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

Regulations are current to 2019-11-19 and last amended on 2019-06-17. Previous Versions

PART IVMaterials

General

  •  (1) Except as otherwise provided for non-originating materials used in the production of a good referred to in subsection 9(1) or 10(1), and except in the case of indirect materials, intermediate materials and packing materials and containers, for purposes of calculating the regional value content of a good and for purposes of subsection 5(1) and (5), the value of a material that is used in the production of the good shall be

    • (a) except as otherwise provided in subsection (2), where the material is imported by the producer of the good into the territory of the NAFTA country in which the good is produced, the customs value of the material with respect to that importation, or

    • (b) where the material is acquired by the producer of the good from another person located in the territory of the NAFTA country in which the good is produced

      • (i) the transaction value, determined in accordance with subsection 2(1) of Schedule VIII, with respect to the transaction in which the producer acquired the material, or

      • (ii) the value determined in accordance with sections 6 through 11 of Schedule VIII, where, with respect to the transaction in which the producer acquired the material, there is no transaction value under subsection 2(2) of that Schedule or the transaction value is unacceptable under subsection 2(3) of that Schedule,

    and shall include the following costs if they are not included under paragraph (a) or (b):

    • (c) the costs of freight, insurance and packing and all other costs incurred in transporting the material to the location of the producer,

    • (d) duties and taxes paid or payable with respect to the material in the territory of one or more of the NAFTA countries, other than duties and taxes that are waived, refunded, refundable or otherwise recoverable, including credit against duty or tax paid or payable,

    • (e) customs brokerage fees, including the cost of in-house customs brokerage services, incurred with respect to the material in the territory of one or more of the NAFTA countries, and

    • (f) the cost of waste and spoilage resulting from the use of the material in the production of the good, minus the value of any reusable scrap or by-product.

  • (2) For purposes of paragraph (1)(a), where the customs value of the material referred to in that paragraph was not determined in a manner consistent with Schedule VIII, the value of the material shall be determined in accordance with Schedule VIII with respect to the importation of that material and, where the costs referred to in paragraphs (1)(c) through (f) are not included in that value, those costs shall be added to that value.

  • (3) For purposes of subsection (1), the costs referred to in paragraphs (1)(c) through (f) shall be the costs referred to in those paragraphs that are recorded on the books of the producer of the good.

Intermediate Materials

  • (4) Except for purposes of determining the value of non-originating materials used in the production of a light-duty automotive good and except in the case of an automotive component assembly, automotive component or sub-component for use as original equipment in the production of a heavy-duty vehicle, for purposes of calculating the regional value content of a good the producer of the good may designate as an intermediate material any self-produced material that is used in the production of the good, provided that where an intermediate material is subject to a regional value-content requirement, no other self-produced material that is subject to a regional value-content requirement and is incorporated into that intermediate material is also designated by the producer as an intermediate material.

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

    • (a) 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 these Regulations;

    • (b) the designation of a self-produced material as an intermediate material shall be made solely at the choice of the producer of that self-produced material; and

    • (c) except as otherwise provided in subsection 14(4), the proviso set out in subsection (4) does not apply with respect to an intermediate material used by another producer in the production of a material that is subsequently acquired and used in the production of a good by the producer referred to in subsection (4).

  • (6) The value of an intermediate material shall be, at the choice of the producer of the good,

    • (a) the total cost incurred with respect to all goods produced by the producer that can be reasonably allocated to that intermediate material in accordance with Schedule VII; or

    • (b) the aggregate of each cost that forms part of the total cost incurred with respect to that intermediate material that can be reasonably allocated to that intermediate material in accordance with Schedule VII.

  • (7) Total cost under subsection (6) consists of the costs referred to in subsection 2(6), and is calculated in accordance with that subsection and subsection 2(7).

  • (8) Where a producer of a good designates a self-produced material as an intermediate material under subsection (4) and the customs administration of a NAFTA country into which the good is imported determines during a verification of origin of the good that the intermediate material is a non-originating material and notifies the producer of this in writing before the written determination of whether the good qualifies as an originating good, the producer may rescind the designation, and the regional value content of the good shall be calculated as though the self-produced material were not so designated.

  • (9) A producer of a good who rescinds a designation under subsection (8)

    • (a) shall retain any rights of review and appeal under sections 57.1 through 70 of the Customs Act with respect to the determination of the origin of the intermediate material as though the producer did not rescind the designation; and

    • (b) may, not later than 30 days after the customs administration referred to in subsection (8) notifies the producer in writing that the self-produced material referred to in paragraph (a) is a non-originating material, designate as an intermediate material another self-produced material that is incorporated into the good, subject to the proviso set out in subsection (4).

  • (10) Where a producer of a good designates another self-produced material as an intermediate material under paragraph (9)(b) and the customs administration referred to in subsection (8) determines during the verification of origin of the good that that self-produced material is a non-originating material,

    • (a) the producer may rescind the designation, and the regional value content of the good shall be calculated as though the self-produced material were not so designated;

    • (b) the producer shall retain any rights of review and appeal under sections 57.1 through 70 of the Customs Act with respect to the determination of the origin of the intermediate material as though the producer did not rescind the designation; and

    • (c) the producer may not designate another self-produced material that is incorporated into the good as an intermediate material.

Indirect Materials

  • (11) For purposes of determining whether a good is an originating good, an indirect material that is used in the production of the good

    • (a) shall be considered to be an originating material, regardless of where that indirect material is produced; and

    • (b) if the good is subject to a regional value-content requirement, for purposes of calculating the net cost under the net cost method, the value of the indirect material shall be the costs of that material that are recorded on the books of the producer of the good.

Packaging Materials and Containers

  • (12) Packaging materials and containers, if classified under the Harmonized System with the good that is packaged therein, shall be disregarded for purposes of

    • (a) determining whether all of the non-originating materials used in the production of the good undergo an applicable change in tariff classification; and

    • (b) determining under subsection 5(1) the value of non-originating materials that do not undergo an applicable change in tariff classification.

  • (13) Where packaging materials and containers are classified under the Harmonized System with the good that is packaged therein and that good is subject to a regional value-content requirement, the value of those packaging materials and containers shall be taken into account as originating materials or non-originating materials, as the case may be, for purposes of calculating the regional value content of the good.

  • (14) For purposes of subsection (13), where packaging materials and containers are self-produced materials, the producer may choose to designate those materials as intermediate materials under subsection (4).

Packing Materials and Containers

  • (15) For purposes of determining whether a good is an originating good, packing materials and containers in which the good is packed

    • (a) shall be disregarded for purposes of determining whether

      • (i) the non-originating materials used in the production of the good undergo an applicable change in tariff classification, and

      • (ii) the good satisfies a regional value-content requirement; and

    • (b) if the good is subject to a regional value-content requirement, the value of the packing materials and containers shall be the costs thereof that are recorded on the books of the producer of the good.

Fungible Goods and Fungible Materials

  • (16) Subject to subsection (16.1), for purposes of determining whether a good is an originating good,

    • (a) where originating materials and non-originating materials that are fungible materials

      • (i) are withdrawn from an inventory in one location and used in the production of the good, or

      • (ii) are withdrawn from inventories in more than one location in the territory of one or more of the NAFTA countries and used in the production of the good at the same production facility,

      the determination of whether the materials are originating materials may be made on the basis of any of the applicable inventory management methods set out in Schedule X; and

    • (b) where originating goods and non-originating goods that are fungible goods are physically combined or mixed in inventory and prior to exportation do not undergo production or any other operation in the territory of the NAFTA country in which they were physically combined or mixed in inventory, other than unloading, reloading or any other operation necessary to preserve the goods in good condition or to transport the goods for exportation to the territory of another NAFTA country, the determination of whether the good is an originating good may be made on the basis of any of the applicable inventory management methods set out in Schedule X.

  • (16.1) Where fungible materials referred to in paragraph (16)(a) and fungible goods referred to in paragraph (16)(b) are withdrawn from the same inventory, the inventory management method used for the materials must be the same as the inventory management method used for the goods, and where the averaging method is used, the respective averaging periods for fungible materials and fungible goods are to be used.

  • (16.2) A choice of inventory management methods under subsection (16) shall be considered to have been made when the customs administration of the NAFTA country into which the good is imported is informed in writing of the choice during the course of a verification of the origin of the good.

Accessories, Spare Parts and Tools

  • (17) Accessories, spare parts or tools that are delivered with a good and form part of the good’s standard accessories, spare parts or tools are originating materials if the good is an originating good, and shall be disregarded for purposes of determining whether all the non-originating materials used in the production of the good undergo an applicable change in tariff classification or determining under subsection 5(1) the value of non-originating materials that do not undergo an applicable change in tariff classification, provided that

    • (a) the accessories, spare parts or tools are not invoiced separately from the good; and

    • (b) the quantities and value of the accessories, spare parts or tools are customary for the good, within the industry that produces the good.

  • (18) Where a good is subject to a regional value-content requirement, the value of accessories, spare parts and tools that are delivered with that good and form part of the good’s standard accessories, spare parts or tools shall be taken into account as originating materials or non-originating materials, as the case may be, in calculating the regional value content of the good.

  • (19) For purposes of subsection (18), where accessories, spare parts and tools are self-produced materials, the producer may choose to designate those materials as intermediate materials under subsection (4).

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

    • Example 1: subsection 7(2), Customs Value not Determined in a Manner Consistent with Schedule VIII

      Producer A, located in NAFTA country A, imports material A into NAFTA country A. Producer A purchased material A from a middleman located in country B. The middleman purchased the material from a manufacturer located in country B. Under the laws in NAFTA country A that implement the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade, the customs value of material A was based on the price actually paid or payable by the middleman to the manufacturer. Producer A uses material A to produce Good C, and exports Good C to NAFTA country D. Good C is subject to a regional value-content requirement.

      Under subsection 4(1) of Schedule VIII, the price actually paid or payable is the total payment made or to be made by the producer to or for the benefit of the seller of the material. Section 1 of that Schedule defines producer and seller for purposes of the Schedule. A producer is the person who uses the material in the production of a good that is subject to a regional value-content requirement. A seller is the person who sells the material being valued to the producer.

      The customs value of material A was not determined in a manner consistent with Schedule VIII because it was based on the price actually paid or payable by the middleman to the manufacturer, rather than on the price actually paid or payable by Producer A to the middleman. Thus, subsection 7(2) applies and material A is valued in accordance with Schedule VIII.

    • Example 2: subsection 7(5), Value of Intermediate Materials

      A producer located in a NAFTA country produces Good B, which is subject to a regional value-content requirement under paragraph 4(2)(b). The producer also produces Material A, which is used in the production of Good B. Both originating materials and non-originating materials are used in the production of Material A. Material A is subject to a change in tariff classification requirement under paragraph 4(2)(a). The costs to produce Material A are the following:

      • Product costs:
        • Value of originating materialsblank line$  1.00
        • Value of non-originating materialsblank line7.50
        • Other product costsblank line1.50
      • Period costs (including $0.30 in royalties):blank line0.50
      • Other costs:blank line0.10
      • Total cost of Material A:blank line$10.60

      The producer designates Material A as an intermediate material and determines that, because all of the non-originating materials that are used in the production of Material A undergo an applicable change in tariff classification set out in Schedule I, Material A would, under paragraph 4(2)(a) qualify as an originating material. The cost of the non-originating materials used in the production of Material A is therefore not included in the value of non-originating materials that are used in the production of Good B for the purpose of determining the regional value content of Good B. Because Material A has been designated as an intermediate material, the total cost of Material A, which is $10.60, is treated as the cost of originating materials for the purpose of calculating the regional value content of Good B. The total cost of Good B is determined in accordance with the following figures:

      • Product costs:
        • Value of originating materials
          • - intermediate materialsblank line$10.60
          • - other materialsblank line3.00
        • Value of non-originating materialsblank line5.50
      • Other product costsblank line6.50
      • Period costs:blank line2.50
      • Other costs:blank line0.10
      • Total cost of Good B:blank line$28.20
    • Example 3: subsection 7(5), Effects of the Designation of Self-produced Materials on Net Cost

      The ability to designate intermediate materials helps to put the vertically integrated producer who is self-producing materials that are used in the production of a good on par with a producer who is purchasing materials and valuing those materials in accordance with subsection 7(1). The following situations demonstrate how this is achieved:

      Situation 1

      A producer located in a NAFTA country produces Good B, which is subject to a regional value-content requirement of 50 per cent under the net cost method. Good B satisfies all other applicable requirements of these Regulations. The producer purchases Material A, which is used in the production of Good B, from a supplier located in a NAFTA country. The value of Material A determined in accordance with subsection 7(1) is $11.00. Material A is an originating material. All other materials used in the production of Good B are non-originating materials. The net cost of Good B is determined as follows:

      • Product costs:
        • Value of originating materials (Material A)blank line$11.00
        • Value of non-originating materialsblank line5.50
        • Other product costsblank line6.50
      • Period costs: (including $0.20 in excluded costs)blank line0.50
      • Other costs:blank line0.10
      • Total cost of Good B:blank line$23.60
      • Excluded costs: (included in period costs)blank line0.20
      • Net cost of Good B:blank line$23.40

      The regional value content of Good B is calculated as follows:

      RVC=

      (NC - VNM) ÷ NC × 100

      =

      ($23.40 - $5.50) ÷ $23.40 × 100

      =76.5%

      The regional value content of Good B is 76.5 per cent, and Good B, therefore, qualifies as an originating good.

      Situation 2

      A producer located in a NAFTA country produces Good B, which is subject to a regional value-content requirement of 50 per cent under the net cost method. Good B satisfies all other applicable requirements of these Regulations. The producer self-produces Material A which is used in the production of Good B. The costs to produce Material A are the following:

      • Product costs:
        • Value of originating materialsblank line$  1.00
        • Value of non-originating materialsblank line7.50
        • Other product costsblank line1.50
      • Period costs: (including $0.20 in excluded costs)blank line0.50
      • Other costs:blank line0.10
      • Total cost of Material A:blank line$10.60

      Additional costs to produce Good B are the following:

      • Product costs:
        • Value of originating materialsblank line$  0.00
        • Value of non-originating materialsblank line5.50
        • Other product costsblank line6.50
      • Period costs: (including $0.20 in excluded costs)blank line0.50
      • Other costs:blank line0.10
      • Total additional costs:blank line$12.60

      The producer does not designate Material A as an intermediate material under subsection 7(4). The net cost of Good B is calculated as follows:

      Costs of Material A (not designated as an intermediate material)Additional Costs to Produce Good BTotal
      Product costs:
      Value of originating materials$ 1.00$ 0.00$ 1.00
      Value of non-originating materials  7.50  5.5013.00
      Other product costs  1.50  6.508.00
      Period costs (including $0.20 in excluded costs):  0.50  0.501.00
      Other costs:   0.10   0.10   0.20
      Total cost of Good B:$10.60$12.60$23.20
      Excluded costs (in period costs)  0.20  0.20   0.40
      Net cost of Good B (total cost minus excluded costs):$22.80

      The regional value content of Good B is calculated as follows:

      RVC=

      (NC - VNM) ÷ NC × 100

      =

      ($22.80 - $13.00) ÷ $22.80 × 100

      =42.9%

      The regional value content of Good B is 42.9 per cent, and Good B, therefore, does not qualify as an originating good.

      Situation 3

      A producer located in a NAFTA country produces Good B, which is subject to a regional value-content requirement of 50 per cent under the net cost method. Good B satisfies all other applicable requirements of these Regulations. The producer self-produces Material A, which is used in the production of Good B. The costs to produce Material A are the following:

      • Product costs:
        • Value of originating materialsblank line$ 1.00
        • Value of non-originating materialsblank line7.50
        • Other product costsblank line1.50
      • Period costs: (including $0.20 in excluded costs)blank line0.50
      • Other costs:blank line0.10
      • Total cost of Material A:blank line$10.60

      Additional costs to produce Good B are the following:

      • Product costs:
        • Value of originating materialsblank line$ 0.00
        • Value of non-originating materialsblank line5.50
        • Other product costsblank line6.50
      • Period costs: (including $0.20 in excluded costs)blank line0.50
      • Other costs:blank line0.10
      • Total additional costs:blank line$12.60

      The producer designates Material A as an intermediate material under subsection 7(4). Material A qualifies as an originating material under paragraph 4(2)(a). Therefore, the value of non-originating materials used in the production of Material A is not included in the value of non-originating materials for the purposes of calculating the regional value content of Good B. The net cost of Good B is calculated as follows:

      Costs of Material A (designated as an intermediate materialAdditional Costs to Produce Good BTotal
      Product costs:
      Value of originating materials$10.60$  0.00$10.60
      Value of non-originating materials   5.505.50
      Other product costs   6.506.50
      Period costs (including $0.20 in excluded costs):   0.500.50
      Other costs:   0.10   0.10
      Total cost of Good B:$10.60$12.60$23.20
      Excluded costs (in period costs)   0.20   0.20
      Net cost of Good B (total cost minus excluded costs):$23.00

      The regional value content of Good B is calculated as follows:

      RVC=

      (NC - VNM) ÷ NC × 100

      =

      ($23.00 - $5.50) ÷ $23.00 × 100

      =76.1%

      The regional value content of Good B is 76.1 per cent, and Good B, therefore, qualifies as an originating good.

    • Example 4: Originating Materials Acquired from a Producer Who Produced Them Using Intermediate Materials

      Producer A, located in NAFTA country A, produces switches. In order for the switches to qualify as originating goods, Producer A designates subassemblies of the switches as intermediate materials. The subassemblies are subject to a regional value-content requirement. They satisfy that requirement, and qualify as originating materials. The switches are also subject to a regional value-content requirement, and, with the subassemblies designated as intermediate materials, are determined to have a regional value content of 65 per cent.

      Producer A sells the switches to Producer B, located in NAFTA country B, who uses them to produce switch assemblies that are used in the production of Good B. The switch assemblies are subject to a regional value-content requirement. Producers A and B are not accumulating their production within the meaning of section 14. Producer B is therefore able, under subsection 7(4), to designate the switch assemblies as intermediate materials.

      If Producers A and B were accumulating their production within the meaning of section 14, Producer B would be unable to designate the switch assemblies as intermediate materials, because the production of both producers would be considered to be the production of one producer.

    • Example 5: Single Producer and Successive Designations of Materials Subject to a Regional Value-Content Requirement as Intermediate Materials

      Producer A, located in NAFTA country, produces Material X and uses Material X in the production of Good B. Material X qualifies as an originating material because it satisfies the applicable regional value-content requirement. Producer A designates Material X as an intermediate material.

      Producer A uses Material X in the production of Material Y, which is also used in the production of Good B. Material Y is also subject to a regional value-content requirement. Under the proviso set out in subsection 7(4), Producer A cannot designate Material Y as an intermediate material, even if Material Y satisfies the applicable regional value-content requirement, because Material X was already designated by Producer A as an intermediate material.

    • Example 6: Single Producer and Multiple Designations of Materials as Intermediate Materials

      Producer X, who is located in NAFTA country X, uses non-originating materials in the production of self-produced materials A, B and C. None of the self-produced materials are used in the production of any of the other self-produced materials.

      Producer X uses the self-produced materials in the production of Good O, which is exported to NAFTA country Y. Materials A, B and C qualify as originating materials because they satisfy the applicable regional value-content requirements.

      Because none of the self-produced materials are used in the production of any of the other self-produced materials, then even though each self-produced material is subject to a regional value-content requirement, Producer X may, under subsection 7(4), designate all of the self-produced materials as intermediate materials. The proviso set out in subsection 7(4) only applies where self-produced materials are used in the production of other self-produced materials and both are subject to a regional value-content requirement.

    • Example 7: subsection 7(17)

      The following are examples of accessories, spare parts or tools that are delivered with a good and form part of the good’s standard accessories, spare parts or tools:

      • (a) consumables that must be replaced at regular intervals, such as dust collectors for an air-conditioning system,

      • (b) a carrying case for equipment,

      • (c) a dust cover for a machine,

      • (d) an operational manual for a vehicle,

      • (e) brackets to attach equipment to a wall,

      • (f) a bicycle tool kit or a car jack,

      • (g) a set of wrenches to change the bit on a chuck,

      • (h) a brush or other tool to clean out a machine, and

      • (i) electrical cords and power bars for use with electronic goods.

    • Example 8: Value of Indirect Materials that are Assists

      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, and uses it in the production of Good A. Producer A provides to Producer B, at no charge, tools to be used in the production of Material X. The tools have a value of $100 which is expensed in the current year by Producer A.

      Material X is subject to a regional value-content requirement which Producer B chooses to calculate using the net cost method. For purposes of determining the value of non-originating materials in order to calculate the regional value content of Material X, the tools are considered to be an originating material because they are an indirect material. However, pursuant to subsection 7(11) they have a value of nil because the cost of the tools with respect to Material X is not recorded on the books of Producer B.

      It is determined that Material X is a non-originating material. The cost of the tools that is recorded on the books of producer A is expensed in the current year. Pursuant to section 5 of Schedule VIII, the value of the tools (see subparagraph 5(1)(b)(ii) of Schedule VIII) must be included in the value of Material X by Producer A when calculating the regional value content of Good A. The cost of the tools, although recorded on the books of producer A, cannot be included as a separate cost in the net cost of Good A because it is already included in the value of Material X. The entire cost of Material X, which includes the cost of the tools, is included in the value of non-originating materials for purposes of the regional value content of Good A.

  • SOR/95-382, s. 1
  • SOR/2001-108, s. 2
  • SOR/2002-27, s. 3
 
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