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August 11, 2020 Article 5 min read

The United States-Mexico-Canada Agreement is bringing added oversight to ensure compliance with the new trade rules. Accurate documentation is required, audits are coming, and fines and penalties await those who don’t comply. Are you ready?

Interior of a warehouse with boxes stacked on pallets.The USMCA went into effect on July 1, 2020, and strict oversight is on the way to ensure companies comply with the new trade agreement’s rules. This isn’t just a “new NAFTA.” The USMCA contains many changes to the rules and documentation requirements, and audits and enforcement will bring new levels of official oversight. Noncompliance may only create problems with the customs authorities; you’re potentially putting your commercial relationships at risk if you supply products to clients without certainty of their country of origin qualification and proper documentation. If you’re still signing the old NAFTA documents without checking the tariff codes, you have work ahead.

The USMCA contains many changes to the rules and documentation requirements, and audits and enforcement will bring new levels of official oversight. 

Many suppliers are now getting solicitations from their customers to provide documents certifying that the products they’re purchasing qualify as originating and are eligible for the duty-free benefits of USMCA. And those with suppliers lower down the chain need to do the same — even if they’re only shipping to customers within their own country.

Do you just fill out the form and send them back? In many cases, the answer is no — not without ensuring compliance under the new rules. In order to prepare the certifying documents, you need to understand what you’re certifying, know the specific rules to follow, and perform the necessary analysis, calculations, and documentation of results.

You need to understand what you’re certifying, know the specific rules to follow, and perform the necessary analysis, calculations, and documentation of results.

If you haven’t started this yet or you’re feeling considerably behind in the process, there’s some potentially good news. While USMCA requirements are now in effect the authorities have indicated that during Phase I of the implementation — from July 1, 2020 through Dec. 31, 2020 — U.S. Customs and Border Protection (CBP) intends to focus on supporting companies’ efforts to comply with its provision and may, in appropriate cases, show restraint in enforcement. This could provide you with a “second chance” to adapt to the new requirements and regulations without facing enforcement action.

Note this is an indication that enforcement may be relaxed in some situations but it’s not a guarantee. If you aren’t yet in compliance, it’s important to be able to show you’re in the process of developing and implementing a compliance plan and, in the event of an audit, be ready to show progress is being made. Showing that you’re working with a third-party consulting firm on an established timeline to compliance can be a plus.

If you aren’t yet in compliance, it’s important to be able to show you’re in the process of developing and implementing a compliance plan.

Many companies just starting the compliance process are reporting concern about the complexity of the certification and the amount of legwork required. We’ve broken down the process into four steps to help make it more manageable.

1. Know what’s being qualified

Closely examine every good that you’re manufacturing or selling and make sure it’s assigned the correct Harmonized Tariff Schedule (HTS) code. The HTS code is critical to determining the rule of origin you’ll use and ultimately whether the product qualifies or not. The USMCA has a new set of HTS-specific rules so products that were deemed originating under NAFTA system may no longer qualify.

Validation of the HTS code requires a detailed description of the good/product, how it’s manufactured, and how it’s used. This becomes the basis of a technical determination to validate the finding. The process of validating HTS codes can get complicated, and many companies are seeking assistance from an advisory firm to avoid incorrect assumptions. Don’t just use the code that you’ve always used — HTS codes are updated regularly, and any change in classification will affect other aspects of compliance.

2. Understand the rules that must be met

Once you’ve validated your HTS codes, you’ll need to understand the rule of origin (ROO) that applies to each code. The ROO may be based on a regional value content (RVC), tariff shift, or both. The ROO for a particular HTS code might be similar to an old NAFTA code but it could also be completely different. Just because a product was considered originating under the old NAFTA system doesn’t mean it will be under USMCA; a fresh analysis must be performed under the new rules.

3. Complete the corresponding analysis and calculations

Next, you’ll do the product origin analysis and calculation to see if the good qualifies for USMCA benefits. The calculations will determine the RVC or level of substantial transformation a product or good has to qualify for benefits. To proceed, you’ll need an updated bill of materials (BOM) that accurately describes each component making up the finished good, along with the HTS code for each of the inputs and documentation about its origin. A word of caution: In many instances you’ll need to rely on information from your suppliers as inputs to your calculations. Depending on their size and level of sophistication, you may need to help educate them. Everything that flows from them could be wrong if the incorrect inputs are provided.

Once the BOMs are updated and you’ve completed the analysis and calculations, you’ll know which part numbers comply with the ROO to consider them originating.

4. Document the results

The final step is preparing documentation to certify origination and ensure your customer qualifies for USMCA benefits.

The documentation process has changed under the USMCA. Previously, there was an official form called the NAFTA certificate that companies downloaded from the CBP website and simply filled out and signed. Under USMCA, the official form has been eliminated and replaced by general guidance contained in USMCA’s Annex 5-A. The guidance includes nine elements that must be provided to show compliance. The items can be included in an invoice or a separate document; as long as the information is provided the requirement is met.

In addition to providing the nine elements to your customers, we suggest adding them to the terms and conditions of your purchase orders to ensure you receive the correct certifying documents prior to making payment.

By breaking the process down into these four steps, the process becomes understandable and manageable. But given the technical challenges, sheer volume of effort, and potential consequences of enforcement or lost business due to noncompliance, many suppliers are bringing in assistance of third-party consultants.

If you’re behind on your compliance plan, the CBP has provided a welcome window of opportunity to qualify your products for USMCA benefits. Reach out to your Plante Moran contact and schedule a call with our USMCA task force if you need to discuss a compliance plan for your company with the new USMCA requirements.

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