Don't Overlook This Exporting Obstacle

Country-of-origin rules are important to understand. Why? Not complying might cost you more than cash penalties

Written by Paul Gallant

Proving your exports are made in Canada can be a tricky and time-consuming process, especially if your company sources components, processes and labour from other countries. But a flurry of new trade agreements, not to mention NAFTA, make it worth the effort to correctly determine the country of origin of your products.

Every country has basic rules requiring a declaration of the country of origin for goods crossing its border. Used for trade statistics and to make sure the sale is legal—for example, not subject to sanctions—declarations of origins must be provided to customs authorities or the importer may face stiff penalties. Although the importer is ultimately responsible, many of them include a clause in the purchase order to pass on the cost of misclassified goods to the exporter.

“In addition to the financial penalty, it’s going to seriously hurt your business relationship,” says Candace Sider, vice-president of regulatory affairs for Canada at customs broker Livingston International. The Canadian Border Services Agency can levy fines of up to $400,000 per occurrence for incorrect declarations that are not corrected within 90 days of the agency questioning the origin of the goods; other countries have equally steep fines. If doubts remain about the declared origin, customs can also visit the importer to monitor compliance and levy more fines if they believe it’s an ongoing issue.

But it’s not just about obeying the law. Careful determination of the country of origin can generate massive savings on duties when you’re selling to countries that have signed a preferential trade agreement with Canada. With 10 deals in force so far, there are a dozen more in various stages of negotiation.

Most agreements, including NAFTA, use a shift in Harmonized Tariff Schedule (HS) classification as the primary way to determine origin. If a raw ingredient is processed in Canada so that the product’s tariff classification changes—from, say, uncombed Indian cotton (HS chapter 52) into men’s overcoats (HS chapter 61)—then that product would be seen as originating in Canada. But sewing buttons onto an Indian-made overcoat would not likely count as an HS shift.

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Each agreement has different rules and exceptions. For example, while NAFTA has more than 21 circumstances where coffee, tea, maté and spice products can undergo a tariff shift. The text of the Canada-Colombia free trade agreement allows just four circumstances and specifically excludes changes that “result exclusively from packaging for retail sale.” The Canada-South Korea free trade agreement, expected to come into force in 2015, handles the classification shift of coffee, tea, maté and spices differently again.

HS classification shifts aren’t the only way to determine the country of origin. Many of Canada’s trade agreements allow producers and exporters to consider regional value-content requirements. Under NAFTA, if the value of materials that originate outside the trade zone does not exceed 7% of the adjusted value of the product, the goods would still qualify as sufficiently Canadian to get preferential treatment.

Because the determination process can be so involved—adding as much as 5% to the end cost of the product in some cases—Sider says some companies hire third parties to do it. While it’s possible that goods might be “made in Canada” under one agreement but not “made in Canada” under another, there’s an increasing standardization of how origin is determined; many of Canada’s newer agreements can be seen as variations on NAFTA.

If goods receiving preferential treatment are later found to have been misclassified, the importer can be forced to pay the outstanding customs and duties, as well as the penalties, and will often pass that cost onto the exporter.

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