Supply chain and your FTA: do your goods qualify?
It's always a good idea to regularly check in with your vendors to make sure your goods still qualify for the applicable Free Trade Agreement (FTA).
Do your goods still qualify?
As a Canadian, U.S. or Mexican company, it is all too easy to be chugging along in your business, sourcing components or even whole goods from other free trade participants when you decide to change your source to another country. If that other country is a non-free-trade participant (e.g. China, Taiwan), whatever your company is sourcing will no longer meet the necessary criterion to qualify for duty-free status.
What you may not realize is that the vendor is obligated to report the change. And if they don't, you as the importer are the one at risk of having to repay duties if an audit is conducted.
Keeping this in mind, it’s essential to routinely check in with your vendors to revalidate whether your goods qualify for the applicable free trade agreement. Failing to do so could cost your business.
For the purposes of this article, we'll explore this within the context of USMCA/ CUSMA certificates. Let’s get into the nitty-gritty.
Know what you are responsible for
The USMCA/ CUSMA has been around for a long time, as it is the evolution of NAFTA. Part of this agreement allows for all goods qualifying for USMCA/ CUSMA to be duty free. Other FTAs have been ratified or implemented so duty rates will lower gradually until they are free. As each country has their own regulations, rules and forms, it is important to be cognizant of each country’s requirements.
As the importer, you are responsible for ensuring you have a valid, completed, correct certificate of origin, signed by a company signing officer with knowledge of customs and logistics.
Not as easy as you may think
Commonly, the importer uses the USCMA/ CUSMA certificate as supplied by their vendor. They trust that the certificate qualifies for USCMA/ CUSMA and that the vendor has done their due diligence.
Should the product claimed under USCMA/CUSMA be under Customs audit or review and the certifier is unable to or fails to present documents (or even enough information for tariff classification) the CBSA officer may rule that without proper information on the product qualification (including HS codes, etc.) there is not sufficient information to determine whether or not goods qualify under USCMA/CUSMA.
But here’s the kicker – if this happens, as the importer, you will be asked to pay back the Customs duty retroactively.
For instance, if you decide to switch supplier from any USCMA/ CUSMA territories to one outside of it, even if you are only switching for a single component, the change may prevent the manufacturer from benefiting from the USMCA/ CUSMA preferential tariff treatment unless the right record or document is provided proving that the origination of the imported goods has not changed.
What’s essential to keep in mind here is that creating and issuing a certificate is not as easy as you may have thought. If you as the certifier are unsure if the products qualify, it’s best to refrain from issuing a certificate.
Watch for blind spots
The following are common blind spots we see importers missing when it comes to this issue —and sometimes to their detriment.
Mistakes to avoid making include:
- Putting incorrect information on the certificate – particularly Origin Criterion “A” being used for manufactured goods.
- Not completing information on the certificate in its entirety
- Not having the certificate signed by a signing officer or someone with Customs/purchasing knowledge
- Failing to recognize when your vendor changes suppliers or the countries of export (purchase)
- Not being aware that the vendor may have different sources for the same item (e.g., the same auto parts may be manufactured in both the U.S. and Europe. If the vendor does not list every parts number on the certificate, any European-originated parts will be hit with the USMCA/CUSMA duty rate.)
- Not knowing the rules of origin for the specific tariff classification (i.e., could be a not qualifying good, or doesn’t meet the tariff shift, etc.)
- Not aligning with the import – stock-keeping units (SKUs) are different, the commodity doesn’t reference the import, etc.
- Providing certificates because the purchaser has asked for it, or not being away when a vendor issues a USCMA/CUSMA certificate for merchandise they imported into the U.S. from a non-USMCA/CUSMA country.
- (In the case of some vendors) still using NAFTA certificate, which is no longer valid, instead of USMCA/CUSMA certificate of origin. They look very similar!
Mistakes like the above are common, but they can have impacts. If you don’t check in and your vendors make a change, the certificate will be incorrect and thus invalid. The tariff (the 10-digit classification that specifically identifies the product) also determines the duty rate, so you risk no longer having duty-free status, and thus have to pay the applicable duties.
If you are caught in any of the above blind spots, however, rest assured that this issue does not delay shipments. Rather, the review of the FTA takes place once your shipment is released, at which time the Customs officer reviews documents.
Best practices to avoid surprise duty
The good news is, with knowledge and support, you can proactively stay on top of this in a way that allows you to avoid the risk of paying duty. Here are some best practices, as shared by our consulting and compliance experts:
- Ensure that you know when the certificate expires
- Know your commodities tariff classification and understand the rules of origin
- Ensure that you negate liabilities (contract, email, etc.) should the certificate be found incorrect
- Educate your purchasers so they know which countries have Trade Agreements
- (For Importers of Record) Ensure you provide a statement saying you are not responsible should the certificate be determined invalid by CBSA.
- Learn more best practices for importers
We've got your back
Our trade consulting team is here to help you navigate the ins and outs of tariff classification and FTAs. In a world of ever-changing regulations and requirements, you need an experienced partner by your side. Connect with our team of consulting professionals today.
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