(e)(2), which specifies when the 90-day
time period for filing a protest begins in the case of a protest
against a decision not involving a liquidation or reliquidation, has
been modified as set forth below by the inclusion of a specific
reference to a claim filed under 19 U.S.C. 1520(d).
Customs notes that in the case of a denial of a post-importation
claim on the merits (that is, where the denial is based on a negative
origin determination rather than on procedural grounds), a person who
signed a Certificate of Origin relating to the good at issue has a
right to file a protest against the denial (see 19 U.S.C. 1514(c)(2)(E)
and interim Sec. 174.12(a)(5) as republished below). In order to
reflect current Customs practice, Secs. 181.33 (d)(2) and (d)(3), as
set forth below, have been modified to provide that the notice of
denial of the claim in such cases shall include a statement regarding
the right to file a protest against the denial under Part 174 of the
regulations.
Part 181, Subpart E (Restrictions on Drawback And Duty-Deferral
Programs)
Section 181.41
Comment: Two commenters stated that this section implies that the
effective dates of 1996 and 2001 apply only where preferential tariff
treatment under NAFTA is claimed. This is not correct and therefore it
should be made clear that these effective dates apply to all
merchandise whether or not NAFTA preferential treatment is involved.
Customs response: Customs agrees that the subpart covers all
exports to Canada or Mexico, whether a claim for preferential tariff
treatment is made or not. Accordingly, the second sentence of
Sec. 181.41, as set forth below, has been modified by inserting a
period after ``January 1, 2001'' and removing the rest of the sentence.
Section 181.44(a)
Comment: A commenter pointed out that it is too difficult for the
drawback claimant to ``discover'' the duty paid on the merchandise when
it is imported into the United States and when it is imported into
Canada and Mexico. As an alternative, this commenter suggested that a
NAFTA control number be placed on the commercial invoice when a
drawback claim is expected to be filed. Each U.S. exporter could use
its tax identification number (from the Certificate of Origin) followed
by a date code and a sequential number. This control number should
become part of the import records associated with NAFTA claims in
Canada or Mexico.
This commenter went on to state that whenever this sequential NAFTA
drawback control number appears, Canadian or Mexican Customs should
enter the amount of duty from the import entry, together with the
control number, into a database which could be downloaded into the U.S.
Customs computer system. The data could then be accessed by U.S.
Customs through ABI to determine duties paid upon importation into
Canada or Mexico. Upon liquidation of the import transaction in Canada
or Mexico, the computer record would be updated. The drawback claimant
should be allowed to waive the right to claim a refund of the amount
equal to the additional duties that would be owed to Canadian or
Mexican Customs. This would set the date of entry when duties have been
paid in Canada or Mexico for drawback purposes. The commenter suggested
that without a link between the three Customs administrations, drawback
claims will be delayed.
Customs response: This commenter recognizes that the Agreement and
the statute require the amount of duty paid in Canada or Mexico to be
reported. The commenter's proposal to require a drawback control number
to be placed on the commercial invoice and for the Customs Services of
the three countries to monitor that number would be extremely
burdensome. In addition,
[[Page 46339]]
Customs is aware that many U.S. importers have alleged an inability to
obtain the foreign invoice. Such inability can only result from a
failure of the commercial participants to address the issues in a
timely manner. Drawback claims require that the commercial participants
resolve these information issues in the terms of the sale before the
export so that the required information on the completed transaction
can be presented to Customs to establish any drawback eligibility.
Paragraph (c) of Sec. 181.47 lists the required evidence.
Comment: A commenter stated that any claim based on estimates (that
is, the NAFTA duty rate multiplied by the invoice value) would not take
into account duty exemptions that may be available to Canadian and
Mexican importers and that may not be apparent on the face of the
commercial documents (for example, articles assembled abroad and
returned). If there are no such exemptions and value can be determined
on the face of the commercial documents, then the claimant should be
allowed to base the duty amount on the appropriate NAFTA duty rate in
Canada or Mexico multiplied by the FOB value.
Customs response: Drawback claimants cannot base their claims on
estimates; rather, each claim must be based on the liquidated amount of
duty paid on the import entry for goods entered into Canada or Mexico.
Section 181.44(b)
Comment: Two commenters stated that this section is unclear as to
the calculation of drawback when two or more components are used in the
process of manufacture. One of these commenters raised the question of
whether the comparison of duty paid must be between the duty paid on
each component part and the duty paid on the finished article exported
to Canada or Mexico or between the total duty paid on all component
parts and the duty paid on the finished article exported to Canada or
Mexico. This commenter provided the following example:
Two parts, X and Z, are imported duty-paid into the United
States at $2.00 and $4.00, respectively. Assume article Y is
manufactured and exported to Canada or Mexico and duty of $5.00 is
due. Does the lesser of the two duties apply to X and Z individually
(resulting in $6.00 in drawback) or collectively (resulting in $5.00
in drawback)?
Customs response: With respect to the duty comparisons, the
comparison should be made on an individual basis regardless of whether
two components are used to make one export article or one component,
such as a chemical, is split into two export articles. Section 181.44,
as set forth below, has been modified by redesignating paragraphs (b)-
(e) as (c)-(f) and adding a new paragraph (b) which sets forth the
relative value calculation and individual comparison principle and
includes the following example:
Upon importation of Chemical X into the United States, Company A
entered Chemical X and paid $2.00 in duties. Company A processed
Chemical X into Products Y and Z, each having the same relative
value; that is, $1.00 in duty is attributable to Product Y and $1.00
in duty is attributable to Product Z. Company A exported Product Y
to Canada and Canada assessed a free rate of duty. Company A
exported Product Z to Mexico and Mexico assessed the equivalent of
US$2.00 in duty. There is no entitlement to drawback on the export
of Product Y to Canada because zero is the lesser amount when
compared to the $1.00 in duty attributable to Product Y as a result
of the separation of Chemical X into Products Y and Z. There would
be entitlement to drawback on the export to Mexico, consisting of
the $1.00 duty attributable to Product Z, because that amount is the
lesser amount when comparing the duty paid to the United States and
the US$ equivalent duty paid to Mexico.
Section 181.44(c)
Comment: Three commenters expressed concern about the statement in
Sec. 181.44(c) (redesignated in this document as Sec. 181.44(d) as
discussed above) that ``same kind and quality'' is synonymous with
``identical or similar good''. They stated that this terminology should
not restrict or eliminate rulings and court cases related to same kind
and quality. Another commenter stated that making the term ``same kind
and quality'' synonymous with the terms ``identical'' or ``similar''
seems to eliminate substitution drawback since identical or similar
goods are defined in part as ``goods that were produced in the same
country as that good''. If this is true, then the example in this
section is incorrect because it allows for the substitution of foreign
and domestic goods. On a related subject, a commenter raised the point
that the statement that the two terms are synonymous leaves the door
open for narrowing the scope of the ``same kind and quality'' provision
to that of ``identical or similar.'' This commenter was of the view
that it should be stated that all rulings, court cases or other
determinations pertaining to same kind and quality will be the guiding
force in understanding the meaning of ``identical and similar good.''
Customs response: Although it is true that the term ``same kind and
quality'' is considered to have the same meaning as the term
``identical or similar'', Customs does not intend to require that the
substituted merchandise come from the same country to qualify for
manufacturing drawback under the NAFTA. Section 181.44(d), as set forth
below, has been modified to clarify these points.
Section 181.45
Comment: With regard to the reference in this section to ``same
condition'' instead of ``unused merchandise'', three commenters
questioned whether a third unique type of drawback is contemplated by
this regulation, that is, same condition drawback for NAFTA countries
and unused drawback or manufacturing drawback for all other countries.
Otherwise, they stated that the terminology used in the NAFTA and in 19
U.S.C. 1313(j), as amended by section 632 of the Act, must be
harmonized. Also on this subject, another commenter stated that, for
consistency, the term ``same condition drawback'' should be replaced
with ``unused merchandise drawback.''
Customs response: The Agreement was signed by the United States on
December 17, 1992. The United States could not, without reopening
negotiations with the two other Governments, incorporate changes made
to its national laws subsequent to December 17, 1992, in its obligation
to implement the Agreement. Consequently, with respect to trade between
the three NAFTA parties there will be unavoidable inconsistencies when
compared with trade between the United States and countries outside the
Agreement. It is simply impossible to eliminate all differences between
the provisions of sections 203 and 632 of the Act by regulation. In
trade between NAFTA countries the provisions of section 203 of the Act
control. Subpart E can do no more than to implement section 203 of the
Act.
Section 181.45(b)
Comment: Two commenters stated that the second sentence of the
example should be amended to simply read ``X immediately exports the
desk to Z in Mexico'' because, whether or not duties are owed in
Mexico, the mere fact of exportation will allow X to obtain a refund of
99% of the $25.00 in duty paid upon importation of the desk into the
United States. These commenters went on to state that the fact that Z
pays duty of $10.00 in Mexico is moot: 19 U.S.C. 1313(j)(1) contains no
limitation based upon payment of duties in the NAFTA country of import.
Thus, including the $10.00 Mexican duty in
[[Page 46340]]
the example rather than a ``whether or not'' phrase regarding payment
of duty in Mexico, will be confusing to industry and to Customs
personnel. Since the amount of duty is only germane in calculating the
``lesser of two duties'' under a manufacturing scenario, these
commenters stated that the suggested modifications of the example would
more accurately reflect the law.
Customs response: The sentence which precedes the example, together
with the example, illustrates precisely the point made by the comment.
Comment: A commenter stated that the term ``commercially
interchangeable'' should be substituted for ``completely fungible'' in
subparagraph (2) of this section.
Customs response: In order to avail oneself of full drawback under
direct identification, the Agreement and implementing legislation
permit identification of the exported good as the imported good by
means of a recordkeeping system only if the goods are fungible and
commingled. Section 181.45(b)(2)(i), as set forth below, has been
modified as explained below in the response to the comments submitted
regarding Schedule X of the Appendix to Part 181, and the modified text
does not include the superfluous word ``completely'' before
``fungible''.
Section 181.45(c)
Comment: One commenter stated that the statement ``X exports it
within 90 days'' in the example under this section should be changed to
refer to ``within 3 years''.
Customs response: The period for exportation is clearly stated in
Sec. 181.45(c). An example cannot impose a further qualification on
either the statute or implementing regulation. So long as the period is
less than 3 years the example correctly illustrates the provision.
Section 181.46(b)
Comment: Two commenters stated that the existing exporter's summary
procedure and waiver of prior notice provisions and the new provisions
for ``unused merchandise drawback'' eliminate the need to inspect the
goods prior to export because it would be too difficult for Customs to
determine ``unused'' status by visual inspection. These two commenters,
after stating that the Office of Trade Operations has indicated that
the required 5 days of prior notice may be shortened to 48 hours,
suggested that any change to this time period in Part 191 of the
Customs Regulations should be reflected in the corresponding provision
in Part 181. In addition, one of these commenters pointed out that
there never existed a requirement for filing at the port of
exportation.
Customs response: Although the exporter's summary procedure and
waiver of prior notice provisions are not specifically provided for in
the NAFTA, they are not new to the Drawback Program. Therefore, the
existence of these two privileges would not be a basis for eliminating
the physical inspection of the goods. With respect to shortening the
prior notice period from 5 days to 48 hours, this principle already has
been considered by Customs in connection with a pending proposed
revision of Part 191 of the Customs Regulations. Section 181.46(b), as
set forth below, has been modified to specify a prior notice period of
2 working days rather than 5 days.
Comment: One commenter pointed out that the statement in this
section that ``[g]enerally, for same condition drawback, the claim
would be filed with the Customs port where the examination would take
place'' is not practical and not required by law.
Customs response: Because there are currently no requirements that
claimants file same condition claims at the port where the examination
will take place, Customs agrees that this statement should be replaced
by the following: ``To facilitate expedited processing of claims,
claimants should file same condition drawback claims in the port where
the examination would take place''. Section 181.46(b) as set forth
below has been modified accordingly.
Comment: A commenter requested that the text of this section be
replaced by the appropriate sections from Part 191 of the regulations.
The commenter did not explain the basis for this comment.
Customs response: Customs believes that the new language set forth
in the preceding response will at least in part address this comment.
Section 181.47(a)
Comment: Two commenters stated that this section places an undue
burden on the claimant because it requires the claimant to monitor the
enforcement of the Canadian or Mexican Customs regulations. These
commenters also argued that the section is also unfair in that it
requires the claimant to have access to duty payment information to
which it is not privileged, when sometimes the claimant does not even
know who the ultimate importer is in Canada or Mexico.
Customs response: The Agreement provides that the amount of the
duties paid in the destination NAFTA country must be presented by the
person seeking a refund of that duty from the exporting NAFTA country.
In order to obtain the refund, the claimant must obtain the cooperation
of its customer in Canada or Mexico.
Section 181.47(b)(1)
Comment: Two commenters complained that the Canadian or Mexican
Customs entry and the document referred to as the ``certification'',
which are required to be submitted under this section, are too
difficult for the U.S. exporter to obtain. Two other commenters stated
that requiring both documents is redundant and contradictory to the
paperless entry concept. Another commenter suggested that the entry
documents should not be required but rather should be used only if
available and that certification should only be provided in the event
of an audit.
Customs response: The provision reflects a basic and necessary
component of a proper NAFTA drawback claim and is not redundant since
alternative methods may be used to establish that amount as set forth
in paragraph (c) of Sec. 181.47. As regards the alleged burden imposed
by this provision, and as noted elsewhere, a drawback claimant will
need the cooperation of its Mexican or Canadian customer in order to
benefit under the agreement.
Section 181.47(b)(2)(i)
Comment: Two commenters believed that the documents required in
Part 191 of the regulations satisfy the NAFTA requirements. They stated
that commercial invoices, proof of payment of duties and import
documents relating to an exportation to a foreign country have never
been required with drawback claims under Part 191 and should only be
required in the event of an audit. These two commenters also stated
that these documents would not be required at the time of filing the
claim under the exporter's summary procedure.
Customs response: Paragraph (c) of Sec. 181.47 does not require
filing of the Canadian or Mexican Customs entry because, under
subparagraph (4), the drawback claimant may file an affidavit in lieu
of the Canadian or Mexican entry document provided that certain
specified information is also submitted. The requirement for these new
documents is a result of the new ``lesser of the two'' system which is
part of the NAFTA Agreement. The documents required in Part 191 of the
regulations would not enable either the claimant or Customs to have
knowledge of the
[[Page 46341]]
amount of duties paid upon importation into Canada or Mexico.
Section 181.47(b)(2)(ii)(G) provides an alternative means for a
drawback claimant under 19 U.S.C. 1313(j)(1) to show exportation.
Section 181.47(b)(2)(i)(A)
Comment: Four commenters stated that it is unclear why the tariff
classification number of the imported merchandise is needed when the
drawback is based upon the duty paid (regardless of the tariff number).
These commenters further stated that tariff numbers have never played a
significant role in drawback before.
Customs response: The tariff classification number will facilitate
processing drawback claims by Customs. The use of a number rather than
a textual description is better adapted to automated processing
procedures. In the near future, tariff numbers will be required for all
drawback claims, not just for NAFTA claims. These numbers are needed
for compiling profiles as part of the planned selectivity system for
drawback.
Because drawback claims under the Agreement require a comparison on
an individual basis, as noted by these same commenters, with respect to
Sec. 181.45, the line item information is needed in order to process a
claim under the Agreement.
Section 181.47(b)(2)(i)(B)
Comment: An objection was raised by three commenters regarding the
requirement of submission of the commercial invoice because many
importers do not have a hard copy of this document. These commenters
argued that submission of the commercial invoice is contrary to the
Customs modernization provisions of the Act and to the principles of
automation, and they further stated that the commercial invoice is
difficult to obtain because it contains proprietary information. Two of
these commenters also pointed out that Customs will not have sufficient
staff to review all of this documentation.
Customs response: Customs agrees that claimants should not be
required to submit Customs Form 7501 and copies of commercial invoices
with their claims unless they are requested by Customs. Accordingly,
Sec. 181.47(b)(2)(i)(B), as set forth below, has been modified to
specify only ``Customs Form 7501 or the import entry number''. It
should be noted, however, that claimants (and other parties who provide
information on which a claim is based) must continue to maintain
records to support the claim and make them available upon request. This
includes records of importation and invoice-level information.
Section 181.47(b)(2)(i)(C)
Comment: Three commenters objected to the inclusion of the Canadian
and Mexican entry numbers on the exporter's summary procedure because:
(1) These numbers are not available to the exporter; (2) the exporter's
summary procedure was not intended for this purpose; and (3) the courts
have ruled that when information such as this is impossible to obtain
the ``best evidence available'' must be accepted.
Customs response: These numbers are needed in order for the NAFTA
countries to implement a data exchange system which will be used to
verify the requested amount of drawback based on the ``lesser of the
two'' system. The NAFTA parties will provide each with a tape of entry
numbers and corresponding duty payments so that claimed amounts may be
verified on a spot-check basis. Entry numbers are needed for this
system to work.
Section 181.47(b)(2)(i)(D)
Comment: Three commenters stated that the NAFTA regulations should
require only ``evidence of exportation'', as is required in Part 191 of
the regulations, rather than the ``proof of exportation'' provided for
in this section and in other sections of these NAFTA regulations.
Customs response: Customs agrees that the term ``evidence'' should
be substituted for the term ``proof'' in each such context in order to
be consistent with Part 191 of the regulations, and the Subpart E
texts, as set forth below, have been appropriately modified throughout.
Section 181.47(b)(2)(i)(E)
Comment: Three commenters stated that waivers of rights to drawback
are already available in the form of certificates of delivery and
certificates of manufacture, and therefore any additional waiver
requirement is redundant.
Customs response: The certificate of delivery does not waive any
right to drawback particularly in light of the right to transfer
substitute merchandise. This certificate makes it absolutely clear to
the certifier that it may not claim any drawback with respect to the
merchandise covered by the waiver.
Comment: A commenter questioned the validity of the waiver of the
right to drawback by the importer in favor of the exporter when
Sec. 181.48(a) clearly states that the exporter is entitled to
drawback.
Customs response: A waiver is needed from the importer who
transfers any merchandise to a manufacturer and issues a certificate of
delivery. A manufacturer who transfers merchandise to an exporter and
issues a certificate of manufacture and delivery also needs to issue a
waiver.
Section 181.47(b)(2)(i)(F)
Comment: Three commenters stated that the requirement that the
drawback claimant provide a certification that he has not issued a
Certificate of Origin for the goods to another party, or that he will
notify Customs if he does so, is not valid because there is no NAFTA
provision that precludes drawback when NAFTA preference is taken. One
commenter stated that the separate certification or affidavit is not
needed because it is well known that double dipping is illegal.
Customs response: The requirement is necessary since it is far from
obvious that providing a Certificate of Origin which enables a Mexican
or Canadian importer to obtain a duty reduction or refund from Mexico
or Canada would be considered illegal double-dipping by a United States
drawback claimant since that claimant would not necessarily benefit
directly from the actions of its customers.
Comment: Another commenter took issue with the requirement for an
affidavit by a manufacturing claimant certifying that no other claim
has been filed on the goods. This commenter stated that once the
claimant receives either a certificate of delivery or a certificate of
manufacture and delivery, he can only certify that he has not made any
other claim on the goods. The manufacturing claimant will not know
whether the importer or any other party makes a claim on the goods.
Customs response: The commenter appears to compare the requirements
of Sec. 181.47(b)(2)(i)(F) and Sec. 181.51(b). The Customs
recordkeeping statute, 19 U.S.C. 1508, as amended by section 205 of the
Act, does not prohibit a drawback claimant from providing an affidavit
on the preparation of a Certificate of Origin with the drawback claim.
It does require a drawback claimant to report such facts within 30 days
of filing a drawback claim if that claimant has not already done so.
Informed compliance means that the Government is under an
obligation to inform persons who deal with it which acts are
proscribed. The regulation which requires a certification that the same
import entry for the same designation of goods has not been used in
more than one claim fulfills that obligation.
[[Page 46342]]
Section 181.47(b)(2)(ii)(A)
Comment: Two commenters stated that the requirement for the tariff
classification at entry is superfluous.
Customs response: As already pointed out, in the near future tariff
numbers will be required for all drawback claims, not just for NAFTA
claims. These numbers are needed for compiling profiles as part of the
planned selectivity system for drawback.
Section 181.47(b)(2)(ii)(B)
Comment: Four commenters stated that the requirement regarding
submission of commercial invoices is in conflict with the requirements
of the Customs modernization provisions of the Act and is a step
backwards in the automation process. These commenters further argued
that these documents are impossible to obtain when the claimant is not
the importer. One of these commenters suggested requiring a pro forma
invoice instead for same condition claims in order to resolve the
latter problem. Another of these commenters stated that the detail
required in this section may not be available due to automation and
paperless entries and that it should be changed to refer to Customs
Form 7501 and any appropriate documentation which identifies the
subject goods. Another commenter stated that the entry documents (such
as Customs Form 7501) may not be available because of confidentiality
considerations.
Customs response: Again, Customs agrees that claimants should not
be required to submit commercial invoices with their claims.
Accordingly, Sec. 181.47(b)(2)(ii)(B), as set forth below, has been
modified by removing the two references to commercial invoices, and
Sec. 181.47(b)(2)(iii)(B), as set forth below, has been similarly
modified for purposes of consistency. However, Customs would again
point out that claimants (and other parties who provide information on
which a claim is based) must possess and maintain records to support
the claim and make them available upon request. This includes records
of importation and invoice-level information.
Section 181.47(b)(2)(ii)(G)
Comment: Two commenters stated that this section should begin with
the words ``If exporter summary procedures are not in force''. In
addition, two commenters stated that the words ``* * * and signed in
ink'' should be deleted because obtaining an original ink signature on
a nonnegotiable copy of a document is an unnecessary burden. Finally,
one commenter stated that this section does not take into account
claimants using procedures under Sec. 191.51 of the regulations and
that it should be amended to reflect that fact.
Customs response: Customs agrees that where the exporter's summary
procedure is approved for the claimant, the requirement in
Sec. 181.47(b)(2)(ii)(G) is not applicable; accordingly, this section
as set forth below has been modified by adding at the beginning of the
first sentence the words ``If a claimant is not approved for the
exporter's summary procedure,''. In addition, while the evidence of
export document must be signed, Customs agrees that the signature need
not be in ink; accordingly, the section as set forth below has been
modified by removing the words ``and signed in ink'' from the first
sentence. Finally, Customs agrees that this section should reflect that
evidence of exportation may also be established in accordance with the
provisions of Sec. 191.51; accordingly, Sec. 181.47(b)(2)(ii)(G), as
set forth below, has been modified by adding at the end of the first
sentence the words ``, or any other evidence of exportation provided
for in Sec. 191.51 of this chapter''.
Section 181.47(b)(2)(ii)(H)
Comment: Three commenters stated that providing a waiver from the
importer is redundant since a certificate of delivery already serves
the same purpose. One of these commenters suggested that if Customs
must have it, it should be provided for directly on the certificate of
delivery.
Customs response: A certificate of delivery does not in itself
constitute a waiver of the right to claim drawback. Thus, an explicit
waiver is necessary.
Customs agrees in principle that the waiver could be incorporated
into the certificate of delivery form. However, until that form is
revised to include the waiver, a separate waiver is needed.
Section 181.47(b)(2)(ii)(I)
Comment: One commenter recommended that the affidavit be
incorporated onto the ``J'' side of Customs Form 7539, but with
reference to ``designated goods'' changed to ``identified goods''.
Another commenter stated that the affidavit is unnecessary but that if
Customs must have it, it should be included on the drawback entry form
instead.
Customs response: So long as the affidavit is included with the
drawback entry, the legal requirement will be satisfied.
Section 181.47(b)(2)(iii)(B)
Comment: One commenter objected to the requirement of submission of
the commercial invoice because it will not be available in hard copy.
This commenter stated that a pro forma invoice would solve this
problem.
Customs response: Customs took the position in promulgating 19 CFR
191.142(b)(6) that drawback under 19 U.S.C. 1313(c) is payable to an
exporter claimant who is the importer of record or the actual owner
named in the import entry. There is nothing in section 203 or 632 of
the Act which would require a change to that position. As such, it is
unclear why the person who ordered the merchandise and who determined
that the merchandise did not meet the order specifications would not
have the original invoice issued by the foreign supplier.
Section 181.47(b)(2)(iii)(C)
Comment: It was pointed out by a commenter that import documents
for foreign countries are not available to the U.S. seller and that it
is virtually impossible for the U.S. seller to obtain proof of payment
and final duty determination notices.
Customs response: The commenter has misread the section.
Subparagraph (C) states the evidence needed to show that the
specifications were not met.
Section 181.47(c)
Comment: Two commenters stated that the phrase ``for purposes of
evidence of duties paid'' is confusing in that Sec. 181.47(a) also
refers to ``evidence of exportation''. They also suggested that Customs
may want to consider a single definition for ``evidence of
exportation'' as has always been done under Part 191 of the regulations
and introduce specific requirements only for 19 U.S.C. 1313 (a) or (b)
drawback for ``evidence of duties paid'' since this information is
germane only to manufacturing drawback when calculating the ``lesser of
the two duties''.
Customs response: It would be quite difficult for Customs to draft
an affidavit for the parties. The language needed to demonstrate that
the claimant's goods were received by its Mexican or Canadian customer
and the amount of duty paid to Canada or Mexico by that customer would
depend on that customer's statement.
There is a difference between the provision on exportation in
Sec. 181.47(b)(2)(ii)(G) (which has specific reference to 19 U.S.C.
1313(j)(1)) and the provision in Sec. 181.47(c). Because in the former
case there is full drawback available without a comparison between the
duty that was paid in the United States and the duty paid in Canada or
Mexico, the provisions necessarily
[[Page 46343]]
differ. The provisions of Sec. 181.47(c) also apply in a NAFTA context
to other duty reduction programs such as temporary importations under
bond, bonded warehouses, and foreign trade zones (see
Sec. 181.53(a)(3)).
Section 181.48
Comment: With regard to paragraphs (b) and (c), two commenters
pointed out that the wording is confusing and not consistent with
``mainline'' drawback in that, under Part 191 of the regulations and
under the Customs modernization provisions of the Act, it is always the
exporter of record who is entitled to drawback. One of these commenters
suggested the following alternative language: ``The exporter of record
is entitled to the drawback unless the exporter directs in writing that
another entity receive the drawback refund.''
Customs response: The provision in Sec. 181.48(b) follows the
position set forth in 19 CFR 191.142(b)(6). Section 181.48(c) is
consistent with current law regarding the identity of the claimant for
same condition drawback. The Customs modernization provisions of the
Act followed this interpretation with respect to the identity of the
claimant for unused merchandise drawback.
Section 181.49
Comment: One commenter stated that this section does not specify
which records are required to be kept by the exporter, importer,
manufacturer or producer. This commenter argued that Customs
recordkeeping requirements are strictly limited to those records which
are referenced in the statute and that this is consistent with
Congressional intent under H.R. 3450. This commenter also suggested
that Customs review the commentary in the House Report with regard to
section 632 of the Act and that Customs also compare Sec. 181.49 to
Sec. 181.53(g).
Customs response: The types of records are set forth in
Sec. 181.47(b); this section simply sets the retention period. Since
payment occurs in most instances under the accelerated payment program
before liquidation takes place, the period starts and ends earlier. In
any event, Sec. 181.49 follows the existing policy set forth in 19 CFR
191.5. Customs notes that 19 U.S.C. 1313(t), which was added by section
632 of the Act, makes the general recordkeeping requirements set forth
in 19 U.S.C. 1508(c) applicable in the context of drawback certificates
and provides that the retention period starts on the date the
certificate is issued in the case of a person who issues a certificate
relating to another person's drawback claim. Accordingly, Sec. 181.49,
as set forth below, has been modified by adding at the end the
following sentence: ``However, any person who issues a drawback
certificate that enables another person to make or perfect a drawback
claim shall keep records in support of that certificate commencing on
the date that the certificate is issued and shall retain those records
for three years following the date of payment of the claim.''
Section 181.50(a)
Comment: A commenter raised the issue that whereas the regulations
require that the amount of duties paid to Canada or Mexico be
``established'' as a prerequisite to the completion of the claim, they
do not provide instructions as to how these duty amounts will be
established and they do not prescribe a time frame in which the duty
amounts will be settled for the purpose of finalizing the claim.
Customs response: This section describes generally the process by
which Customs will determine the amount of drawback to be paid. A
directive for the guidance of Customs officers will address the
internal Customs procedures that will implement the process in detail.
With regard to the time frame issue, see the discussion of
Sec. 181.50(b) below.
Section 181.50(b)
Comment: Two commenters stated that requiring liquidation of
entries made in Mexico and Canada before a drawback claim is liquidated
eliminates most drawback claims from the Customs modernization act
bypass system. In a related comment, another commenter stated that this
section is in conflict with the Customs modernization provisions of the
Act in a bypass (selectivity) system context because the liquidation of
all designated import entries is no longer required for drawback
liquidation. This commenter argued that requiring that there be prior
liquidation of the import entry in Canada or Mexico undermines the
process and conflicts with the requirement for fair and reasonable
procedures as described in the legislative history accompanying the
Customs modernization provisions of the Act.
Customs response: Customs will not be able to determine the
``lesser of'' the two duties unless the final amount of duties paid
upon entry to Canada or Mexico is available. See also the response to
the next comment.
Comment: A commenter stated that a time limit for liquidations is
needed and that the current indefinite time period is in conflict with
the intent expressed by Congress in the new drawback provisions
contained in section 632 of the Act. In this regard this commenter
referred to the accompanying House Report in which it was stated that
``the Committee expects that Customs should issue drawback regulations
which take into consideration the various time limitations for
recordkeeping, filing claims, amendments and clarifications and for
auditing and liquidating drawback claims.''
Customs response: There is no requirement under the law that
provides for a specific time period for liquidation of drawback claims,
and practical considerations (including differences in the entry laws
of the three NAFTA Parties) militate against imposing a strict time
limit for liquidation of a drawback claim.
On a related subject, the United States and Canada have agreed that
each import transaction involving goods subject to a NAFTA drawback
claim in the exporting country should be monitored for a period of 3
years so that appropriate information may be provided to the exporting
country for purposes of applying the ``lesser of'' rule; this 3-year
period was chosen because it represents in most cases the time during
which all factors affecting ultimate finalization of the import entry
(including changes to the entry made by the importer after importation)
would be set. Accordingly, Sec. 181.50(b) as set forth below has been
modified to provide that a drawback claim shall not be liquidated for a
period of 3 years after the date of entry of the goods in Canada or
Mexico.
Comment: A commenter made the following suggestion with respect to
the policy that liquidation of the drawback claim not occur until the
liquidation of the Canadian or Mexican customs entry has become final:
In order to avoid a long waiting period, a waiver of the right to
challenge the amount of estimated Canadian or Mexican duties should be
established. Under this procedure, the claimant would agree to waive
the right to claim any additional duties owed to Canadian or Mexican
Customs.
Customs response: The commenter alleges that liquidation of a
drawback claim can be done more quickly if the right to challenge the
amount of duties assessed by Canada or Mexico is waived. However, a
U.S. drawback claimant, unless it is also the importer into Mexico or
Canada, has no right to waive the amount of duty paid by the Mexican or
Canadian importer. Also, a system involving payment of drawback claims
based upon the waiving of rights to challenge the Canadian or Mexican
duty amounts could result in the United
[[Page 46344]]
States issuing an overpayment to the drawback claimant each time the
import entry was liquidated for a lower amount of duties. The change to
Sec. 181.50(b) discussed in the response to the preceding comment
represents Customs view regarding the proper time period during which
liquidation of a drawback claim should not take place.
Section 181.50(c)
Comment: With respect to the requirement that a person who receives
a drawback refund through accelerated payment must repay the duties if
a NAFTA claim is adversely affected thereafter, a commenter stated that
this should be amended to state that repayment is not required until
the adverse decision has been made final by the courts and/or by
operation of law.
Customs response: The suggestion that a claimant who receives an
accelerated payment before liquidation need not repay it until the
adverse action which makes that accelerated payment erroneous would be
acceptable if the bond required the recipient to repay the principal
sum with interest running from the date that Customs made the
accelerated payment and until repaid. Since that process could take
years, the bond amounts would have to be increased accordingly to
protect the revenue. Accordingly, Customs concludes that the obligation
to repay arises whenever an administrative action occurs which affects
the NAFTA drawback claim.
Section 181.51(a)
Comment: Three commenters noted that certifying that an entry was
not designated and paid on a prior drawback claim is unnecessary
because a claimant that knowingly does this is guilty of fraud, and the
Compliance Program and the civil penalties should offer sufficient
protection against fraudulent claims.
Customs response: Customs believes that the regulation serves a
useful purpose in reminding the claimant to exercise care to make
certain that double claims are not made.
Section 181.51(b)
Comment: A commenter stated that the requirement for the claimant
to state that no Certificate of Origin has been provided for the goods
should be changed to a statement that no other ``NAFTA'' Certificate of
Origin has been provided for the goods. This is because sometimes
exporters may use Certificates of Origin for other purposes (for
example, for enforcement of trade sanctions).
Customs response: The first sentence under Sec. 181.51(b) refers to
a Certificate of Origin ``provided for under Sec. 181.11(a)'', and the
second sentence refers to ``any such'' Certificate of Origin; as such
the Certificate of Origin cannot be mistaken for any other certificate
of origin that may apply to other laws. Therefore, use of ``NAFTA'' as
suggested would be redundant and thus inappropriate.
Comment: A commenter referred specifically to the requirement that
the claimant provide notice of whether another person has prepared a
NAFTA Certificate of Origin for those goods. This commenter stated that
this is in conflict with the new regulation that the claimant provide
an affidavit that no Certificate of Origin has been provided for those
goods.
Customs response: Section 181.47(b)(2)(i)(F) requires a claimant to
affirm that no NAFTA Certificate of Origin was provided ``except as
stated on the drawback claim''. Section 181.51(b) supplements that
provision and makes it clear that a claimant who provides a NAFTA
Certificate of Origin must report that fact to Customs.
Comment: A commenter stated that new subsection (t) of 19 U.S.C.
1313 provides that ``any person who issues a certificate which would
enable another person to claim drawback shall be subject to the
recordkeeping provisions of this chapter, with the retention period
beginning on the date that such certificate is issued'' and that the
interim regulations are deficient in that they do not implement the
language of this statutory provision. This commenter stated that
subsection (t) would be helpful because it would establish a retention
period beginning on the date the certificate was issued, instead of the
date of payment.
Customs response: The NAFTA Certificate of Origin record retention
period is set forth in Sec. 181.12. See 19 U.S.C. 1508(c). The NAFTA
Certificate of Origin is not a certificate that would enable another
person to claim drawback. The certificates covered by 19 U.S.C. 1313(t)
are the certificate of delivery and the certificate of manufacture and
delivery.
Comment: A commenter stated that should this regulation remain as
is, the 30-day window for filing the Certificate of Origin after filing
the claim will create another administrative nightmare for Customs
because all of the affidavits regarding Certificates issued (which may
come in at various times after submission of the drawback entry) will
have to be matched with previously filed drawback entries. This
commenter stated that some adjustment should be made in the regulatory
text to meet this problem.
Customs response: This comment is unclear because there is no ``30-
day window for filing the Certificate of Origin.'' There are, however,
two 30-day windows established in this section which involve notifying
Customs of the existence of a Certificate of Origin for goods on which
drawback has been paid. These two notification periods are necessary
because if a drawback claimant prepares a Certificate of Origin for its
Canadian or Mexican customer, it could result in a reduction of duty
paid to Canada or Mexico on the goods for which the claimant is basing
its drawback claim. Therefore, it must be reported to Customs so that
Customs will be able to track and adjust that drawback claim. A
drawback claimant who makes a drawback claim and then provides a
Certificate of Origin to its customer jeopardizes its drawback claim.
Section 181.52
Comment: Two commenters stated that this provision creates
contingent liabilities on every claim filed that could go on for a
significant amount of time and that, therefore, the time frames allowed
under NAFTA Article 502(3) for duty refunds in Canada and Mexico should
be clearly indicated. These two commenters also stated that Customs
will not be able to comply with this requirement without automation, or
without recording the Canadian or Mexican entry number at the time the
drawback claim is filed. In this regard, they referred to language
pertaining to Title VI of H.R. 3450 which states that monitoring of
drawback information can only be carried out effectively through
exchange of electronic information.
Customs response: The commenters are correct. The very nature of
the Agreement creates that contingent liability because of the
differences in national laws and the right of an importer to make a
post-entry NAFTA claim that is expressly provided in the Agreement. The
alternative that was considered by the three Governments was to
prohibit all refunds on goods moving from one NAFTA party to another
NAFTA party. Permitting limited refunds necessarily increases
uncertainty.
Section 181.53
General comments: The following general comments were made with
regard to the operation of this section:
1. A commenter requested that the effective dates of this section
be stated at the beginning of the section.
[[Page 46345]]
2. One commenter stated that the regulations should address the
importation of goods from NAFTA countries covered by U.S. duty deferral
programs, even though there will be some duties which could be deferred
under these programs until all of the staged duty reductions and
eliminations under NAFTA have been completed. This commenter also
asked, if a claim for preferential tariff treatment is filed upon
importation, whether an importer may file a warehouse entry or
application for admission to a foreign trade zone and, if the claim is
valid, whether it will be honored upon warehouse withdrawal or foreign
trade zone entry for consumption.
3. A commenter asked whether the ``lesser of the two'' method will
apply when zero payment of duties is an issue.
4. A commenter stated that this section does not address
originating goods which are entered into a bonded warehouse,
manipulated to the point where they are deemed produced in the bonded
warehouse, and subsequently withdrawn for consumption in the United
States.
5. Three commenters stated that the 60-day allowance for obtaining
proof of exportation and duty payment in Canada or Mexico should be
extended to a longer period, and one of these commenters suggested a
120-day period.
Customs response: The effective dates are already stated at the
beginning of Subpart E.
The comment dealing with imports from NAFTA countries is beyond the
scope of Subpart E.
Zero payment of duty into Canada or Mexico will be considered in
making the comparison. If no duty is paid into Canada or Mexico, there
will be no duty refund or deferral. Under the agreement, Canada and
Mexico are required to provide reciprocal treatment of goods sent to
the United States.
The treatment of originating goods entered into a warehouse and
withdrawn for consumption is beyond the scope of Subpart E.
The 60-day time period was set by Article 303(5) of the Agreement.
Knowing of the time frame, there is no reason why the beneficiary of
the refund cannot structure its transfer to ensure that it can comply
with the time period.
Section 181.53(a)(1)
Comment: One commenter took issue with the definition of ``duty
deferral'' provided in this section, stating that Class 2 and 3 customs
bonded warehouses are excluded from this list, whereas their
counterparts, ``warehousing/distribution foreign-trade zones'' are not
excluded. This commenter stated that the initial sentence in
Sec. 181.53(e) provides a better definition of ``a good that is
manufactured or otherwise changed in condition in a foreign-trade zone
* * *''
Customs response: The comment seems to state that a class 2/8
warehouse or a class 3/8 warehouse is excluded from coverage of
Sec. 181.53. Such warehouses are included under Sec. 181.53(b).
Section 181.53(a)(2)
Comment: A commenter suggested adding to this section the following
phrase: ``except for a good eligible for full drawback as provided for
by section 181.45 of this Subpart''. In this regard, this commenter
stated that NAFTA Article 303(6) provides for several import
transactions that are unaffected by any limitations on drawback refunds
or duty-deferral programs. This commenter also stated that Sec. 181.45
captures these Article 303(6) transactions for drawback refund
purposes. This commenter also stated that the regulations should
clearly state that a good departing a foreign-trade zone for export to
Mexico or Canada under circumstances included in Article 303(6) and/or
Sec. 181.45 shall not be subject to treatment ``* * * as if it had been
entered or withdrawn for domestic consumption, and thus subject to
duty.''
Customs response: Customs agrees that goods entitled to full
drawback under Sec. 181.45 should be excluded from this provision.
Accordingly, Sec. 181.53(a)(2), as set forth below, has been modified
by the addition of the following sentence: ``However, the provisions of
this paragraph shall not apply to goods covered by Sec. 181.45.''
Comment: A commenter questioned the meaning of the phrase
``treatment as withdrawn for consumption.'' This commenter stated that,
from an operations standpoint in the case of merchandise shipments from
foreign trade zones, a ``pro-forma'' Customs Form 3461 and/or Customs
Form 7501 must be prepared. Since there is no legal provision for a
pro-forma version of these two forms, this commenter stated that the
exact methodology of how to do this should be provided in the
regulations.
Customs response: With respect to the meaning of ``treatment as
withdrawn for consumption'' the provision informs the person who
withdraws that it will be liable for duties on a good withdrawn for
exportation to Canada or Mexico unless it is exempted by the Agreement
or statute. As regards documentation requirements, Customs agrees that
the regulations should incorporate specific provisions setting forth
the procedural (including documentary) requirements that would apply
for purposes of Sec. 181.53. However, Customs believes that it would be
preferable to deal with this matter in a separate Federal Register
document rather than include such provisions in this final rule
document. Accordingly, Customs intends to publish in the near future a
separate document amending Sec. 181.53 to address these procedural
issues with a view to having appropriate regulations in place on
January 1, 1996, when the Subpart E provisions go into effect.
Section 181.53(a)(3)
Comment: A commenter posed several questions about the process of
``waiver or reduction'' as provided for in this section. Will a pro
forma Customs entry be prepared and held or will it be filed in some
manner with Customs? How will the structure of the paperwork be
organized? Because merchandise that is the subject of the pro forma
entry will also be the subject of a Customs Form 7512 and Customs Form
7525, how will the Census reporting structure be organized?
Customs response: The section sets the legal requirement for
Customs to waive or reduce the duties paid or owed on goods sent to
Canada or Mexico. As indicated in the response to the preceding
comment, the documentary and other procedural aspects of Sec. 181.53
will be addressed in a separate document.
Section 181.53(e)
General comments: The following general comments were made with
regard to the operation of this section:
1. One commenter stated that, by requiring actual payment of duties
to Mexico or Canada, these regulations defeat the purpose for which
this 60-day hiatus was created for foreign trade zones. This purpose
was to address the paperwork and procedural burden the proposed ``NAFTA
Drawback'' would impose on Customs and on companies that use foreign
trade zones and export to Canada and/or Mexico. This commenter saw the
burden as follows:
Step One--Merchandise shipped from a zone to Mexico and/or Canada with
an appropriate tariff payment to U.S. Customs.
Step Two--Merchandise arrives in Mexico or Canada with appropriate
tariff payments made.
Step Three--The U.S. exporter files for NAFTA Drawback with the
evidence of payment(s) made in Canada or Mexico.
This commenter went on to state that, originally, the 60-day hiatus
was
[[Page 46346]]
expected to provide an opportunity to combine steps one and three but
that, by requiring payments to be made, this section forces a return
back to the three-step procedure. As it is, the potential for this
situation already exists when a Mexican or Canadian importer decides to
use a deferral program that extends his payment of duties owed beyond
the 60-day schedule imposed on the U.S. exporter. The regulations and
H.R. 3450 provide adequate anti-fraud provisions to protect against the
opportunity for any abuses that the suggested modifications might
otherwise provide. Moreover, Sec. 181.52 provides for the adjustment of
drawback payments pursuant to a NAFTA preference claim made subsequent
to the payment of a NAFTA drawback refund. This commenter therefore
suggested that in similar fashion such a protection could become part
of the Sec. 181.53(e) procedures so that evidence of duty paid could be
based on the duty owed (but not yet paid) in Mexico or Canada.
2. The same commenter requested that the phrase ``as calculated
under paragraph (e)(1) or (e)(2)'' in the introductory paragraph of
this section be replaced by the phrase ``as calculated consistent with
the provisions of 19 CFR 146 Section 146.65''.
3. Another commenter stated that this section does not take into
account that the Customs modernization provisions of the Act allow for
periodic entry procedures for goods transferred from foreign trade
zones to be expanded to a monthly timeframe instead of submission of
entry-by-entry paperwork.
4. Two commenters stated that the examples provided in this section
are convoluted and should be replaced. One commenter suggested that the
examples should set forth the following facts: The imported products
HTSUS classification; the rate of duty in the United States and in
Mexico or Canada; dutiable value; and total value. Moreover, it was
suggested that there should also be an example illustrating NAFTA
treatment for a good departing a foreign trade zone for Mexico or
Canada that combines both privileged and non-privileged foreign
components and/or materials.
5. A commenter pointed out that there is no provision for mixed
status merchandise (privileged and nonprivileged). This commenter also
stated that there is no provision for zone restricted status
merchandise. Since no production can occur in zone restricted status,
if storage distribution were not included in the special actions under
Sec. 181.53, new special provisions for this status would not be
necessary but should be mentioned.
6. Two commenters stated that the provision under section
202(a)(2)(A) of H.R. 3450 should be included in this section or it will
be misinterpreted. These commenters believed that it should be
interpreted only to mean that a foreign trade zone cannot be used to
create a NAFTA originating good qualifying for NAFTA duty reduction. On
a related subject, another commenter stated that this section does not
address goods which are processed but not produced in a foreign trade
zone (processed with non-originating materials). This commenter asked
whether privileged foreign status would be permitted to ``lock in''
NAFTA preferential tariff treatment.
7. A commenter requested further clarification of the valuation
methodology included in this section. This commenter further believed
that weight should not be a factor other than when it is a factor for
HTSUS purposes and therefore suggested using the language ``in its
condition and HTSUS quantity.''
8. A commenter asked what the date of exportation is for NAFTA
purposes.
9. A commenter requested that a definition of ``assessed'' be
provided.
10. A commenter believed that the requirement for proof of
exportation in this section is an unnecessary paperwork burden and
suggested that a summary procedure similar to the one used in drawback
should be established.
Customs response: The requirement for the collection of duties is
set forth in Article 303(5)(a) of the Agreement.
The inclusion of paragraphs (e)(1) and (2) facilitate having the
zone withdrawal NAFTA requirements in one part.
Whether a good is removed under the current weekly entry procedure
or some other periodic entry procedure will not change the concepts set
forth in the provision.
Creating complex examples will tend to obscure the principles
sought to be illustrated: That is, which duty amounts are to be
compared? The use of oil is appropriate since the principle is
illustrated when privileged foreign status is claimed. There is no need
for a separate example of merchandise consisting of nonprivileged and
privileged status merchandise since the principles set in both examples
would apply to such merchandise.
Export to Canada or Mexico of zone restricted status merchandise
will not require an entry for consumption. It will require the goods so
exported to be treated as a withdrawal for consumption for the sole
purpose of computing whether there should be a reduction or waiver of
duty.
The comment on section 202(a)(2) of the Act is beyond the scope of
Subpart E. It deals with goods that are entered for consumption from a
zone.
With respect to the use of weight as part of the valuation
methodology, Customs does not concur with the suggested change because
the provisions of this section follow the provisions of the Foreign
Trade Zones Act (see 19 U.S.C. 81c(a)).
In the case of a shipment from the United States to Canada or
Mexico, the date of exportation would be the date on which the goods
leave the United States with evidence that the person sending those
goods to Canada or Mexico intends to join them to the commerce of
Canada or Mexico (see 19 CFR 101.1(k)).
The common meaning of the term ``assessed'' applies. As such, there
is no need to provide for a separate definition that repeats the common
meaning.
With respect to the proof of export burden under NAFTA, the comment
fails to recognize that unlike drawback for shipments to non-NAFTA
countries, the basis for entitlement to a refund, waiver or reduction
in duty there depends entirely on the article and the amount of duty
paid to Canada or Mexico. Also, the comment confuses the distinction
between one drawback claim which may involve many exportations of
merchandise on which duty was previously paid and specific withdrawals
on which potential duty liability starts when that merchandise is
withdrawn from a zone.
Section 181.53(e)(1)
Comment: A commenter stated that there are imported goods in
foreign trade zones destined for Canada and/or Mexico under zone
restricted status (19 CFR 146.44). This commenter stated that a general
exemption from 19 CFR 146.63(b) should be provided for these goods
because, for these goods to be entered or withdrawn for domestic
consumption from an FTZ, Sec. 146.63(b) provides that merchandise in
zone restricted status may be entered for consumption only when the
Foreign Trade Zone Board has ruled that the merchandise can be entered
for consumption. To require rulings on such a routine matter will
impose an unnecessary procedural burden on the Foreign Trade Zone
Board, zone users and on Customs.
Customs response: The issue of goods in a zone restricted status
will be addressed in the separate document regarding Sec. 181.53
procedures to be published in the near future as mentioned above.
[[Page 46347]]
Section 181.53(e)(2)
Comment: A commenter took issue with the implication of this
section that payments may be refunded only up to the limits established
by Sec. 181.44. Specifically, this commenter stated that under these
regulations the exporter is required to make payments to U.S. Customs
that might otherwise be unnecessary or larger in amount than is legally
required for reasons of failure to meet the 60-day deadline. There
should be an explicit provision that provides for the refund of these
unnecessary or excessive payments in whole or in part when the evidence
required by Sec. 181.53 becomes available.
Customs response: There is no allowance for a time extension or a
reconsideration of the initial determination in the NAFTA legislation.
As regards available remedies for any ``unnecessary or excessive''
payments referred to by this commenter, this issue will be addressed in
the separate Sec. 181.53 document to be published as mentioned above.
Comment: A commenter stated that the 60-day period should be
defined on a business month basis, not on a daily basis.
Customs response: As previously stated, the 60-day period was set
by the three Governments in the Agreement. The purpose of the 60-day
requirement was to enable the refund claimant to provide the Canadian
or Mexican entry information so that the appropriate duty comparison
could be made.
Comment: A commenter pointed out that separately defining duty
calculations when treating exports from foreign trade zones as domestic
entries provides for many questions and potentially disparate
procedures. To diminish the likelihood for both these questions and
procedures, this commenter suggested that this section be amended to
reflect current FTZ regulations that cover entries for consumption.
Customs response: These procedural issues will be addressed in the
separate Sec. 181.53 document to be published as mentioned above.
Comment: A commenter alleged that there is a conflict in this
section in that the section states that duty is assessed on privileged
foreign status goods at the time of admission to the zone but in the
example refers to duty assessed one month after admission.
Customs response: The commenter is correct. Accordingly,
Sec. 181.53(e)(2), as set forth below, has been modified by replacing
the words ``at the time of its admission to'' with the words ``at the
time privileged status is granted in''.
Section 181.53(g)
Comment: A commenter stated that the recordkeeping period is
unclear, and therefore this commenter assumed that the normal
recordkeeping periods apply to drawback claims and to import entries.
Two other commenters stated that the 3-year period for record retention
should be stated to avoid confusion.
Customs response: Under 19 U.S.C. 1508(c) and the regulations
thereunder, the periods for record retention vary according to the type
of transaction involved. With respect to warehouse withdrawals, foreign
trade zone entries, and temporary importation bond transactions, the
period is five years from the date of entry. With respect to drawback,
the period is three years from the payment of drawback to the claimant.
Section 181.53(i)
Comment: A commenter stated that if this section relates to waiver
or reduction of duty under duty deferral programs, it is inappropriate
to state that ``* * * Customs shall reliquidate the NAFTA drawback
claim'' because that issue already is addressed in Sec. 181.52.
Customs response: The reference in this section is necessary
because, while Sec. 181.52 is limited to traditional drawback,
Sec. 181.53 includes all of the other contexts which are included in
the term ``NAFTA drawback'' as defined in Sec. 181.1(o) of the
regulations.
Section 181.54
Comment: A commenter stated that the open-ended time period for
U.S. Customs to verify Canadian and Mexican documentation creates
indefinite contingent liabilities. This commenter suggested that a
definite time period should be clearly indicated.
Customs response: Because the national laws differ and because the
Agreement expressly provides for post-entry claims to be filed up to
one year after entry, it is impossible to fix one time limit that will
cover all situations.
Appendix to Part 181
Additional comments were submitted regarding the relationship
between the Subpart E provisions and the provisions of Schedule X of
the Appendix to Part 181. Those comments are addressed below in
connection with the discussion of the Appendix comments.
Part 181, Subpart G (Origin Verifications and Determinations)
Section 181.72
Comment: In order to enable sureties to better protect their
interests, one commenter stated that the regulations should be modified
to require Customs to provide notice to the surety: (1) When Customs
commences an origin verification under paragraph (a) involving the bond
principal's goods; (2) when Customs makes an inquiry of the importer
under paragraph (c); and (3) whenever the foreign producer or exporter
or the U.S. importer fails to cooperate during an origin verification.
Customs response: Requiring such notices to sureties would impose
an unnecessary burden on Customs. Accordingly, this is a matter more
appropriate for the surety and its principal to resolve in the context
of their contractual relationship.
Section 181.75
Comment: One commenter stated that the regulations should be
modified to require Customs to provide notice to a surety when a
negative origin determination is issued to the surety's bond principal
under paragraph (b).
Customs response: A negative determination of origin does not
necessarily result in a bond breach. Consequently, no useful purpose
under these regulations would be served by obligating Customs to
provide such notice to the surety. This is a matter that is best left
to the private parties to resolve as a part of their contractual
relationship.
Part 181, Appendix (Rules of Origin Regulations)
Section 2
Comment: The following comments were submitted on the definitions
and interpretation set forth in section 2:
1. With regard to the definition of ``direct labor costs'', one
commenter noted that many companies include direct labor fringe
benefits as part of their burden, not as part of their direct labor
costs. Thus, it would be more correct to indicate that the defined term
``may'' include fringe benefits in costs that are associated with
employees who are directly involved in the production of a good.
2. In the definition of ``light-duty vehicle'', a commenter stated
that the second reference to ``8702.10.60'' should read ``8702.90.60''.
3. One commenter noted that the definitions and interpretation of
``similar goods'' and ``similar materials'' are important parts in
determining
[[Page 46348]]
eligibility for averaging costs over time where goods are produced in
the same facility. Given this purpose, this commenter argued that these
definitions and interpretation are unduly restrictive because goods and
materials should qualify as ``similar'' for purposes of averaging if
they simply serve identical functions. For example, if both automatic
and manual transmissions are otherwise eligible for averaging, the fact
that these two transmissions may not meet the ``similar characteristics
and component materials'' definitional standard should not disqualify
them from averaging. To accomplish this result this commenter suggested
(1) that the two definitions should be revised to encompass goods and
materials that ``although not alike in all respects, serve the same
function'' and (2) that the interpretation should be eliminated because
it suggests that only identical goods or materials qualify as
``similar''.
Customs response: With regard to the first comment, the commenter
is correct that some companies may include direct labor ``fringe
benefits'' as part of their overhead. However, for purposes of
allocating direct labor, the United States, Canada and Mexico agreed
that the cost of fringe benefits for direct labor must be included in
the ``direct labor costs''. Salaries and fringe benefits for other than
direct labor employees may be included as overhead and would be
allocated according to the methods for overhead in Schedule VII.
Customs agrees that the second reference to ``8702.10.60'' should
read ``8702.90.60'' in the definition for ``light-duty vehicle'', and
the definition, as set forth below, has been modified accordingly.
Customs disagrees with the statement that goods should be
considered ``similar'' if they merely serve identical functions.
Averaging in section 6(15) for regional value content purposes is
allowed so that a producer would not have to segregate the value of its
materials and its production costs when there is very little difference
in the materials and the production costs that would be allocated to
goods for which NAFTA preference is to be claimed and to goods which
are to be consumed in a domestic or non-NAFTA market. The use of the
term ``similar'' provides the necessary balance between the intended
benefit and the need for assurance that the averaged costs will have a
real relationship to the goods. For example, although an electric motor
and a gasoline motor may serve the same function in a model toy,
averaged costs for non-originating materials and for net costs for
these two motors would not provide a meaningful measure of the regional
value content for each type of motor. When this issue was discussed
trilaterally, it was agreed that the current reference to ``similar''
should not be changed.
Section 4
Comment: With regard to section 4(4) which sets forth exceptions to
the change in tariff classification requirement for originating goods,
one commenter stated that subparagraph (b)(iii) should be removed
because it imposes a further qualification that is not reflected in the
NAFTA provisions as set forth in General Note 12(b)(iv)(B), HTSUS.
Specifically, whereas the NAFTA text simply refers to a case where the
undivided tariff headings or the tariff subheadings for the goods
``provide for and specifically describe both the goods themselves and
their parts'', the Appendix text at issue adds a further requirement
that the non-originating materials and the good ``are not both
classified as parts of goods under the heading or subheading'' under
consideration. This commenter suggested that this limiting Appendix
text is not required by either the language or the purpose of the NAFTA
provision and that the ``specifically describe'' language of the NAFTA
text could reasonably apply where the tariff provision is a ``parts''
provision because the minimum regional value content requirement would
still apply.
Customs response: Customs disagrees. Note 22 to the NAFTA clearly
states that the phrase ``specifically describes'' in Article 401(d) was
intended to exclude situations in which both the good and the non-
originating material are classifiable as ``parts'' in the heading or
subheading under consideration.
Section 6
Comment: The following comments were submitted on the regional
value content provisions of section 6:
1. With regard to subsection (14) which concerns non-allowable
interest costs, one commenter agreed that the ``700 basis points''
standard (above which interest would not be countable toward total
cost) was appropriately high. However, this commenter stated that, by
referring to the yield on debt obligations of comparable maturities
issued by the federal government of ``the country in which the producer
is located'', this provision could result in disparate treatment of
similarly situated companies located in different NAFTA countries. In
order to avoid the possibility that two companies with similar interest
costs on a debt of the same denomination may face different interest
caps because their production occurs in different NAFTA countries, this
commenter stated that subsection (14) should be modified to reflect
linkage of the interest rate on a debt to the interest rate on
government debt obligations of the country that issues the debt, so
that the amount of allowable interest costs would depend on the
denomination of the debt rather than the location of the company.
2. One commenter pointed out that in subsection (18) the reference
to the period chosen in ``subsection (14)(a)'' should properly refer to
``subsection 15(a)''.
3. With regard to the examples contained in subsection (20), a
commenter stated that Example 9 would be more clear if it explained
that the tooling expensed on the books of Producer A is considered as
non-originating because the material that the tooling produced is non-
originating.
Customs response: With regard to the first comment, Customs agrees
that disparate treatment may arise because the interest caps in the
NAFTA countries may be different. However, in order to provide
certainty and stability in this area, the United States, Canada and
Mexico agreed to apply the interest cap of the NAFTA country in which
the producer is located.
Customs agrees that the reference to ``subsection (14)(a)'' should
properly read ``subsection (15)(a)'' in subsection (18) which, as set
forth below, has been modified accordingly.
Although Customs agrees that Example 9 in section 6(20) could be
more illustrative by addressing the treatment of the cost of tooling as
a ``non-originating cost'' because it is included in the cost of the
non-originating material produced by the tooling, Customs also notes
that this example was merely intended to illustrate how the cost must
be captured and that it cannot be counted twice. This commenter's
suggestion, however, has been incorporated as a new Example 8 which has
been added to section 7(18) (renumbered from 7(17)) as set forth below.
Section 7
Comment: With regard to section 7(17), one commenter pointed out
that in the first paragraph of Example 4 the reference to ``Material
A'' should read ``Material X''.
Customs response: This typographical error was corrected in a
document published in the Federal Register on March 31, 1994 (59 FR
15047).
Section 9
Comment: With regard to Example 6 under section 9(10), one
commenter
[[Page 46349]]
noted that although the example states that the producer designates the
short block as an intermediate material, the example does not explain
why this designation is made or what its effect might be on the origin
of the part or the traced value in the vehicle.
Customs response: The purpose of Example 6 in section 9(10) is to
illustrate section 9(9)(a) which provides that the designation of a
self-produced material as an intermediate material is only effective
with regard to the calculation of the net cost of the light-duty
automotive good and, therefore, does not permit the producer to ignore
the value of the traced materials for purposes of the calculation of
the value of non-originating materials in the light duty automotive
good. Customs agrees that, in this case, it may be clearer to state
that the intermediate material qualifies as an originating material.
Accordingly, Example 6, as set forth below, has been modified as
follows: (1) By adding a sentence immediately after the second sentence
in the first paragraph to read ``The intermediate material qualifies as
an originating material''; and (2) by changing the last clause in the
first sentence of the second paragraph to read ``even though the
intermediate material is an originating material.''
Section 10
Comment: One commenter alleged that the language of section 10, and
in particular the language of sections 10(1) and 10(2), is contrary to
the wording of Article 403(2) of the NAFTA in that the Appendix
language appears to require only tracing of the value of non-
originating listed materials of the producer of the engine and
transmission (the components), with two different results depending on
the factual circumstances: (1) If the producer of the components is
also the producer of the vehicle, then the tracing must be made through
to the vehicle; or (2) if the producer of the components and vehicle
are different, then the tracing stops at the production of the
components. In other words, where the producer of the vehicle is not
the producer of the component, that vehicle producer simply applies the
normal rules of NAFTA Annex 401 to his product because he by definition
does not ``use'' any material listed in NAFTA Annex 403(2) within the
meaning of Article 403(2)(a) (it is the component producer who uses the
listed material, that is, to produce the component, while the vehicle
producer uses that component to produce the vehicle): thus, the
component, not being a listed material, becomes the ``other material''
referred to in Article 403(2)(b) and is either originating or non-
originating as far as calculation of the regional value content of the
vehicle is concerned. This commenter, apparently concerned by the
appearance of a narrower tracing rule under the Appendix text, stated
that section 10 should be revised to reflect the correct, broader rule
under the NAFTA text, that is, that the value of non-originating listed
materials must be traced to the original-equipment engine and
transmission and through them to the vehicle for purposes of
calculating the regional value content of the vehicle.
In the event that the revision suggested above is not done, this
commenter made the following additional recommendations regarding
section 10:
1. As regards subsection (4) concerning the option of using the
light-duty tracing rules for heavy-duty components, three suggestions
were made. First, the materials covered by the subsection should be
expanded to include listed materials and subcomponents. Second, if
light-duty and heavy-duty vehicles are produced in the same plant, the
producer should have the option of using the light-duty rules for
calculating regional value content. Third, paragraph (b) should be
removed because even if a producer knows the final use of the
component, he should still have the option of using the light-duty
rules.
2. As regards subsection (9)(c) which provides that section 10 does
not apply to a subcomponent for purposes of calculating its regional
value content before it is incorporated into a heavy-duty automotive
good, this commenter questioned the authority for this subsection and
stated that, if there is no authority for it, then Situation 1 of
Example 6 under subsection (10) is incorrect. Furthermore, this
commenter suggested that if there is authority for subsection (9)(c),
then there is a basis for setting up separate manufacturing companies
to convert non-originating cost to originating for determining the
regional value content of a subcomponent that crosses a border, because
the tracing requirement is eliminated.
Customs response: Customs disagrees with the commenter's conclusion
that the text of section 10 does not reflect Article 403(2) of the
NAFTA which requires that the value of a listed non-originating
material be ``traced'' through to any heavy-duty automotive good in
which it is used. The rules in section 10(1) are cumulative. If a
producer of a heavy-duty automotive good ``uses'' a listed non-
originating material, then paragraph (a), (b) or (c) would apply,
depending, of course, on the specific facts. If a producer uses an
automotive component assembly, automotive component or subcomponent,
then paragraph (d) or (e) would apply, resulting in the ``tracing'' of
either the values of all non-originating materials that were
incorporated into that material acquired and used by the producer or
the entire value of that material acquired and used by the producer.
The structure of section 10(1) eliminates any doubt that, regardless of
the stage in which a listed non-originating material is used, the value
of that listed material must always be included in the value of non-
originating materials when calculating the regional value content of
any heavy-duty automotive good into which the listed material is
subsequently incorporated.
Customs disagrees with this commenter's proposals for redrafting
section 10(4) because the regulation reflects the relevant NAFTA
provisions and the intent of the Parties. First, Article 403(2), which
provides the rule for determining the value of non-originating
materials in heavy-duty automotive goods, does not apply to listed
materials or to subcomponents. Second, Article 403 is very clear in
that it provides a specific rule for light-duty vehicles and a specific
rule for heavy-duty vehicles. Third, with the exception of the
situation in which averaging is permitted under Article 403(4) (see
section 12 of the Appendix), Article 403(2) does not provide for the
alternative use of the light-duty tracing rule for heavy-duty
automotive components. In view of the fact that it may be impossible to
identify interchangeable heavy-duty components and light-duty
components that are produced in the same plant, the United States,
Canada and Mexico agreed that the regulations should specifically
address this situation.
With regard to the comment on section 10(9)(c) that there is no
authority to exclude subcomponents from the regional value content
calculation in section 10, Customs simply notes that the special rule
set out in Article 403(2) of the NAFTA is for vehicles and components.
Furthermore, the use of a listed non-originating material in the
production of a subcomponent does not defeat the ``tracing''
requirement applicable to heavy-duty automotive goods. The regulations
set out in section 10(1) make it clear that the value of a listed non-
originating material will always be traced through to any heavy-duty
automotive good into which it is incorporated. For example, section
[[Page 46350]]
10(1)(d) requires the ``tracing'' of a listed non-originating material
even if it was used in the production of an originating subcomponent.
Section 13
Comment: The following comments were submitted on the special
regional value-content requirements contained in section 13:
1. Two commenters referred to subsection (4) which concerns the
averaging period for calculation of regional value content for vehicles
of a new plant or a refit plant.
One of these commenters noted that paragraph (a)(i) would allow a
producer to use launch and start-up cost for a period up to 23 months
as originating content in computing the regional value content. This
commenter suggested that the cost incurred from the first prototype
date to the end of the fiscal year in which the first prototype was
produced should be used for the regional value content calculation for
the vehicles produced in the first fiscal year.
The second commenter concluded that subsection (4) allows a motor
vehicle producer to elect one of the following three periods over which
regional value content is calculated by averaging: (1) Paragraph (a)(i)
allows averaging from the date of the production of a prototype through
the end of the first fiscal year that begins after that date, thus
allowing the producer to roll the first partial year into the first
full fiscal year for averaging purposes; (2) paragraph (a)(ii) allows
averaging over any fiscal year that begins after production of a
prototype and ends before the end of the special regional value content
period (the 5-year or 2-year period specified in section 13(2)); and
(3) paragraph (a)(iii) allows averaging over part of a fiscal year up
to the last day of that 5-year or 2-year special regional value content
period. However, this commenter stated that the exact time periods
covered by these three alternative averaging periods are not clear in
the Appendix text as written. In addition, this commenter suggested
that the end of an averaging period involving a special regional value
content period should coincide with the end of the producer's fiscal
year because significant accounting problems will arise if the
averaging period cuts off before the fiscal year end. Thus, for
example, a 5-year period under section 13(2) would allow averaging for
full five fiscal years plus that portion of a year beginning with the
date of production of the first qualifying prototype.
2. One commenter noted that subsection (5)(h) requires that the
document in which the election to average is made must be filed at
least 10 days before the first day of the producer's fiscal year, or
such other shorter period that the concerned customs administration may
accept. This commenter recommended that this provision be amended to
specify ``10 days before the shipment of the first vehicle intended for
sale''.
Customs response: Customs agrees that section 13(4)(a)(i) would
permit a producer to average over a period of up to 23 months. In the
interest of aligning the averaging period with the period for which the
special RVC is effective for production from a new plant or a refit
plant, it was considered to be more practical to combine the initial
``stub'' period with the first full fiscal year. Paragraphs (a)(ii) and
(a)(iii) provide for the subsequent full fiscal years and for the final
stub period, if any.
Concerning the second comment on section 13(4)(a), Customs first
notes that the commenter has referred to subparagraphs (i), (ii) and
(iii) as ``alternative averaging periods''. This is not correct. One,
two or all three of these subparagraphs could apply in any given
situation, depending on the length of the special RVC period and the
relationship of the first year of that period to the beginning of the
producer's fiscal year.
In response to the remainder of this commenter's remarks, Customs
notes that under Article 403(6), the ``years'' in the periods for which
a special RVC applies to vehicles of a new plant or vehicles of a refit
plant are not necessarily coterminous with the fiscal year of a
producer. Under Article 403(6) the ``year'' in the special RVC period
begins when the first prototype motor vehicle is produced in the new or
refit plant. Under Article 403(3), the ``year'' in the averaging period
for the RVC calculation is the fiscal year of a producer. It was the
intent of the drafters of the regulations to align the averaging period
with the special RVC period in order to allow a producer to obtain the
maximum benefit from the statutory 5-year or 2-year special RVC period.
Customs has no authority to extend or reduce these NAFTA periods which
are also reflected in section 202(c)(6) of the Act.
As regards the comment on section 13(5), Customs does not disagree
entirely with the idea behind the commenter's proposal. Inasmuch as the
first averaging period would not include the full fiscal year (if the
first prototype of a motor vehicle is produced in a plant on a date
after the beginning of the producer's fiscal year), it would appear
reasonable to allow the producer to file at least 10 days before the
beginning of the period which will constitute the first period in which
the producer must average. However, the United States, Canada and
Mexico agreed that the election should be filed at the same time that
other elections to average under section 11 must be filed. The
requirement does not impose an unnecessary hardship on a producer
because the producer will have the requisite knowledge as to when such
prototypes will be produced.
Section 15
Comment: One commenter made the following observations regarding
section 15 which concerns the inability of a supplier, exporter or
producer to provide sufficient information during a verification of the
origin of a good:
1. Whereas section 15 sets forth alternative means to verify the
origin or value of a material used in the production of a good when the
person from whom the producer obtained the material is unable to
provide sufficient verifying information, when a producer supplies
verifying information the relevant customs administration should accept
it. Moreover, the customs administration should have the obligation to
explain in writing any refusal to accept the offered information
supporting the origin of the material.
2. While section 15 properly provides that the customs
administration shall take into consideration whether the customs
administration of the importing country issued an advance ruling under
Article 509 of the NAFTA which concluded that the material is an
originating material, a provision should be added to authorize a
``retroactive ruling'' that a material is an originating material (for
U.S. purposes, this could be done as a request for internal advice as
provided for in Part 177 of the Customs Regulations). A producer often
learns of a supplier's financial weakness in advance of problems that
would make it impossible to obtain the information necessary to verify
the origin of a material, and a ``retroactive ruling'' provision would
allow the producer to obtain a ruling that would cover prior periods.
The procedure for obtaining such a ruling should be consistent with the
advance ruling provisions, except that the supplier of the material
should provide exact historical data, including exporter's certificates
of origin, rather than projected costs. Addition of a retroactive
ruling provision would also reduce the need to rely on the other
section 15
[[Page 46351]]
alternative means to verify the origin of a material.
Customs response: With regard to the first comment, Customs notes
that subsection (1) of section 15 provides for factors to be considered
by a customs administration where, during a verification of a good, a
producer of a material is unable to supply sufficient verifying
information for reasons beyond that person's control. The regulation
thus contemplates the situation in which a verification requires
information from the producer of the material, perhaps, for example, in
the form of that person's books or records. It is unclear what the
commenter's reference is to accepting the information offered. Of
course, nothing in section 15 precludes the customs administration from
considering information from the producer of the good or from any other
source; rather, the section enumerates certain sources of information
which may provide relevant information. Normally, of course, the
verification process proceeds by seeking information from the producer
of that good and, if necessary, from the producer of a material. If the
customs administration is satisfied with respect to the origin of a
material by virtue of information provided by the producer of the good,
then presumably the situation identified in section 15 will not occur.
The NAFTA countries did not perceive the need to provide for an
obligation to accept proffered information or to explain any
unwillingness to do so. Customs does not believe that any amendment in
this regard is necessary or appropriate.
As regards the second comment, the commenter accurately observes
that section 15(1)(a) provides that, among the factors to be
considered, is whether an advance ruling under Article 509 of the NAFTA
has been issued with respect to the material. The commenter appears to
be seeking a separate procedure through which the producer of the good
could obtain a decision with respect to the origin of a material which
would presumably affect the origin determination with respect to the
good. Such a procedure is intrinsic to the verification process. Thus,
if the outcome of the verification depends on the origin of the
material, it would be expected that the producer of the good would
provide such information in its possession to demonstrate where the
material originated. The customs adminstration would then apply the
conclusion to the goods subject to the verification. Accordingly, it
does not appear that there is any need for the regulations to be
amended in order to meet the concern identified by the commenter.
Schedule III
Comment: One commenter stated that the valuation provisions of the
interim regulations should be reviewed and revised to more accurately
reflect the terms of General Note 12(c), HTSUS, which specifically
refers to the legal standards set forth in section 402 of the Tariff
Act of 1930, as amended (19 U.S.C. 1401a). This commenter cited the
following specific examples in this regard:
1. Under section 3 of Schedule III, subsection (4) provides for the
acceptance of transaction value between related parties when the
producer demonstrates ``that the transaction value of the good in that
sale closely approximates a test value referred to in subsection (5).''
However, the ``test value'' referred to in subsection (5) is limited to
``the transaction value of identical goods or similar goods sold at or
about the same time as the good being valued is sold to an unrelated
buyer who is located in the territory of the NAFTA country in which the
buyer is located.'' This commenter stated that this is much more
limited than the comparable statutory provision (19 U.S.C.
1401a(b)(2)(B)) that applies under General Note 12(c), HTSUS, which
includes other ``test values'' that can be used to demonstrate the
acceptability of the transaction value between related parties.
2. Also under section 3 of Schedule III, subsection (8) appears to
require that the ``test value'' has been ``previously accepted by the
customs administration''. This commenter stated that this requirement
is not contained in the U.S. valuation statute referred to in General
Note 12(c), HTSUS.
Customs response: Schedules II, III and VIII of the Appendix to
Part 181 of the interim NAFTA regulations were based on the Agreement
on Implementation of Article VII of the General Agreement on Tariffs
and Trade (the ``Customs Valuation Code,'' or ``Code''), rather than on
the U.S. valuation statute (19 U.S.C. 1401a), or the valuation statutes
of Canada or Mexico. Since the Code is a neutral document common to all
three NAFTA parties, it was therefore decided that the Code should form
the basis of that part of the regulations that is concerned with how to
determine regional value content under the transaction value method.
In regard to the specific points raised by the commenter, the test
value referred to in Schedule III, section 3(5), is based on the
transaction value of identical or similar goods since the purpose of
the test value is to establish whether a transaction value between a
related producer and seller, determined in accordance with Schedule II,
is acceptable. Since transaction value is the only method of
determining the value of a good under Schedule II, there is no
justification for any alternative bases of determining test values as
there is under the Code. Just as test values under the Code must be
based on a value previously accepted by a customs administration, so
too NAFTA requires that a test value shall have been previously
accepted.
Schedule VII
Comment: The following comments were submitted in regard to the
reasonable allocation of costs provisions contained in Schedule VII:
1. Two commenters referred specifically to sections 3(1)-(3) which
concern methods used for internal management purposes by a producer of
a good to reasonably allocate to that good direct material costs,
direct labor costs or overhead.
One of these commenters noted that although the text in each case
sets forth the criterion of ``benefit, cause or ability to bear'' for
purposes of determining the reasonableness of the method used, the
elements of this criterion are neither defined anywhere in the Appendix
nor further explained in the examples under Schedule VII. This
commenter suggested that: (1) This criterion should be eliminated, on
the theory that a cost allocation method used for a (true) internal
management purpose (that is, as stated in section 7 of Schedule VII,
not solely for the purpose of qualifying a good as an originating good)
should satisfy the reasonableness requirement; or (2) at the least, a
definition or explanation of ``benefit, cause or ability to bear''
should be included in the final Appendix texts.
The second commenter expressed similar views and stated that the
following interpretation of section 3 should be expressly affirmed in
the final Appendix text: (1) That section 3 requires a customs
administration to accept an allocation method that is used by the
producer of a good for an internal management purpose, unless the
allocation method is determined to be manifestly unreasonable; and (2)
that a customs administration bears a heavy burden to disqualify any
allocation method based on lack of relation to the criterion of
benefit, cause or ability to bear because an allocation method that is
used for internal management purposes is presumptively reasonable since
a company is unlikely to rely on an allocation method for internal
[[Page 46352]]
decision-making if it does not meet the benefit, cause or ability to
bear criterion. Consistent with this interpretation, this commenter
further suggested that section 3 should be revised to reflect a pure
internal use test because the ``reasonableness'' requirement, based on
the benefit, cause or ability to bear criterion, does not add
meaningfully to the rule, injects an unnecessary degree of subjectivity
into the cost allocation approval process, and is adequately provided
for by the terms of section 7 of Schedule VII. Finally, this commenter
recommended that, at a minimum, the following definitions be added to
the Appendix to clarify the meaning of the ``benefit, cause or ability
to bear'' criterion:
Benefit or benefits received: This criterion identifies the
beneficiaries of the outputs of the cost pool and allocates the costs
in proportion to the benefits received.
Cause or cause and effect: This criterion identifies the outputs of the
cost pool (any grouping of individual costs) and allocates the costs in
proportion to the services provided.
Ability to bear: This criterion advocates allocating costs in
proportion to the cost objective's ability to bear.
2. With regard to section 6, one commenter stated that paragraph
(d) should be eliminated so as to permit allocation of a gain or loss
from the sale of a capital asset consistent with Generally Accepted
Accounting Principles (GAAP) because, under GAAP, a gain or loss from
the disposal of an asset constitutes a legitimate element of the total
cost of the asset. Thus, a gain or loss on depreciation does not
represent an extraordinary cost, and any write-off on sale or disposal
of an asset should be reflected in total cost.
3. One commenter argued that section 7 should be eliminated for
several reasons. First, section 7 is ambiguous when taken in context
with section 4, which applies when an allocation method does not
satisfy section 3 and which requires use of an allocation method that
is reasonable based on the criterion of benefit, cause or ability to
bear. The ambiguity exists because, if an internally used allocation
method is deemed not to satisfy the reasonableness requirement in
section 3 by virtue of the restriction in section 7, section 4 requires
the producer of a good to use an alternative allocation method that
does meet the benefit, cause or ability to bear reasonableness
criterion. Given the rejection of the internally used allocation method
under section 3, the only solution under section 4 is to use an
allocation method that is solely for the purpose of qualifying a good
as an originating good. This is precisely what section 7 is designed to
prevent. Second, section 7 is unnecessary because, so long as an
allocation method meets the reasonableness test under the benefit,
cause or ability to bear criterion, the purpose of the allocation
method is irrelevant. Finally, section 7 is redundant given the non-
qualifying operations provision in section 17 of the Appendix as
regards any production or pricing practice the object of which is to
circumvent the Appendix. This commenter also suggested that if section
7 is to be retained, it should, at a minimum, provide specific and
objective criteria for determining whether a cost allocation method is
used solely to qualify a good as an originating good.
Customs response: Customs disagrees with the commenters'
suggestions that the criteria of ``benefit, cause or ability to bear''
are not necessary in section 3, or, in the alternative, that the terms
should be defined. The terms are recognized principles used in the cost
accounting industry. They are broad principles that provide a measure
by which Customs can determine the reasonableness of a cost allocation
method for an internal management purpose. Customs does not dispute the
fact that most producers, for one or more internal management purposes,
are likely to rely on allocation methods that satisfy one of these
criteria. The regulation, however, is intended to capture all
situations and, therefore, must necessarily identify criteria against
which the regulatory requirement is to be measured.
Concerning the comment on section 6(d), Customs agrees with the
commenter's analysis of the treatment, for cost accounting purposes, of
the gain or loss from the sale of a capital asset. However, in this
case the Parties agreed that, for purposes of a ``reasonable''
allocation of costs in the calculation of total cost, such gains or
losses are not reasonably allocated to a good.
The commenter's remarks concerning section 7 are understandable
because the criteria of ``benefit, cause or ability to bear'' are used
in both sections 3 and 4 to determine whether a cost allocation is
reasonable. Nevertheless, Customs does not agree that section 7 should
be eliminated. The structure of Schedule VII requires that, under
section 3, an allocation method for an internal management purpose is
to be used if it is a reasonable allocation. However, section 7 states
that any allocation method for an internal management purpose will, on
its face, not be accepted as ``reasonable'' if it is solely for the
purpose of qualifying a good as an originating good. If costs are not
reasonably allocated under section 3, then the producer is required to
comply with section 4. Section 4 provides for the use of a method set
out in the addenda to Schedule VII and/or any method based on one of
the criteria of benefit, cause or ability to bear.
Schedule VIII
Comment: With regard to Schedule VIII (value of materials), one
commenter raised an issue concerning section 3 which operates as an
exception to the general rule that the transaction value of a material
is unacceptable if, among other things, the producer and the seller are
related persons and the relationship between them influenced the price
actually paid or payable for the material. Referring specifically to
the first sentence of subsection (7) which states that ``[s]ubsection
(4) provides an opportunity for the seller or the producer to
demonstrate that the transaction value closely approximates a test
value previously accepted by the customs administration of the NAFTA
country in which the producer is located, and is therefore acceptable
under subsection (1)'', the commenter suggested the following
interpretation thereof: the customs administration of the NAFTA country
into which a good is imported is required to accept (and thus may not
audit) the transaction value of a material used in the production of
the good if the customs administration of the country into which the
material was imported (and where the material was incorporated into the
exported good) approved that transaction value during a valuation audit
performed on the material when it was imported. This commenter stated
that because section 3 is ambiguous, the provision should be clarified
to reflect this interpretation. In addition, this commenter recommended
that section 3 be modified to expressly state that the customs
administration attempting to verify the value of a good that
incorporates a material must accept any pre-approval or advance ruling
concerning the value of the material by the customs administration of
the country into which the material was first imported.
Customs response: For the purposes of Schedule VIII, unless
otherwise stated, the term ``customs administration'' is defined as
``the customs administration of the NAFTA country into whose territory
the good, in the production of which the material being valued is used,
is imported.'' Section 3 sets forth the basis for
[[Page 46353]]
determining whether the transaction value of a material determined
under section 2(1) is acceptable. One basis under section 3 for
validating a transaction value of a material is for a seller or
producer to demonstrate to a customs administration (that is, a customs
administration as defined above) that the transaction value determined
in accordance with section 2(1) closely approximates a test value
previously accepted by the customs administration of the NAFTA country
in which the producer is located. Accordingly, the regulations permit
the customs administration of one NAFTA country to accept the
transaction value of a material if it closely approximates a test value
determined by the customs administration of another NAFTA country.
However, this must be demonstrated to the satisfaction of the customs
administration (as defined for purposes of Schedule VIII), and there is
no requirement that a customs administration must accept any test value
put forward by a particular seller or producer.
Schedule X
Comment: The following comments were submitted regarding Schedule
X, principally in the context of the drawback and duty-deferral program
provisions of Subpart E of Part 181:
1. With respect to the commingling of fungible goods and the
inventory methods that are allowable to determine the origin of
materials, one commenter stated that Schedule X excludes identification
procedures (inventory methods) that have been allowed in drawback such
as ``lower to higher'', ``higher to lower'' and blanket identification.
This commenter also stated that FIFO is administratively unworkable and
economically unfeasible for most companies, in part because the
association of entry numbers with imported part numbers which is needed
under FIFO is too detailed. On this same subject, two commenters stated
that Schedule X is unworkable and not consistent with the intent of
Congress which, as stated in Ways and Means Report 103-361, was ``* * *
to provide sufficient flexibility in the inventory accounting methods
for such goods to make them administratively workable for industry.''
Another commenter stated that the words ``completely fungible'' should
be changed to ``commercially interchangeable'' because of the
redefinition of the term ``fungible'' in the Customs modernization
provisions of the Act.
2. Three commenters raised the issue of commingled fungible goods
that are 100 percent imported, two of them stating that, in such a
case, entries for goods (within the appropriate time period) may be
designated under the inventory averaging procedure and that this is
supported by the legislative history relating to the Customs
modernization provisions of the Act. These commenters also stated that,
in such circumstances, the ``high-to-low'' method or any other Customs
approved accounting method may be used.
3. Another commenter stated that the Appendix should not be used
for the purposes of determining inventory methods because the Appendix
is generally for rules of origin purposes. This commenter also stated
that the inventory methods used to support a same condition drawback
claim should be set forth separately because Article 303 of the NAFTA
is not subject to the uniform regulations requirement of Chapter 5 of
the NAFTA.
4. Two commenters pointed out that Customs should give some thought
to companies that must keep extremely detailed records such as those
dealing in footwear, eye wear, finished clothing and other articles
that are produced in a wide variety of styles, sizes and colors. This
commenter stated that the requirements of Schedule X are so onerous
that companies that produce or distribute these types of articles will
not be able to export to Canada and Mexico for lack of ability to
comply with these requirements. This commenter also suggested that
Customs should address the area of former 19 U.S.C. 1313(j)(2)
substitution drawback claimants in a NAFTA context. In this regard, the
commenter stated that, assuming such claimants meet the requirements
for drawback under 19 U.S.C. 1313(j)(1), Customs should recognize that
they do not need to resubmit any applications for purposes of obtaining
drawback under 19 U.S.C. 1313(j)(1) in a NAFTA context but rather would
simply file the claims in accordance with the applicable regulations.
This commenter, after stating that Customs officials from the Office of
Trade Operations have indicated that the Schedule X inventory
procedures will be applied to all 19 U.S.C. 1313(j)(1) drawback claims,
expressed the view that Schedule X should apply only in the context of
Part 181.
5. A commenter pointed out that Secs. 191.141(e) and 191.22, taken
together, also provide for storage and identification methods and
provide more options for approved accounting methods than Schedule X
does. For example, these sections allow use of ``high-to-low'', but
Schedule X does not. This commenter therefore suggested that the
provisions of Sec. 191.22 should be used instead of Schedule X.
6. Two commenters stated that the inventory methods authorized for
foreign trade zone procedures (Sec. 146.23) should be included in
Schedule X in order to avoid the need for multiple inventory systems as
the price for using both trade programs. These commenters cited, as an
example that these two provisions are not in agreement (at least with
respect to terminology), the fact that Schedule X calls for a specific
identification method whereas Sec. 146.23 requires a unique
identification number. If these two requirements are the same, these
commenters suggested that the regulatory text should state that this is
the case.
7. Another commenter asked whether LIFO and average methods are
acceptable for drawback and, if so, whether they can be used on exports
to non-NAFTA countries. If not, this commenter asked whether claimants
must switch to FIFO or maintain different accounting methods for the
same goods.
Customs response: These comments principally address an allegedly
impractical and unworkable application of the inventory management
methods of Schedule X as required under Sec. 181.45(b)(2)(i). In sum,
the commenters argue that the Customs-approved methods in
Secs. 191.121(e) and 191.22 (drawback) and in Sec. 146.23 (foreign
trade zones) of the Customs Regulations should be allowed in place of
the methods set forth in Schedule X.
Customs disagrees with these comments to the extent that they
propose an expansion of the allowable methods for determining which
commingled goods are eligible for full drawback under Sec. 181.45(b).
Schedule X was promulgated under NAFTA Article 511 and applies, by
operation of NAFTA Article 303(6)(b), to imported goods which have been
commingled with fungible goods and which are exported to Canada or
Mexico in the same condition as when imported into the United States.
Nevertheless, the number of comments submitted on this point
suggests that the text of Sec. 181.45(b)(2)(i) could be improved.
Accordingly, Sec. 181.45(b)(2)(i), as set forth below, has been
modified to more clearly reflect the intended effect of Article
303(6)(b), that is, as a narrow exception to the broad operation of
Article 303 which restricts drawback to the amount determined under the
``lesser of'' rule. Beginning in 1996 (for exports to Canada) and in
2001 (for exports to Mexico), same condition substitution drawback will
be prohibited altogether. The only
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exceptions are for the goods described in Article 303(6). Thus, ``same
condition'' drawback for imported goods commingled with fungible goods
is allowed, but only to the extent that the identity of the imported
goods is determined by use of one of the approved inventory management
methods set forth in Schedule X.
Additional Changes to the Regulations
In addition to the changes to the interim regulatory texts
discussed above, this document modifies the interim texts to set forth
changes that are necessary (1) to reflect subsequent trilateral
discussion and agreement regarding regulatory standards pursuant to
Article 511 of the NAFTA or (2) based on an independent review of the
interim texts within Customs. These changes are discussed below.
Changes Pursuant to Trilateral Discussions
Subsequent to the publication of the interim regulations in T.D.
94-1, and in keeping with the principle of ongoing cooperation in the
implementation and administration of the NAFTA as provided for in
Section F of Chapter Five of the NAFTA, representatives of the United
States, Canada and Mexico held further meetings which resulted in
agreement regarding (1) use of the definition of ``conspicuous'' as set
forth in Annex 311 of the NAFTA, (2) the adoption of an additional
standard covering denial of preferential tariff treatment based on a
failure to provide certain documentation in transshipment cases, (3)
the adoption of additional standards for origin verifications, (4) the
adoption of additional standards to be applied with regard to requests
for advance rulings under Article 509 of the NAFTA, and (5) the
modification of the substantively verbatim texts implementing the rules
of origin provisions of Chapter Four of the NAFTA. The agreed changes,
as reflected in the final regulatory texts set forth in this document,
are summarized below.
Definition of ``Conspicuous''
During the trilateral discussions it was pointed out that the
interim amendments to Part 134 did not set forth the definition of
``conspicuous'' contained in the country of origin marking provisions
of Annex 311 of the NAFTA. Accordingly, Sec. 134.1 has been modified,
as set forth below, by the addition of that definition as a new
paragraph (k). Customs believes that this definition is appropriate for
both NAFTA and non-NAFTA contexts since the NAFTA definition reflects
existing Customs practice and regulatory standards (see, for example,
the last sentence of Sec. 134.41(b)).
Failure to Provide Documents in Transshipment Cases
The new standard regarding shipping documents provides that
preferential tariff treatment may be denied to an originating good if
the good is shipped through or transshipped in a non-NAFTA country and
the importer does not provide, upon request, copies of the customs
control documents showing that the good remained under customs control
while in that non-NAFTA country. Section 181.23, as set forth below,
has been modified by the addition of a new paragraph (b) to reflect
this new standard, and Sec. 181.31 (regarding post-importation claims)
and Sec. 181.71 (regarding origin verifications), as set forth below,
have been appropriately modified as a consequence of the adoption of
this new standard.
Origin Verifications
The Parties agreed to a new standard for origin verifications that
permits verification of the applicable rate of duty applied to an
originating good in accordance with NAFTA Annex 302.2 and determination
of whether a good is a qualifying good for purposes of NAFTA Annex
703.2. Accordingly, Sec. 181.72 as set forth below has been modified by
the addition of a new paragraph (a)(2) to reflect this standard.
In addition, the new standard for origin verifications provides
that a questionnaire may be completed, at the option of the exporter or
producer, either in the language of the importing country or in the
language of the country in which the exporter or producer is located.
Paragraph (a)(3)(ii) (paragraph (a)(2)(ii) in the interim texts) of
Sec. 181.72, as set forth below, has been modified accordingly.
Requests for Advance Rulings
The new trilaterally-agreed standards regarding advance ruling
requests concern the information required to be submitted with the
request and therefore only affect Sec. 181.93 of the interim
regulations. The substantive changes reflected in Sec. 181.93, as set
forth below, are as follows:
1. In paragraph (b)(1), which concerns general information to be
included in the request, the following requirements have been added:
identification of the specific subject matter of the request; inclusion
of a statement regarding the accuracy and completeness of the
information submitted; inclusion of the name and address of the
exporter and producer of the good where the importer is the requesting
party; inclusion of the name and address of the producer and importer
of the good where the exporter is the requesting party; inclusion of
the name and address of the exporter and importer of the good where the
producer is the requesting party; submission of copies of advance
rulings or other rulings issued to the requesting party by Customs
regarding the tariff classification of the good, if relevant to the
issue in the advance ruling request; and, if no ruling on tariff
classification was issued to the requesting party, sufficient
information to enable Customs to classify the good if relevant to the
issue in the advance ruling request.
2. Paragraph (b)(2)(ii), which concerns tariff change rulings, has
been changed by designating the interim text as subparagraph (A) in
order to facilitate the addition of a new subparagraph (B) setting
forth information that must be in an advance ruling request which
involves an origin issue requiring an assessment of whether materials
undergo an applicable change in tariff classification.
3. In paragraph (b)(2)(iii), which concerns rulings on regional
value content, the following changes have been made: in the first
sentence, the words ``or under both methods'' have been added to
reflect the fact that satisfaction of a regional value content
requirement may involve use of both the transaction value method and
the net cost method as well as the fact that a ruling on both issues
may be sought; the second sentence, which sets forth the information to
be submitted for purposes of the transaction value method, has been
changed by inserting specific references to relevant provisions of the
Appendix to Part 181, by adding a requirement for information
sufficient to calculate the value of each material for which the origin
is unknown and that is used in the production of the good, by adding a
requirement for specific information regarding each material that is
claimed to be an originating material and is used in the production of
the good, and by adding a requirement specifying information to be
submitted where the advance ruling request involves an issue as to
whether the transaction value is acceptable with respect to the good;
the third sentence, which sets forth the information to be submitted
for purposes of the net cost method, has been changed by inserting
specific references to relevant provisions of the Appendix to Part 181,
by adding references to lists of all ``product, period and other''
costs and of all ``excluded''
[[Page 46355]]
costs, by limiting the required materials value information to non-
originating materials or materials for which the origin is unknown and
that are used in the production of the good, and by requiring a
statement regarding the period over which the net cost calculation is
to be made; and a new sentence has been added at the end to limit the
information required to be submitted where the advance ruling request
concerns only the calculation of an element of a regional value content
formula.
4. A new paragraph (b)(2)(iv), with the heading ``NAFTA rulings on
producer materials'', has been added to specify information that must
be submitted where the advance ruling request either involves an issue
with respect to an intermediate material or is submitted by a Canadian
or Mexican producer of a material and concerns only the origin of such
material.
5. Paragraph (b)(5), which requires the submission of information
regarding prior or current transactions, has been reconfigured to
facilitate the addition of references to information regarding the
following: judicial or quasi-judicial review in Canada or Mexico; a
verification of origin performed in the United States, Canada or
Mexico; an administrative appeal in the United States, Canada or
Mexico; a request for an advance ruling in the United States, Canada or
Mexico; and the status or disposition of any current or prior judicial
or quasi-judicial review, verification of origin, administrative
appeal, or advance ruling request.
Chapter Four Rules of Origin
With regard to the substantively verbatim regulatory texts covering
the rules of origin provisions of Chapter Four of the NAFTA, which were
set forth in the interim regulations in the Appendix to Part 181, the
trilaterally-agreed changes thereto concern clarifications of ambiguous
provisions, corrections in grammar or punctuation and, in certain
cases, textual additions to remedy instances in which the original
trilateral text was incomplete or the intent of the Parties was not
adequately expressed. These changes, which are incorporated in the text
of the Appendix to Part 181 as set forth below, are as follows:
Calculation of Total Cost
Calculation of total cost is required for purposes of the de
minimis rule in section 5, the net cost method in section 6 and the
valuation of intermediate materials in sections 7 and 10. However,
references in the original trilateral texts to the calculation of total
cost were incomplete in sections 5, 7 and 10. Therefore, in order to
make it clear as to what costs are included in the ``total cost'' as
that term is used in the trilateral texts, new subsection (6) has been
added to section 2, new sections 5(10), 7(7) and 10(9)(f) have been
added, and consequential changes have been made to the following
provisions in sections 5, 6 and 7: sections 5(9) (a) and (b) (sections
5(8) (a) and (b) in the interim texts); section 6(12); and sections
7(6)(a) and (b).
Effect of Choice to Average
Throughout the trilateral texts there are references to
``averaging'' for purposes of determining the net cost of goods, the
value of materials or the value of traced materials. Whenever a
producer makes the choice to average, the period over which that
producer averages cannot be changed, and the duration of the choice to
average must extend to the end of the fiscal year of that producer.
Although these requirements were implicit in the original trilateral
texts, it became apparent that it was necessary to state them
explicitly. Therefore, new subsections (7) through (10) have been added
to section 2, and the following changes have been made to the related
provisions in sections 6 and 12 and in Schedule X: revision of section
6(15)(a)(ii); addition of new sections 6(18) and 6(19) and
redesignation of interim sections 6(18) and 6(19) as 6(20) and 6(21);
in sections 12(5) (a) and (b), addition of the words ``that is evenly
divisible into the number of months of the producer's fiscal year
remaining at the beginning of that period''; addition of new sections
12(6) through 12(9) and redesignation of interim sections 12(6) and
12(7) as 12(10) and 12(11); and revision of sections 3 and 12 of
Schedule X.
Averaging For De Minimis and Accumulation
The original trilateral texts failed to provide specifically for
the use of averaging in determining the value of the non-originating
materials in subsections (1) and (5) of section 5 (de minimis), and in
determining the net cost and value of non-originating materials in
subsection (2) of section 14 (accumulation). To provide guidance on the
use of averaging in situations involving de minimis or accumulation,
new subsections (11) and (12) have been added to section 5 and new
subsection (3) has been added to section 14. Consequential amendments,
such as redesignation of subsections and internal references, have also
been made.
Section 4
Section 7(10) provides for the situation in which a self-produced
material may be designated as an intermediate material if it is used in
the production of a good that is subject to a regional value content
requirement. It was not clear under the original trilateral texts that
a self-produced material, used in a good which is not subject to a
regional value content requirement, could be considered as a material
for purposes of the NAFTA rules of origin. Accordingly, a new
subsection (8) has been added to section 4 in order to make it clear
that a self-produced material may be considered as a material used in
the production of a good even if the good is not subject to a regional
value content requirement. Such a self-produced material must have
either originating or non-originating status under the NAFTA rules of
origin, and that status will influence the application of a particular
NAFTA rule of origin to the good produced from that material. In
addition, a new subsection (9) has been added to section 4 setting
forth an example to illustrate such a situation.
Section 6
Article 403 of the NAFTA specifically provides a producer with the
option to use an averaging method for calculating the net cost for
automotive goods, and sections 11, 12 and 13 of the trilateral
regulations implement the specific provisions of Article 403 for
automotive goods. The NAFTA does not specifically provide for averaging
with respect to any other goods. However, because it was recognized
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