| M E M O R A N D U M | |
| TO: | Clients and Friends of the Firm |
| FROM: | John M. Peterson Neville Peterson LLP |
| RE: | Implementation of New NAFTA Rule of Origin for Data Processing Equipment and Parts, Effective January 1, 2003 |
I. Introduction
On January 1, 2003, a new and extremely liberal North American Free Trade Agreement (NAFTA) preference rule of origin will enter into force with respect to various imported automatic data processing (ADP) machines and parts thereof. Under this rule, certain ADP machines and components will be deemed to be NAFTA “originating” when imported into one NAFTA country from another, based solely upon their classification – and regardless of where they were actually manufactured.
This new NAFTA preference rule of origin may have a positive impact on many firms’ North American operations -- for example, simplifying the determination of NAFTA “originating” status for goods, and eliminating the need to track the origin of automatic data processing goods which might be incorporated into other goods. It may also eliminate the need to trace the origin of some goods and components for purposes of establishing “American Goods Returned” status under HTS subheading 9801.00.10 for goods circulating in North American trade, and may simplify “repair and alteration” operations involving goods moving in North American trade.
Potentially affected companies should undertake a careful study of the potential impact of this new rule on its operations in advance of the new rule’s January 1, 2003 effective date.
II. NAFTA "Virtual Customs Union" for ADP Products and Parts
Article 308.1 of the North American Free Trade Agreement (NAFTA) 1 requires the United States, Canada and Mexico to establish a virtual “Customs union” in respect of certain ADP products and parts thereof. 2 This Customs union was to be achieved by requiring the three NAFTA signatories to adopt common external duty rates on certain ADP goods by specified dates.
Annex 308.1 to the NAFTA (copy appended hereto as Exhibit A) provides that each NAFTA party --
. . . shall reduce its most-favored-nation rate of duty applicable to a good provided for under tariff provisions set out in Tables 308.1.1 and 308.1.2 in Section B to the rates set out therein, to the lowest rate agreed by any Party in the Uruguay Round of multilateral trade negotiations, or to such reduced rate at the Parties may agree, in accordance with the schedule set out in Section B, or with such accelerated schedule as the Parties may agree.
This provision commits the NAFTA signatories to adopting common external tariff rates by specified dates. Tables 308.1.1 of NAFTA (see Exhibit A) indicates the tariff items for which common external rates of duty are to be adopted, the target rates envisioned by the parties, and the time table for achieving these rates. The use of the letter “R” indicates that the duty rates in question are to be achieved on the date of entry into force of NAFTA (January 1, 1994). The symbol “S” means that the targeted rate (or such other duty rate as the countries may agree), is to be achieved “in five equal annual stages commencing January 1, 1999", i.e., by January 1, 2003.
As signatories to the Information Technology Agreement (ITA), the United States and Canada have already reduced their duty rates on the covered products to “Free”. Mexico recently announced that, under its unilateral “ITA Plus” program, which will go into effect January 1, 2003, 3 it will eliminate its duties on the covered products. Thus, the “virtual Customs union” will be achieved, and NAFTA Article 308.1 will enter into force, effective January 1, 2003.
The new NAFTA Preference Rule of Origin which will become effective for Annex 308.1 goods is set forth in Paragraph 2 of Annex 308.1, Section A which provides:
2. Notwithstanding Chapter 4 (Rules of Origin), when the most-favored-nation rate of duty applicable to a good provided for under the tariff provisions set out in Table 308.1.1 in Section B conforms with the rate established under Paragraph 1, each Party shall consider the good, when imported into its territory from the territory of another Party, to be an originating good.
In other words, beginning January 1, 2003, whenever an article classified under any of the tariff headings specified in Annex 308.1 enter the United States from Canada or Mexico, it may be treated as an “originating” good for NAFTA purposes based solely on its tariff classification, notwithstanding that the good might have been originally and completely manufactured in, say, Japan, or some other non-NAFTA country.
NAFTA Annex 308.1's “virtual Customs union” reflects the notion that the mere presence of one of the covered articles in the North American territory indicates that the external common tariff of one of the parties (if any) has been paid. Thus, once these goods have entered the NAFTA territory, they enjoy effective “free circulation” through all three NAFTA countries.
Perhaps more significantly, each of the products may be designated as NAFTA “originating”. This means that when the products are imported into the United States from another NAFTA territory and a NAFTA Certificate of Origin has been provided for the good, the importer can avoid payment of duties and merchandise processing fees on the good -- even if the good was actually produced in a non-NAFTA country. Moreover, covered component materials may be treated as NAFTA “originating” when used in the production of another article within the NAFTA territory.
Because of NAFTA Article 303 duty drawback and duty-deferral restrictions, NAFTA “originating” status could be claimed for one of goods covered by Annex 308.1 even if, for example, the good in question were a Japanese computer part or other Annex 308.1 good which transited a maquiladora or other bonded facility in Mexico, and was then entered into the United States. Notwithstanding that the good may have entered Mexico in bond, the prohibition of NAFTA duty deferrals or drawbacks, which would be triggered when the good is exported from Mexico, would require the exporter to account for the good to Mexican authorities, and pay any duties owing. Having thus been entered into a NAFTA country, the ADP good may pass into “free circulation” in the other NAFTA countries.
The NAFTA Annex 308.1 preference rule of origin is designated as origin criterion “E” on the NAFTA Certificate of Origin form . 4
III. Good Covered by NAFTA Article 308.1
The list of goods covered by NAFTA Article 308.1 is shown in Section B of NAFTA Annex 308.1, which is appended at Exhibit A. This Section of the Annex sets forth two tables, describing covered articles, the rate of duty to be achieved, and the schedule for achieving the rate of duty.
The articles covered in Table 308.1.1 of the Annex includes ADP machines, digital processing units, input/output units, displays, storage units, and other units of automatic data processing machines. Significantly, it also includes “parts of computers”, provided for in Harmonized Tariff Schedule subheading 8473.30, as well as computer power supplies of HTS Heading 8504, metal oxide varistors, diodes, transistors, and other semiconductor devices, LEDs, and piezoelectric crystals. Semiconductor devices and integrated circuits classified in HTS headings 8541 and 8542 are covered by the Annex.
IV. Other Changes or Proclamations Required
The “virtual Customs union” of NAFTA Annex 308.1 and the NAFTA preference accorded to covered products, is set out in Section 202 of the North American Free Trade Agreement Implementation Act.
Article 513 of NAFTA indicates that, among the duties given to the NAFTA “Working Group on Rules of Origin” is the obligation to:
Propose to the [NAFTA] Commission any modification of or addition to Article 303, 308 or 311, Chapter 4, this Chapter, the Marking Rules, the Uniform Regulations or any other provision of this Agreement as may be required to conform with any change to the Harmonized System.
Obviously, since NAFTA entered into force, there have been substantial changes to the International HS nomenclature for goods of Heading 8471. Presumably, a revision to Annex 308.1 of NAFTA, showing the new or changed rates of duty, should become effective on or before January 1, 2003.
Finally, NAFTA Annex 308.3 provides that:
To facilitate the operation of Article 308(3) the Parties shall consult regarding the tariff classification of local area network apparatus and shall endeavor to agree no later than January 1, 1994 on the classification of such goods in each Party’s tariff schedule.
To our knowledge, the NAFTA parties have agreed that LANS are classified under HTS Heading 8471 and are therefore covered by Article 308.
IV. Conclusion
The full implementation of NAFTA Article 308.1 has the potential to change the way information technology companies conduct various operations in North America. Companies should consider the rule and examine the ways it may affect their operations.
Additional information concerning NAFTA Article 308(1) is available from our offices. Please contact us if you have any questions.
1. Annex 308.1 applies to certain automatic data processing goods and their parts.
Certain automatic data processing goods and their parts, specified in Annex 308.1, that do not originate in the territory are considered originating upon importation into the territory of a NAFTA country from the territory of another NAFTA country when the most-favored nation tariff rate of the good conforms to the rate established in Annex 308.1 and is common to all NAFTA countries (Reference: Annex 308.1).
|
Home I Overview I Areas of Practice Our Attorneys I Firm Highlights I NP Trade Resource Library Hot Topics I Reading Room I Links I Contact Us |
|
The material on this site is protected under the copyright laws of the United States of America and international conventions, and is the exclusive property of Neville Peterson LLP or any licensee. All rights reserved. © Neville Peterson LLP 2002. |
 |