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NAFTA Rules of Origin Regulations (SOR/94-14)

Regulations are current to 2020-09-09 and last amended on 2019-06-17. Previous Versions

PART IIIRegional Value Content

  •  (1) Except as otherwise provided in subsection (6), the regional value content of a good shall be calculated, at the choice of the exporter or producer of the good, on the basis of either the transaction value method or the net cost method.

  • (2) The transaction value method for calculating the regional value content of a good is as follows:

    RVC = (TV - VNM) ÷ TV × 100

    where

    RVC
    is the regional value content of the good, expressed as a percentage;
    TV
    is the transaction value of the good, determined in accordance with Schedule II with respect to the transaction in which the producer of the good sold the good, adjusted to an F.O.B. basis; and
    VNM
    is the value of non-originating materials used by the producer in the production of the good, determined in accordance with section 7.
  • (3) The net cost method for calculating the regional value content of a good is as follows:

    RVC = (NC - VNM) ÷ NC × 100

    where

    RVC
    is the regional value content of the good, expressed as a percentage;
    NC
    is the net cost of the good, calculated in accordance with subsection (11); and
    VNM
    is the value of non-originating materials used by the producer in the production of the good, determined, except as otherwise provided in sections 9 and 10, in accordance with section 7.
  • (4) Except as otherwise provided in section 9 and paragraph 10(1)(d), for purposes of calculating the regional value content of a good under subsection (2) or (3), the value of non-originating materials used by a producer in the production of the good shall not include

    • (a) the value of any non-originating materials used by another producer in the production of originating materials that are subsequently acquired and used by the producer of the good in the production of that good; or

    • (b) the value of any non-originating materials used by the producer in the production of a self-produced material that is an originating material and is designated as an intermediate material.

  • (5) For purposes of subsection (4),

    • (a) in the case of any self-produced material that is not designated as an intermediate material, only the value of any non-originating materials used in the production of the self-produced material shall be included in the value of non-originating materials used in the production of the good; and

    • (b) where a self-produced material that is designated as an intermediate material and is an originating material is used by the producer of the good with non-originating materials (whether or not those non-originating materials are produced by that producer) in the production of the good, the value of those non-originating materials shall be included in the value of non-originating materials.

  • (6) The regional value content of a good shall be calculated only on the basis of the net cost method where

    • (a) there is no transaction value for the good under subsection 2(1) of Schedule III;

    • (b) the transaction value of the good is unacceptable under subsection 2(2) of Schedule III;

    • (c) the good is sold by the producer to a related person and the volume, by units of quantity, of sales by that producer of identical goods or similar goods, or any combination thereof, to related persons during the six month period immediately preceding the month in which the good is sold exceeds 85 per cent of the producer’s total sales to all persons, whether or not related and regardless of location, of identical goods or similar goods, or any combination thereof, during that period;

    • (d) the good is

      • (i) a motor vehicle of any of headings 87.01 and 87.02, subheadings 8703.21 through 8703.90 and headings 87.04, 87.05 and 87.06,

      • (ii) a good of a tariff provision listed in Schedule IV or an automotive component assembly, automotive component, sub-component or listed material, and is for use in a motor vehicle referred to in subparagraph (i), either as original equipment or as an after-market part,

      • (iii) a good of any of subheadings 6401.10 through 6406.10, or

      • (iv) a good of heading 84.69;

    • (e) the exporter or producer chooses to accumulate with respect to the good in accordance with section 14; or

    • (f) the good is an intermediate material and is subject to a regional value-content requirement.

  • (7) If the exporter or producer of a good calculates the regional value content of the good on the basis of the transaction value method and the customs administration of a NAFTA country subsequently notifies that exporter or producer in writing, during the course of a verification of origin, that

    • (a) the transaction value of the good, as determined by the exporter or producer, is required to be adjusted under section 4 of Schedule II or is unacceptable under subsection 2(2) of Schedule III, there is no transaction value for the good under subsection 2(1) of Schedule III or the transaction value method may not be used because of the application of paragraph (6)(c), or

    • (b) the value of any material used in the production of the good, as determined by the exporter or producer, is required to be adjusted under section 5 of Schedule VIII or is unacceptable under subsection 2(3) of Schedule VIII, or there is no transaction value for the material under subsection 2(2) of Schedule VIII or the transaction value method may not be used to calculate the regional value content of the material because of the application of paragraph (6)(c),

    the exporter or producer may choose that the regional value content of the good be calculated on the basis of the net cost method, in which case the calculation must be made within 60 days after the producer receives the notification, or such longer period as that customs administration specifies.

  • (8) If the exporter or producer of a good chooses that the regional value content of the good be calculated on the basis of the net cost method and the customs administration of a NAFTA country subsequently notifies that exporter or producer in writing, during the course of a verification of origin, that the good does not satisfy the applicable regional value-content requirement, the exporter or producer of the good may not recalculate the regional value content on the basis of the transaction value method.

  • (9) Nothing in subsection (7) shall be construed as preventing any review and appeal under sections 57.1 through 70 of the Customs Act, of an adjustment to or a rejection of

    • (a) the transaction value of the good; or

    • (b) the value of any material used in the production of the good.

  • (10) For purposes of the transaction value method, where non-originating materials that are the same as one another in all respects, including physical characteristics, quality and reputation but excluding minor differences in appearance, are used in the production of a good, the value of those non-originating materials may, at the choice of the producer of the good, be determined in accordance with one of the methods set out in Schedule IX.

  • (11) For purposes of subsection (3), the net cost of a good may be calculated, at the choice of the producer of the good, by

    • (a) calculating the total cost incurred with respect to all goods produced by that producer, subtracting any excluded costs that are included in that total cost, and reasonably allocating, in accordance with Schedule VII, the remainder to the good;

    • (b) calculating the total cost incurred with respect to all goods produced by that producer, reasonably allocating, in accordance with Schedule VII, that total cost to the good, and subtracting any excluded costs that are included in the amount allocated to that good; or

    • (c) reasonably allocating, in accordance with Schedule VII, each cost that forms part of the total cost incurred with respect to the good so that the aggregate of those costs does not include any excluded costs.

  • (12) Total cost under subsection (11) consists of the costs referred to in subsection 2(6), and is calculated in accordance with that subsection.

  • (13) For purposes of calculating net cost under subsection (11),

    • (a) excluded costs shall be the excluded costs that are recorded on the books of the producer of the good;

    • (b) excluded costs that are included in the value of a material that is used in the production of the good shall not be subtracted from or otherwise excluded from the total cost; and

    • (c) excluded costs do not include any amount paid for research and development services performed in the territory of a NAFTA country.

  • (14) For purposes of calculating non-allowable interest costs, the determination of whether interest costs incurred by a producer are more than 700 basis points above the yield on debt obligations of comparable maturities issued by the federal government of the country in which the producer is located shall be made in accordance with Schedule XI.

  • (15) For purposes of the net cost method, the regional value content of the good, other than a good with respect to which an election to average may be made under subsection 11(1), (3) or (6), 12(1) or 13(4), may be calculated, where the producer elects to do so, by

    • (a) calculating the sum of the net costs incurred and the sum of the values of non-originating materials used by the producer of the good with respect to the good and identical goods or similar goods, or any combination thereof, produced in a single plant by the producer over

      • (i) a month,

      • (ii) any consecutive three month or six month period that falls within and is evenly divisible into the number of months of the producer’s fiscal year remaining at the beginning of that period, or

      • (iii) the producer’s fiscal year; and

    • (b) using the sums referred to in paragraph (a) as the net cost and the value of non-originating materials, respectively.

  • (16) The calculation made under subsection (15) shall apply with respect to all units of the good produced during the period chosen by the producer under paragraph (15)(a).

  • (17) An election made under subsection (15) may not be rescinded or modified with respect to the goods or the period with respect to which the election is made.

  • (18) Where a producer chooses a one, three or six month period under subsection (15) with respect to goods, the producer shall be considered to have chosen under that subsection a period or periods of the same duration for the remainder of the producer’s fiscal year with respect to those goods.

  • (19) Where the net cost method is required to be used or has been chosen and an election has been made under subsection (15), the regional value content of the good shall be calculated on the basis of the net cost method over the period chosen under that subsection and for the remainder of the producer’s fiscal year.

  • (20) Except as otherwise provided in subsections 11(10), 12(11) and 13(10), where the producer of a good has calculated the regional value content of the good under the net cost method on the basis of estimated costs, including standard costs, budgeted forecasts or other similar estimating procedures, before or during the period chosen under paragraph (15)(a), the producer shall conduct an analysis at the end of the producer’s fiscal year of the actual costs incurred over the period with respect to the production of the good and, if the good does not satisfy the regional value-content requirement on the basis of the actual costs during that period, immediately inform any person to whom the producer has provided a Certificate of Origin for the good, or a written statement that the good is an originating good, that the good is a non-originating good.

  • (21) For purposes of calculating the regional value content of a good, the producer of that good may choose to treat any material used in the production of that good as a non-originating material.

  • (22) Each of the following examples is an “Example” as referred to in subsection 2(4).

    • Example 1: example of point of direct shipment (with respect to adjusted to an F.O.B. Basis)

      A producer has only one factory, at which the producer manufactures finished office chairs. Because the factory is located close to transportation facilities, all units of the finished good are stored in a factory warehouse 200 metres from the end of the production line. Goods are shipped worldwide from this warehouse. The point of direct shipment is the warehouse.

    • Example 2: examples of point of direct shipment (with respect to adjusted to an F.O.B. Basis)

      A producer has six factories, all located within the territory of one of the NAFTA countries, at which the producer produces garden tools of various types. These tools are shipped worldwide, and orders usually consist of bulk orders of various types of tools. Because different tools are manufactured at different factories, the producer decided to consolidate storage and shipping facilities and ships all finished products to a large warehouse located near the seaport, from which all orders are shipped. The distance from the factories to the warehouse varies from 3 km to 130 km. The point of direct shipment for each of the goods is the warehouse.

    • Example 3: examples of point of direct shipment (with respect to adjusted to an F.O.B. Basis)

      A producer has only one factory, located near the centre of one of the NAFTA countries, at which the producer manufactures finished office chairs. The office chairs are shipped from that factory to three warehouses leased by the producer, one on the west coast, one near the factory and one on the east coast. The office chairs are shipped to buyers from these warehouses, the shipping location depending on the shipping distance from the buyer. Buyers closest to the west coast warehouse are normally supplied by the west coast warehouse, buyers closest to the east coast are normally supplied by the warehouse located on the east coast and buyers closest to the warehouse near the factory are normally supplied by that warehouse. In this case, the point of direct shipment is the location of the warehouse from which the office chairs are normally shipped to customers in the location in which the buyer is located.

    • Example 4: subsection 6(3), net cost method

      A producer located in NAFTA country A sells Good A that is subject to a regional value-content requirement to a buyer located in NAFTA country B. The producer of Good A chooses that the regional value content of that good be calculated using the net cost method. All applicable requirements of these Regulations, other than the regional value-content requirement, have been met. The applicable regional value-content requirement is 50 per cent.

      In order to calculate the regional value-content of Good A, the producer first calculates the net cost of Good A. Under paragraph 6(11)(a), the net cost is the total cost of Good A (the aggregate of the product costs, period costs and other costs) per unit, minus the excluded costs (the aggregate of the sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs) per unit. The producer uses the following figures to calculate the net cost:

      • Product costs:
        • Value of originating materialsblank line$  30.00
        • Value of non-originating materialsblank line40.00
        • Other product costsblank line20.00
      • Period costs:blank line10.00
      • Other costs:blank line0.00
      • Total cost of Good A, per unit:blank line$100.00


      • Excluded costs:
        • Sales promotion, marketing and after-sales service costsblank line$  5.00
        • Royaltiesblank line2.50
        • Shipping and packing costsblank line3.00
        • Non-allowable interest costsblank line1.50
      • Total excluded costs:blank line$12.00

      The net cost is the total cost of Good A, per unit, minus the excluded costs.

      • Total cost of Good A, per unit:blank lineblank line$100.00
      • Excluded costs:blank lineblank line- 12.00
      • Net cost of Good A, per unit:blank lineblank line$  88.00

      The value for net cost ($88) and the value of non-originating materials ($40) are needed in order to calculate the regional value content. The producer calculates the regional value content of Good A under the net cost method in the following manner:

      RVC=

      (NC - VNM) ÷ NC × 100

      =

      (88 - 40) ÷ 88 × 100

      =54.5%

      Therefore, under the net cost method, Good A qualifies as an originating good, with a regional value-content of 54.5 per cent.

    • Example 5: paragraph 6(6)(c), net cost method required for certain sales to related persons

      On January 15, 1994, a producer located in NAFTA country A sells 1,000 units of Good A to a related person, located in NAFTA country B. During the six month period beginning on July 1, 1993 and ending on December 31, 1993, the producer sold 90,000 units of identical goods and similar goods to related persons from various countries, including that buyer. The producer’s total sales of those identical goods and similar goods to all persons from all countries during that six month period were 100,000 units.

      The total quantity of identical goods and similar goods sold by the producer to related persons during that six month period was 90 per cent of the producer’s total sales of those identical goods and similar goods to all persons. Under paragraph 6(6)(c), the producer must use the net cost method to calculate the regional value content of Good A sold in January 1994, because the 85 per cent limit was exceeded.

    • Example 6: paragraph 6(11)(a)

      A producer in a NAFTA country produces Good A and Good B during the producer’s fiscal year.

      The producer uses the following figures, which are recorded on the producer’s books and represent all of the costs incurred with respect to both Good A and Good B, to calculate the net cost of those goods:

      • Product costs:

        Value of originating materialsblank line$2,000

        Value of non-originating materialsblank line1,000

        Other product costsblank line2,400

      • Period costs: (including $1,200 in excluded costs)blank line3,200
      • Other costs:blank line400
      • Total cost of Good A and Good B:blank line$9,000

      The net cost is the total cost of Good A and Good B, minus the excluded costs incurred with respect to those goods.

      • Total cost of Good A and Good B:blank line$9,000
      • Excluded costs:blank line- 1,200
      • Net cost of Good A and Good B:blank line$7,800

      The net cost must then be reasonably allocated, in accordance with Schedule VII, to Good A and Good B.

    • Example 7: paragraph 6(11)(b)

      A producer located in a NAFTA country produces Good A and Good B during the producer’s fiscal year. In order to calculate the regional value content of Good A and Good B, the producer uses the following figures that are recorded on the producer’s books and incurred with respect to those goods:

      • Product costs:

        Value of originating materialsblank line$2,000

        Value of non-originating materialsblank line1,000

        Other product costsblank line2,400

      • Period costs: (including $1,200 in excluded costs)blank line3,200
      • Other costs:blank line400
      • Total cost of Good A and Good B:blank line$9,000

      Under paragraph 6(11)(b), the total cost of Good A and Good B is then reasonably allocated, in accordance with Schedule VII, to those goods. The costs are allocated in the following manner:

      Allocated to Good AAllocated to Good B
      Total cost ($9,000 for both Good A and Good B)$5,220$3,780

      The excluded costs ($1,200) that are included in total cost allocated to Good A and Good B, in accordance with Schedule VII, are subtracted from that amount.

      Total Excluded costs:Excluded Cost Allocated to Good AExcluded Cost Allocated to Good B

      Sales promotion, marketing and after-sale service costsblank line500

        290  210

      Royaltiesblank line200

        116  84

      Shipping and packing costsblank line500

        290  210
      Net cost (total cost minus excluded costs):$4,524$3,276

      The net cost of Good A is thus $4,524, and the net cost of Good B is $3,276.

    • Example 8: paragraph 6(11)(c)

      A producer located in a NAFTA country produces Good C and Good D. The following costs are recorded on the producer’s books for the months of January, February and March, and each cost that forms part of the total cost are reasonably allocated, in accordance with Schedule VII, to Good C and Good D.

      Total cost: Good C and Good D (in thousands of dollars)Allocated to Good C (in thousands of dollars)Allocated to Good D (in thousands of dollars)
      Product costs:

      Value of originating materials

      1000100

      Value of non-originating materials

      900800100

      Other product costs

      500300200
      Period costs: (including $420 in excluded costs)5,6793,0362,643
      Minus Excluded costs420300120
      Other costs:000
      Total cost (aggregate of product costs, period costs and other costs):6,7593,8362,923
    • Example 9: subsection 6(12)

      Producer A, located in a NAFTA country, produces Good A that is subject to a regional value-content requirement. The producer chooses that the regional value content of that good be calculated using the net cost method. Producer A buys Material X from Producer B, located in a NAFTA country. Material X is a non-originating material and is used in the production of Good A. Producer A provides Producer B, at no charge, with tools to be used in the production of Material X. The cost of the tools that is recorded on the books of Producer A has been expensed in the current year. Pursuant to subparagraph 5(1)(b)(ii) of Schedule VIII, the value of the tools is included in the value of Material X. Therefore, the cost of the tools that is recorded on the books of Producer A and that has been expensed in the current year cannot be included as a separate cost in the net cost of Good A because it has already been included in the value of Material X.

    • Example 10: subsection 6(12)

      Producer A, located in a NAFTA country, produces Good A that is subject to a regional value-content requirement. The producer chooses that the regional value-content of that good be calculated using the net cost method and averages the calculation over the producer’s fiscal year under subsection 6(15). Producer A determines that during that fiscal year Producer A incurred a gain on foreign currency conversion of $10,000 and a loss on foreign currency conversion of $8,000, resulting in a net gain of $2,000. Producer A also determines that $7,000 of the gain on foreign currency conversion and $6,000 of the loss on foreign currency conversion is related to the purchase of non-originating materials used in the production of Good A, and $3,000 of the gain on foreign currency conversion and $2,000 of the loss on foreign currency conversion is not related to the production of Good A. The producer determines that the total cost of Good A is $45,000 before deducting the $1,000 net gain on foreign currency conversion related to the production of Good A. The total cost of Good A is therefore $44,000. That $1,000 net gain is not included in the value of non-originating materials under subsection 7(1).

    • Example 11: subsection 6(12)

      Given the same facts as in example 10, except that Producer A determines that $6,000 of the gain on foreign currency conversion and $7,000 of the loss on foreign currency conversion is related to the purchase of non-originating materials used in the production of Good A. The total cost of Good A is $45,000, which includes the $1,000 net loss on foreign currency conversion related to the production of Good A. That $1,000 net loss is not included in the value of non-originating materials under subsection 7(1).

  • SOR/95-382, s. 1
  • SOR/2000-86, s. 3
  • SOR/2002-27, s. 99
  • SOR/2009-188, s. 2
 
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