By: Paul Fudacz, Senior Associate Attorney
Under the NAFTA Rules of Origin, General Note (GN) 12 of the HTSUS, when non-originating materials are used to produce a final product in a NAFTA country, in order for that final product (also referred to as the “Good”) to qualify for NAFTA preferential treatment, the non-originating materials must undergo either a change in tariff classification; an applicable change in tariff classification plus a regional value-content requirement; or the final product must meet a regional value-content requirement. The specific requirements that pertain to a Good, defined by HTSUS number, are set forth under GN 12(t).
Originating materials, on the other hand, do not need to undergo a tariff shift, and are counted 100% toward the originating content of a final product in an RVC calculation, provided that it can be proven that the subject material is indeed originating. This is true even if the originating material is produced with non-originating content, but otherwise satisfies the applicable GN 12(t) rule. In the case of purchased materials, the most common way to prove that a material is originating is to obtain a NAFTA certificate of origin from the supplier, or other written verification whereby the producer of the material attests that the material satisfies the NAFTA rules of origin based on their analysis.
The NAFTA rules also recognize that many producers of Goods also produce materials and components themselves that are used in the production of the final product. These are known as “self-produced materials”. The NAFTA Rules of Origin regulations define a “self-produced material” as a “material that is produced by the producer of a good, and used in the production of that good.” Except for certain automotive goods, a producer may designate a self-produced material as an “intermediate material” , which is then treated essentially the same way as a purchased material for purposes of application of the GN 12(t) rules. The Rules of Origin further define “intermediate material” as “a self-produced material that is used in the production of a good, is designated as an intermediate material”, and that “in order to qualify as an originating material, a self-produced material that is designated as an intermediate material must qualify as an originating material.”
If a self-produced material satisfies the GN 12(t) rule for that specific material, based on the HTSUS of the material, and if the producer designates the material as an intermediate material, then the self-produced material can be considered 100% originating when performing an RVC calculation for the final product itself. On the other hand, if the self-produced material does not satisfy the 12(t) rule of origin, it cannot be designated as an originating intermediate material, but can still be considered a non-originating self- produced material classified under its own HTS number for tariff shift purposes. In other words if a non-originating self-produced material has an HTS number that makes the necessary tariff shift under the 12(t) rule for the final good, and if no RVC is required, then the final good can satisfy the rule of origin on this basis. However, if an RVC is required, the non-originating content of a non-originating self-produced material must be included in the value of non-originating materials in the RVC calculation of the final good.
Producers must be aware however that there are some important differences under the NAFTA rules of origin when determining whether a self-produced intermediate material is originating. As stated above, in order to qualify as an originating material, a self-produced material that is designated as an intermediate material must qualify as an originating material under the rules of origin. Also where the 12(t) rule applicable to the self-produced intermediate material includes an RVC requirement, no other self-produced material that is subject to a regional value-content requirement and is incorporated into that intermediate material can be designated by the producer as an intermediate material. In other words, the NAFTA rules prohibit “nesting” of intermediate materials into other intermediate materials. Otherwise, there is no limit on the number of originating self-produced materials that can be designated as intermediate materials.
Also, producers must be aware that if an intermediate material is subject to an RVC requirement under GN 12(t), the RVC must be calculated using the net cost method.
As an example of the application of the Rules of Origin pertaining to intermediate materials, a particular printed circuit board produced by the producer of a final product (a television) is classified under 8529.90.13. The GN 12(t) notes applicable to the item provide for “a change to tariff items . . .8529.90.13. . .from any other tariff item.” Therefore the only requirement for the printed circuit board to qualify as an originating material is that any non-originating components must undergo the above stated change in tariff classification. Therefore if all the non-originating components are classifiable under a heading other than 8529, the printed circuit board will qualify as originating under the NAFTA, and the value of any non-originating materials used in the production of the printed circuit board do not have to be included in the value of non-originating materials in an RVC calculation for the television.
Certain other free trade agreements (FTA’s), but not all, incorporate the concept of treating certain self-produced materials in the same fashion as purchased materials including the U.S. Columbia and the U.S. Korea free trade agreements, however they do not incorporate the concept of designating self-produced materials as intermediate materials.
Often producers that utilize the NAFTA, or other trade agreements, need all the help they can get in terms of establishing qualifying regional value content in their products. The use of the rules applicable to self-produced materials can make the difference between qualifying and not qualifying in many cases. It is therefore important that producers understand the benefits associated with the use of self-produced materials, but they also must make sure that they understand and apply the applicable rules correctly in order to avoid compliance problems or unwelcome surprises in the event of a NAFTA verification.