ALSTON&BIRD LLP. Customs Procedures for Imports with CAFTA-DR Preferential Treatment. October 16, 2014 Guatemala City

Transcription

1 ALSTON&BIRD LLP Customs Procedures for Imports with CAFTA-DR Preferential Treatment October 16, 2014 Guatemala City Copyright 2014 BJ Shannon All Rights Reserved

2 Roadmap 1. CAFTA Origin Rules 2. CAFTA Enforcement and Verifications 3. CAFTA Documentation Requirements 4. Examples and Common Pitfalls 5. Conclusions and Suggestions

3 1. CAFTA Origin Rules Apparel origin rules Special rules for certain materials Special rules for certain garments Country-specific programs Short supply

4 Originating Goods Originating goods qualify for CAFTA treatment Originating apparel articles are almost always duty-free in the United States Originating goods must meet CAFTA s rules of origin All the CAFTA rules can be found at General Note 29 of the HTSUS The HTSUS is at: bychapter/index.htm

5 Originating Goods What does it mean to be originating? One possibility: Wholly obtained or produced entirely - All CAFTA origin - Minerals mined in the United States - Coffee grown, harvested, dried, milled, and roasted in Guatemala

6 Wholly Obtained/Produced Entirely Cotton planted, grown, ginned, carded and combed in Guatemala Buttons and labels all originate in the United States Cotton fiber spun into yarn and sewing thread in Guatemala Yarn knitted into fabric and fabric dyed and finished in Costa Rica Fabric cut and sewn with Guatemalan sewing thread into shirt and shirt pressed and packed in Costa Rica Result: Wholly obtained or produced entirely (originating) shirt!

7 Originating Goods But most apparel contains at least some non-originating content Another possibility: Meeting specific rules of origin Allows non-originating (foreign) inputs The specific rules of origin are expressed as tariff shift rules Some rules include regional value content requirements - Textiles and apparel are never subject to regional value content!

8 CAFTA Specific Rules of Origin Yarn forward: most common tariff shift rule for CAFTA apparel Chapter rules: sewing thread, visible lining, narrow elastic fabric, and pocketing De minimis: 10 percent; except for elastomeric yarn Single transformation: boxers, brassieres and now many others Short supply: designated yarns and fabrics Special deals: Cumulation and TPLs

9 Men s Woven Trousers Tariff shift rules are based on the HTSUS classification of the finished good and specify the HTSUS classifications of inputs that must be originating Example of yarn forward tariff shift rule: A change to subheadings through from any other chapter, except from headings 5111 through 5113, 5204 through 5212, 5310 through 5311, chapter 54, headings 5508 through 5516, 5801 through 5802 or 6001 through 6006, provided that the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties to the Agreement

10 Yarn Forward Rules A change to subheadings through from any other chapter, except from headings 5111 through 5113, 5204 through 5212, 5310 through 5311, chapter 54, headings 5508 through 5516, 5801 through 5802 or 6001 through 6006, provided that the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties to the Agreement A change to certain trousers from any nonoriginating goods, except from wool woven fabric, cotton yarn or cotton woven fabric, some vegetable fiber woven fabrics, man-made filament yarn or manmade filament woven fabric, manmade staple yarn or man-made staple woven fabric, some special woven fabric (pile and terry) or knit fabric, provided that the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties to the Agreement

11 Yarn Forward Rules Tariff shift rule applies to component determining classification - That component must be woven or knit (or knit to shape) in the Parties with yarn spun or extruded in the Parties - Staple fiber may be of any origin Garment must be cut or knit to shape, or both, and sewn or otherwise assembled in the parties

12 But that s not all.... Watch out for: - Garments with two or more components - Special rules for certain materials ( the chapter rules for sewing thread, visible lining, narrow elastic, pocketing)

13 Two or More Components Only the component of the garment determining classification is subject to the applicable tariff shift rule - Usually the component that gives the garment its essential character - But the whole garment must be cut or knit to shape and sewn or otherwise assembled in CAFTA countries Foreign cut or knit to shape components are forbidden

14 Special Rules for Certain Materials The Chapter Rules The CAFTA origin rules for HTS chapters 61 and 62 (knit and woven apparel) include additional requirements for: - Visible lining - Narrow elastic - Sewing thread - Pocketing

15 Sewing Thread Rules has always required that covered sewing thread of heading 5201, 5401 or 5508 (cotton, man-made staple fiber or man-made filament sewing thread) must be formed and finished in the CAFTA Parties

16 Definition of Sewing Thread For the purposes of headings 5204, 5401 and 5508, the expression sewing thread means multiple (folded) or cabled yarn: (a) Put up on supports (for example, reels, tubes) of a weight (including support) not exceeding 1,000 g; (b) Dressed for use as sewing thread; and (c) With a final Z twist

17 Single Yarn Filament Sewing Thread Many producers use a single-ply filament sewing thread that is technically not classified as sewing thread and is classified as yarn in heading 5402, meaning that it previously could be of any origin under the chapter rule This practice was supported by a series of rulings obtained by importers who did the right thing to confirm their practice was compliant But some people considered this to be a loophole in CAFTA

18 Closing the Loophole: CAFTA Fixes The Parties agreed in February 2011 to make certain technical corrections, or fixes, to CAFTA - Took effect October 15, 2012 Expanded the chapter rule for sewing thread to cover yarn of heading 5402 used as sewing thread Also allowed any thread designed as short supply to be used where CAFTA sewing thread is required Additional fixes - Changed the rules for elastomeric yarn in short supply fabrics and waistbands in short supply garments - Allowed added uses of short supply fabric - Added single transformation garments

19 What Kind of Yarn is This? Single, multifilament yarn - NOT monofilament! It might have as many as 48 filaments in a strand of yarn; but it is not plied Plied yarn is only yarn made with two or more separate yarns twisted or plied together Xungai and Shangyong, Yarn Technology and Quality

20 What About Embroidery Thread? Embroidery thread is also often classified under heading 5402 Embroidery thread is contained in a garment; but is it used as sewing thread? In other words, will foreign embroidery thread disqualify the garment from CAFTA treatment?

21 Visible Lining Fabric Rule applies to specified fabrics used as visible linings in suits, suit jackets, skirts, overcoats, carcoats, anoraks, windbreakers, and similar articles Lining fabric must be formed from yarn and finished in the Parties Pursuant to the CAFTA fixes, short supply fabrics may be as used as visible lining in garments subject to the chapter rule

22 Narrow Elastic Fabric Narrow elastic fabric - Fabric of either heading 6002 (knit) or subheading (woven) - Of a width not exceeding 30 centimeters and containing 5 percent or more elastomeric yarn or rubber thread Commonly used in stretch waistbands Must be formed from yarn and finished in the Parties CAFTA fixes permit use of narrow elastic fabric designed as short supply

23 Pocket Bag Fabric Pocket bag fabric must be formed and finished in the Parties from yarn wholly formed in the Parties Unlike rule for visible lining, this rule is not limited to particular pocketing fabrics or pockets in particular garments CAFTA fixes allow short supply fabric to be used for pocketing

24 Exceptions to the Chapter Rules The chapter rules do not apply to: Single transformation garments Short supply garments Men s and boys and women s and girls woven wool suits, trousers, suit-type jackets and blazers, vests, and women s and girl s skirts, other than of carded wool fabric or made from wool yarn having an average fiber diameter of less than or equal to 18.5 microns Nicaragua TPL garments Costa Rica C TPL

25 Men s Woven Trousers, Again Main body fabric must be woven in the Parties with yarn spun or extruded in the Parties All components of the pants must be cut or knit to shape, or both, and sewn or otherwise assembled in the Parties Visible lining? Not applicable to trousers Narrow elastic? Not present Sewing thread? Must be formed and finished in the Parties Pocketing? Must be formed and finished in the Parties from yarn wholly formed in the Parties

26 Shirt Made with Egyptian Cotton Cotton fiber from Egypt is spun into yarn in Costa Rica, and the yarn is knitted into fabric in Costa Rica The fabric is cut and assembled into a shirt by sewing in Costa Rica Plastic buttons from China sewn on in Costa Rica Sewing thread formed and finished in the United States CAFTA result? Originating good!

27 Lined Blazer with Elbow Patches All of the other fabric making up the outer shell of the blazer (the component determining classification) meets the yarn forward rule Elbow patch fabric from Taiwan is imported into Costa Rica Visible lining, narrow elastic fabric and sewing thread meet the chapter rules All of the fabric components (including the elbow patches) are cut and assembled in Costa Rica CAFTA result? Originating good!

28 Permitted Foreign Inputs Yarn forward rules are written so that some yarns and fabrics can always be non-originating Yarn forward rules never except - Silk yarn or fabric (chapter 50) - Linen fabric (heading 5309) - Coated fabric (heading 5903)

29 Fabric Forward for Wool Garments Special treatment for any wool yarn in any garment - Wool yarn may originate in a country outside the CAFTA territory - Fabric must be formed in CAFTA parties - Garment remains subject to chapter rules

30 De minimis CAFTA s de minimis rule allows the component determining classification to contain non-originating fibers or yarns if their weight does not exceed 10 percent of the component determining classification An exception says that apparel articles containing elastomeric yarns in the component determining classification will originate only of those yarns are wholly formed in CAFTA countries

31 Special Rules for Certain Garments Single Transformation - Also called cut and sew rules - A garment subject to a single transformation rule only needs to be cut (or knit to shape) and sewn or otherwise assembled in the CAFTA Parties The fabric (or yarn) can be from anywhere in the world And the chapter rules do not apply!

32 Single Transformation: Boxer Shorts The tariff shift rules requires that foreign materials undergo the following change: - A change to boxer shorts of subheading or tariff items (of man-made fibers only), or from any other chapter, provided that the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties to the Agreement

33 Single Transformation Garments In CAFTA s original text - Woven boxer shorts - Brassieres - Pajamas - Negligees - Certain girls dresses

34 Additions to Single Transformation Pocketing Letters - The United States negotiated the pocketing chapter rule to secure necessary votes for CAFTA in the U.S. House - In exchange, CAFTA countries obtained concessions, most of which were new single transformation rules Other concessions were duty reductions, changes to the Nicaragua TPL, and changes to the Costa Rica wool garment rules

35 Pocketing Letters Added Babies cotton dresses ( ) Certain women s and girls coats and jackets (cat. 335 and and ) Women s and girls MMF suits (Cat. 644) Men s cotton yarn dyed dress shirts (specifically identified within subheading ) Men s MMF yarn dyed dress shirts (specifically identified within subheading ) Women s wool anoraks ( ) Men s other fiber suit-type jackets subject to wool restraints ( ) Women s and girls ensembles ( and ) Women s and girls suit-type jackets and blazers ( and )

36 CAFTA Fixes Clarified Certain women s and girls pajamas and nightwear were already subject to a favorable single transformation rule The word nightwear was changed to sleepwear to avoid an interpretation that would give single transformation to certain evening wear not intended for sleeping

37 CAFTA Fixes Added The types of pajamas and sleepwear eligible for single transformation was extended to include certain women s and girls woven sleep pants, which were previously subject to yarn forward rules

38 Special Rules for Certain Garments The Pocketing Letters also resulted in partial duty reductions for certain nonoriginating suits, jackets and trousers

39 0.5 Percentage Point Duty Reduction Covered Garments - Women s wool overcoats ( ) - Men s wool suit jackets ( ) - Men s MMF suit jackets ( ) - Men s wool trousers ( ) - Men s cotton trousers ( ) - Men s MMF trousers ( ) - Women s cotton trousers ( ) Requirement: Must be cut or knit to shape and sewn or otherwise assembled in Parties (still not originating) These garments remain subject to the chapter rules

40 2.0 Percentage Point Duty Reduction Covered Garments - Boy s MMF suits ( ) - Men s MMF trousers ( ) - Women s MMF trousers ( ) Requirement: Must be cut or knit to shape and sewn or otherwise assembled in Parties (still not originating) These garments remain subject to the chapter rules

41 Country-Specific Programs Costa Rica - Two wool TPLs ( A and C ) and a third TPL for prosthesis swimwear - Negotiated in exchange for pocketing rule Nicaragua - TPL primarily for cotton and manmade fiber apparel - Included in original agreement but modified by the Pocketing Letters Dominican Republic - Permits duty-free U.S. import of certain non-originating cotton apparel (in exchange for DR import of yarn forward fabric) - Negotiated in exchange for the pocketing rule

42 Two Costa Rica Wool TPLs: A and C Coverage: certain men s and boys and women s and girls wool garments Requirement: Single transformation Limitations - Annual sublimit of 500,000 SME each - Expire at the end of 2018 The notes are at chapter 99, subchapter XV, US note 16 of the HTSUS Beware: the coverage of these TPLs is enormously complicated careful scrutiny of the HTSUS notes on which they are based is critical to their proper use

43 Costa Rica Wool TPL A A applies to certain garments containing 36 percent or more by weight of wool or subject to wool restraints Garments are subject to wool restraints if they are not subject to cotton restraints and the wool exceeds 17 percent by weight of all component fibers A is subject to the chapter rules for visible lining, sewing thread, narrow elastic fabric, and pocketing

44 Garments in A A includes specified men s, boys, women s, and girls suits, suit-type jackets and blazers, trousers, breeches, shorts, and skirts Many but not all of the covered classifications are for fine wool fiber having an average fiber diameter of 18.5 microns or less

45 Costa Rica Wool TPL C C applies to certain garments made from fabric of wool except for fabric of carded wool, or made from wool yarn having an average fiber diameter of less than or equal to 18.5 microns - In other words, C cannot be used for garments of carded wool or of fine fiber C is not subject to the chapter rules for visible lining, sewing thread, narrow elastic fabric, and pocketing

46 Garments in C C includes men s, boys, women s, and girls suits, suit-type jackets and blazers, waistcoats (vests), trousers, breeches, and skirts; but they can t be of carded or fine wool Notice the types of garments in C aren t quite the same as A - A includes shorts and C does not - C includes vests and A does not

47 Garments in Both A and C Many garments of other than carded wool or of wool fiber exceeding an average diameter of 18.5 microns are covered by both A and C In such cases, the garments are first counted against C until it fills and then counted against A Beware: A is subject to the chapter rules while C is not

48 Prosthesis Swimwear TPL Only applies to post-mastectomy breast prosthesis swimwear, with features accommodating prostheses Requirements: - Cut and sewn in Costa Rica with fabric of any origin - Not subject to chapter rules Limit: 133,823 SME in each year 2014 through 2018 Expires: December 31, 2018

49 Nicaragua TPL Originally applied only to cotton and man-made fiber apparel - Required Cut or knit to shape, and sewn or otherwise assembled in Nicaragua with fabric or yarn of any origin The chapter rules do not apply - Cap: 100 million SME per year Effect of Pocketing Letters - Added a new sublimit for 1.5 million SME of men s carded wool sport coats - Eliminated the decreasing cap for TPL - Added a one-for-one rule for cotton and manmade fiber woven trousers of U.S.-formed fabric of U.S.- formed yarn In 2014 the one-for-one rule applies only to the first 50 million SME of cotton trousers If the one-for-one-rule is not met, the United States can reduce the overall TPL for the subsequent year The TPL expires at the end of 2014!

50 A New TPL for Nicaragua? Last summer, Sen. Feinstein (D-CA) introduced legislation to extend the TPL through 2024 Opposition - Producers in other CAFTA countries and their U.S. customers, who enjoy no similar advantage - U.S. textile interests who say Nicaragua has sufficiently developed its apparel exports so that it no longer needs this benefit

51 A New TPL for Nicaragua? Sen. Hagan (D-NC) introduced a more modest bill in December that would extend the TPL for ten years only as to woven trousers and shorts, subject to an earned import allowance program Participating producers or entities controlling production would establish accounts with U.S. Commerce and would get credit for exports of fabric wholly formed in the United States of yarns wholly formed in the United States

52 A New TPL for Nicaragua? The SMEs of eligible apparel the producer or entity could receive each year could not exceed the credits in his account The program would be limited to 50 million SMEs per year; but it could generally be increased in 10 percent increments per year if 90 percent utilized in the previous year

53 A New TPL for Nicaragua? Prospects for passage of either the Feinstein or Hagan bill are uncertain In some ways the damage of expiration has already been done because participants can t plan past 2014 with confidence And uncertainty is the last thing Nicaraguan producers need right now with TPP looming in the future

54 Dominican Republic 2 for 1 Program Qualifying Apparel Articles - Trousers, bib and brace overalls, breeches and shorts, skirts and divided skirts, and pants, all of cotton, but not including denim - Wholly assembled in and imported directly from the DR - Fabric or yarn may be of any origin Duty free with earned import allowance certificates - Qualifying apparel producers earn one SME of credit for every two SMEs of qualifying woven fabric purchased for the manufacture in the DR of eligible articles

55 Dominican Republic 2 for 1 Program Qualifying woven fabric is fabric of cotton, wholly formed in the United States from yarns wholly formed in the United States, suitable for the production of qualifying apparel, and purchased on or after August 1, 2007, for roduction of apparel in the DR - Exceptions for certain Israeli nylon yarns, 10 percent de minimis yarns (except elastomerics), and short supply yarns Qualifying apparel articles are subject to the chapter rules concerning pocketing, sewing thread, narrow elastic fabric, and visible lining

56 Dominican Republic 2 for 1 Program Wholly assembled - All components, of which there must be at least two, pre-existed in essentially the same condition as found in the finished good and were combined to form the finished good in the DR - Minor attachments and minor embellishments (appliqués, beads, spangles, embroidery, and buttons), not affecting the identity of the good, and minor subassemblies (cuffs, plackets, and pockets) will not affect whether a good is wholly assembled in the DR

57 Dominican Republic 2 for 1 Program The Dominican Republic program is unlimited there is no cap The definition of wholly assembled has no counterpart in CAFTA s origin rules, particularly to the extent that it allows minor subassemblies to take place outside of the DR Why don t they give this deal to other CAFTA countries?

58 Mexican Materials: Cumulation Allowed for Chapter 62 woven garments containing materials produced in Mexico, if the Mexican components would qualify as originating if they had been produced in a CAFTA country - Annual limit of 100 million SME - Sublimits for cotton or man-made fiber trousers and skirts (other than blue denim); blue denim trousers and skirts; and certain wool garments - Certain wool garments, not of carded wool fabric or made from wool yarn having an average fiber diameter of not over 18.5 microns, are not subject to the limit

59 Mexican Materials: Cumulation DR lost its eligibility to use the CAFTA cumulation provisions, effective March 1, 2012 CAFTA also contemplates cumulation with Canadian materials, but Canada has not reached the necessary agreement with the CAFTA countries

60 Selected Utilization Cumulation - Overall: percent - Trousers and skirts: 8.39 percent - Denim: percent Costa Rica - TPL A: 8.80 percent - TPL C: 0.67 percent - Swimwear TPL: 0 percent Nicaragua - TPL: 61.5 percent - Sport coats TPL: 0 percent Data from OTEXA, as of Oct. 6

61 CAFTA Short Supply There are now 148 yarns, fabrics, and fibers that are considered to be in short supply or commercially unavailable Some were in the agreement already, others have been added by requests for short supply determinations

62 CAFTA Short Supply Apparel articles are treated as originating if they are cut or knit to shape and sewn or otherwise assembled in CAFTA countries, and if the fabric of the outer shell (exclusive of collars, cuffs, and ribbed waistbands (only if the ribbed waistband is present in combination with cuffs and identical in fabric construction to the cuffs) is wholly of one or more of the following: - short supply fabric, - fabric that is formed in CAFTA countries with short supply yarns, or - any combination of short supply fabric and originating fabric Originating fabric can contain de minimis fibers and yarns

63 CAFTA Short Supply Effects of CAFTA Fixes - Made short supply available not just for outer shell fabric, but also for visible lining fabric, narrow elastic fabric, sewing thread, and pocketing - Ribbed waistbands Addressed an unintended problem faced by producers using short supply fabric to make garments like sweatshirts Previously, waistbands were part of the outer shell and thus had to be of short supply or originating fabric or yarn Now, waistbands can be nonoriginating, like collars and cuffs - Permitted use in short supply fabrics of elastomeric yarn of any origin

64 CAFTA s Odd Treatment of Spandex Narrow elastic fabric only needs to be formed from yarn in CAFTA countries it can be made there with foreign spandex (elastomeric) yarn Spandex in short supply fabric can now be of any origin too But spandex yarn in the component determining classification of originating yarn forward garments still isn t eligible for de minimis

65 2. Enforcement and Verifications Factory visits Requests for documents from importers Challenging CBP determinations CBP enforcement actions

66 CBP has the Enforcement Job U.S. Customs and Border Protection (CBP) protects the tariff revenue of the United States that s its job U.S. Trade Representative (USTR) negotiates free trade agreements like CAFTA U.S. Department of Commerce (DOC) maintains data on TPL usage and facilitates short supply process But origin verifications, information requests, notices of action, penalties and other compliance and enforcement actions are CBP s responsibilities

67 And Enforcement is Important U.S. and CAFTA companies work hard to comply and it is an expensive, time consuming enterprise When someone is reckless, or cheats, and doesn t get caught, he gets an unfair competitive advantage Worse still, the infractions of reckless companies cause CBP to become suspicious of the industry and increase intrusive enforcement activity Noncompliance just isn t fair

68 The Unfortunate Tension U.S. policymakers must empower enforcement authorities without making compliance so difficult that it offsets the benefits of trade

69 CAFTA Compliance Baggage CAFTA comes with a lot of compliance baggage Outsider - Commercial invoice - Bill of lading CAFTA - Commercial invoice - Bill of lading - FTA certificate of origin - Fabric affidavit - Yarn affidavit - Thread affidavit - Production records - Information requests - Notices of action - Factory visits - Etc., etc.

70 Striking a Balance The challenge to the industry is to manage the baggage so that the program is worthwhile Compliance starts in the factories Each producer should have a carefully established compliance practice, with specific individuals charged with the responsibility to follow the rules

71 Factory Visits/Verifications CBP requests the government of the party where the goods are produced to visit the factory CBP attends the visit; usually 3 CBP personnel attend The visit is on short notice and lasts only a few hours CBP produces two or three invoices and asks to see production records relating to the invoices They may request affidavits for yarn, fabric, sewing thread, etc.

72 Origin Verification Problems Factory can t find or produce documents during short visit Documents are missing or nonexistent Documents are incorrect Factory is closed Problems with visit can lead to action against U.S. importer

73 Consent If the producer does not consent to a verification visit, CBP may deny preferential tariff treatment to the type of goods of the producer that would have been the subject of the verification

74 Importer Obligations CBP s regulations implementing CAFTA state: - An importer claiming preferential tariff treatment for a good imported into the United States under [CAFTA] must maintain, for a minimum of five years after the date of importation of the good, all records and documents that the importer has demonstrating that the good qualifies for preferential tariff treatment under the CAFTA DR The fact that the importer has made a claim based on information/certification provided by an exporter or producer will not relieve the importer of the responsibility to provide supporting documents to CBP

75 Levels of CBP Attention None CBP most often releases and liquidates entries with no review at all Review of entry documents Request for Information (CBP Form 28) Focused assessment (audit)

76 Request for Information CBP Form day response deadline CBP (especially at ports with the most CAFTA claims, like Miami) rarely allows extensions Responsible request: Asks for relevant documentation for two or three good examples of styles in the entry

77 Request for Information: Example In support of the DR- CAFTA claim for styles, and, please submit affidavits of origin from the producers of the yarn, fabric and thread Each affidavit must provide a complete description of the item produced, including fiber content, purchaser, date of sale, telephone numbers of persons executing affidavits for verification purposes, etc.

78 Common Requests Requests for: - Documents not relevant to the claimed preference Sewing thread records for short supply garments - Documents substantiating claims for dozens of similar styles in the same entry - Documents substantiating the same claims in dozens of entries Most companies simply cannot compile this much information within 30 days CBP would need a forklift to handle all the documents Ask early: sometimes CBP will agree reasonably to narrow the scope of the request

79 Next Step: Proposed Action CBP Form 29 Notice of Action - If an importer fails to answer the Form 28 within 30 days - If CBP is unhappy with the Form 28 Response This is likely! Form 29 should state what additional information CBP requires - On the Notice of Action, CBP will check the box that says, This action is proposed 20 day response deadline

80 Next Step: Action Taken CBP should issue a second Notice of Action - This time CBP should check the box that says, This action has been taken This results in liquidation - If CBP is satisfied with the response, CBP will liquidate the entry as filed (with CAFTA treatment) - If CBP is not satisfied with the response, CBP will deny CAFTA treatment and will liquidate the entry with a rate advance (with duty)

81 Next Step: Protest Once the entry is liquidated, it may be challenged only by protest - Must be filed within 180 days after liquidation - Will be initially reviewed, and approved or denied, by the same import specialists who issued the Forms 28 and 29 Gives the opportunity to make new arguments or to provide additional documents Always ask for further review (by CBP Headquarters) with adequate justification

82 Next Step: Litigation If the protest is denied, the only recourse is litigation Deadline to file in the U.S. Court of International Trade is 180 days from the date of protest denial This is an Article III court, just like a U.S. Federal District Court Either party can then appeal to the U.S. Court of Appeals for the Federal Circuit Denials of FTA treatment for alleged document failures are rarely litigated

83 CBP Enforcement Information provided through factory verifications has consequences for importers. CBP can: - Suspend preferential treatment if there is insufficient information to support the origin claim - Deny preferential treatment if the factory provides incorrect information to support the claim - Detain goods if there is insufficient information to determine country of origin of the goods - Deny entry if the factory provides incorrect information about country of origin of the goods

84 Importers can be severely punished Failure in an origin verification can cause CBP to claim duties on the factory s past exports to its U.S. customers U.S. importers also can be penalized for gross negligence, CBP can claim a penalty of four times the duty, and CBP has the power to collect duties, even for mere negligence, going back as far as five years

85 So is it Hopeless? CAFTA has extraordinarily complex origin rules Consider: yarn forward, visible linings, sewing thread, narrow elastic fabrics, pocketing, de minimis rules and many others A slight misstep (like a missing sewing thread affidavit) can make a duty free garment dutiable at very high duty rates

86 It s Not Hopeless If You re Prepared!

87 3. Documentation Requirements Goals Types of required documents

88 One Goal We ve reviewed the CAFTA origin rules for the duty free treatment of the apparel articles we export to the United States All documents and records should be precisely prepared with a single goal - Making it clear to the audience (e.g., customers, customs brokers and CBP) that we know the applicable rules and have complied with them We always want the audience s initial reaction to be, This company knows what it s doing

89 Who is Our Audience? The customer (usually the importer of record) wants reassurance from documents and records that his CAFTA claims are justified The customs broker wants guidance from entry documents about which HTSUS classification and CAFTA claim is intended CBP wants to protect the revenue, collect data, and prevent improper classifications and CAFTA claims - CBP is the most powerful audience member, on which this part of the seminar will focus

90 Four Main Types of Documents Entry documents: commercial invoice, bill of lading and other documents (e.g., Nicaragua TPL certificate of eligibility) necessary to obtain release CAFTA certificate of origin Manufacturers affidavits Production records

91 Entry Docs: Invoice The commercial invoice should describe the apparel with sufficient detail to classify it - Type of garment (e.g., shirt, trousers, etc.) - Sex and age group of intended wearer (e.g., men s, women s, boys or girls ) - Whether woven or knit - Fiber content (e.g., 60 percent cotton, 40 percent polyester)

92 Entry Docs: Invoice Other descriptive information, where applicable, necessary for tariff classification (e.g., water resistant, with two or more colors in the warp and/or the filling ) For short supply garments, the commercial invoice should also include the specifications of the fabric or yarn called for by the short supply designation

93 Entry Docs: Certificate of Eligibility Not a CAFTA certificate of origin - CAFTA certificates are issued by importers, exporters, or producers - Certificates of eligibility are issued by the producer/exporter s government Required for CAFTA Nicaragua TPLs Not required for CAFTA Costa Rica TPLs - Means the government can t control who uses the TPLs - Available on a first come, first served basis

94 CAFTA Certificate of Origin This isn t an entry document It must be prepared and signed by the importer, exporter or producer and must be in the importer s possession at the time the CAFTA claim is made The importer must submit it to CBP upon request No required form as long as it contains the necessary information See 19 CFR

95 Certificate of Origin Contents Name, address, phone, and of the importer, exporter, and producer, and of the official or authorized agent of the importer, exporter, or producer signing the form Description of the good Tariff classification to 6 or more digits as necessary for application of the rule of origin Invoice number (if a single shipment) or blanket period not exceeding one year The applicable rule of origin in HTSUS General Note 29 under which the good qualifies Required certification statement about accuracy and availability of supporting records

96 Applicable rule of origin If originating status is based on one of the origin rules in HTSUS Gen. Note 29(n), the certificate should say so (e.g., Gen. Note 29(n)(62/11) ). If originating status is based on short supply under HTSUS Gen. Note 29(m)(viii)(B), the certificate should say so and refer to the OTEXA designation number (e.g., Gen. Note 29(m)(viii), OTEXA Website designation number 141 )

97 Manufacturer s Affidavit Manufacturer s statement describing: - Place of production - Sources of inputs Affidavits may describe finished goods, raw materials/components (yarn, fabric, thread)

98 Manufacturer s Affidavit A manufacturer s affidavit is not a CAFTA certificate of origin A manufacturer s affidavit may describe goods of any origin We should never issue a CAFTA certificate of origin for goods not eligible for preferential treatment

99 Manufacturer s Affidavit Guidance Sources of CBP Guidance - Three TBTs - TBT (October 10, 2007) - TBT (March 31, 2011) - TBT (March 22, 2012) - Where to find them: v/trade/priority_trade/textile s/tbts/ - Ruling letters

100 Background on the TBTs The 2011 and 2012 TBTs were issued in response to complaints that CBP import specialists were interpreting the rules too rigidly - CBP acknowledged it was aware of inconsistencies in the application of the TBTs - CBP addressed certain impractical requirements - CBP Headquarters also issued several ruling letters to clarify its clarifying TBTs Limitations - Three TBTs are cumulative, so they are difficult to interpret - TBTs are guidance, not law - TBTs are not exhaustive and should not be interpreted rigidly

101 TBT Takeaways Fabric and yarn affidavits are necessary They must identify the factory that produced the yarn or fabric, giving the full name and address (not a corporate address or a PO box) An individual contact s name are required - But this need not be a person at the factory - An individual from a corporate office may sign

102 TBT Takeaways The contact person s name must be legibly printed, with at least one of the following: phone number, fax number or address (phone and fax no longer required) Separate yarn and fabric affidavits are required (the fabric manufacturer cannot give an affidavit for yarn that it purchases from someone else)

103 TBT Takeaways The affidavit must contain a description of the goods, such as fiber content, yarn count, and fabric type, and identifying information such as an invoice or order number Blanket certificates are okay; but: - They must describe the product; product descriptions can t vary among orders covered by the blanket certificate - They cannot cover a period of more than one year

104 Blanket vs. Individual Affidavits Some U.S. yarn spinners don t like to give blanket affidavits because of transshipping concerns Either is permitted; but if you use a blanket affidavit, make sure there is no discrepancy with any shipment that it supports Some CBP officers used to say blanket certificates aren t allowed that s wrong but blanket affidavits must be accurate

105 TBT Takeaways When an affidavit doesn t provide confirming details, the importer should supply more support, like purchase orders, invoices, or proofs of payment Where correlation is not apparent, importers should supplement documents with information showing how they are connected to one another, possibly by numbering them If documents cover materials that weren t used to make the goods in question, the importer should include a note that explains this

106 TBT Takeaways If there are omissions through oversight or the result of inaccurate translations, CBP import specialists should seek clarification CBP denial solely on the basis of information it did not request is not appropriate

107 TBT Takeaways Affidavits are expected to but need not be signed, nor do they need to be originals import specialists can call issuers to verify The use of letterhead is not required a letterhead s implication that the company produces other merchandise does not preclude use of the letterhead

108 Production Records CBP regulation requires - All records relating to the origin of a good for which a certificate of origin was issued, including a copy of the certificate and records and documents associated with: The purchase, cost, and value of, and payment for, the good The purchase, cost, and value of, and payment for, all materials, including indirect materials, used in the production of the good, and The production of the good in the form in which the good was exported

109 Production Records Records include certificates of origin, purchase orders, invoices, delivery notices Records of yarn, fabric, or panel formation Transportation and export documents (bills of lading) from the country of origin of yarn or fabric to the country of production Entry documents in the country of production and documents showing movement and delivery in the country of production

110 Production Records Cutting tickets Bills of material or specification sheets Fabric pull sheets of dispatch forms Cutting order Fabric dispatch Cutting reports Production reports Finishing reports Inspection reports Export manifests

111 Production Records: TBT Guidance If the importer purchased the fabric or yarn, he should have invoices for the material If the fabric is a U.S. product, the importer should have bills of lading showing movement to the country of production If applicable, the importer should have records showing the use of U.S. or regionally produced yarn, fabric or cut or knit to shape components

112 4. Examples and Common Pitfalls How do we use entry documents and production records to demonstrate compliance with the rules of origin? - Three examples (yarn forward, single transformation, short supply) - Common pitfalls (short supply, affidavit mishaps)

113 Ex 1: Cotton Knit Polo Shirt A men s cotton knit polo shirt is cut and sewn in Guatemala The fabric is knit in the United States with yarn spun in the United States The collars are knit to shape in the United States with yarn spun in the United States The sewing thread is formed in the United States from cotton fiber and finished in the United States

114 Classification of the Shirt The classification of this shirt under the HTSUS would be , which covers Men s or boys shirts, knitted or crocheted: Of cotton: Men s The commercial invoice accompanying the shirts to the United States should describe the shirts in sufficient detail to classify them

115 Tariff Shift Rule The origin rule says, A change to headings 6105 through 6111 from any other chapter, except from headings 5111 through 5113, 5204 through 5212, 5310 through 5311, chapter 54, headings 5508 through 5516 or 6001 through 6006, provided that the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties

116 To What Does the Rule Apply? Chapter Rule 2 - For purposes of determining whether a good of this chapter is originating, the rule applicable to that good shall only apply to the component that determines the tariff classification of the good and such component must satisfy the tariff change requirements set out in the rule for that good

117 Decoding the Rule The applicable origin rule is a yarn forward rule, so the yarn must be spun in a CAFTA country, the fabric must be knit in a CAFTA country, and the garment must be cut and sewn or knit to shape in a CAFTA country What about the knit to shape collar? It s not the component determining classification, so it doesn t have to be yarn forward; but it still has to be knit to shape in a CAFTA country

118 Applying the Chapter Rules Chapter Rule 4 - Notwithstanding chapter rule 2, a good of this chapter, other than [single transformation goods], containing sewing thread of heading 5204, 5401 or 5508 or yarn of heading 5402 used as sewing thread, shall be considered originating only if such sewing thread is both formed and finished in the territory of one or more of the parties to the Agreement

119 What Does this Mean for the Thread? The sewing thread is of cotton It is classified under HTSUS heading 5204 The rule says that, even thought the sewing thread is not the component of the garment that determines its classification, it must be formed and finished in the CAFTA territory

120 Cotton Knit Polo Shirt Result Based on the facts in our example: - U.S. knit fabric formed from U.S. spun yarn (yarn forward) - Collars knit in United States - Fabric cut and shirt assembled in Guatemala - Sewing thread formed and finished in United States Originating shirt! But how do we prove it?

121 Required Documents Commercial invoice (already mentioned) CAFTA certificate stating that the garment meets Gen. Note 29(n) Affidavit for the fabric Affidavit for the yarn Affidavit for the collars(?) Affidavit for the sewing thread (and possibly yarn used to make the thread)

122 Production Records Purchase orders and invoices for the yarn, fabric, collars and sewing thread Bills of lading and import documents showing movement of the fabric, collars and sewing thread to Guatemala Records showing that these materials were used to produce the shirts (e.g., bills of material, pull sheets, cutting tickets, production reports)

123 Ex 2: Woven Cotton Boxer Shorts Boxer shorts are cut and sewn in Guatemala The fabric is from China The sewing thread is from India The narrow elastic fabric in the waistband is from Malaysia In other words, the boxer shorts are made entirely with non-originating materials

124 Classification of the Boxer Shorts The classification of these boxer shorts under the HTSUS would be , which covers Men s or boys singlets and other undershirts, underpants, briefs, nightshirts, pajamas, bathrobes, dressing gowns and similar articles: Underpants and briefs: Of cotton The commercial invoice accompanying the boxer shorts to the United States should describe the boxer shorts in sufficient detail to classify them

125 Tariff Shift Rule The origin rule says, A change to boxer shorts of subheading , tariff items or or subheading from any other chapter, provided that the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties to the Agreement

126 Decoding the Rule The applicable origin rule is a single transformation rule. It requires only cutting and sewing in the CAFTA territory. But what about the Chapter Rules?

127 Applying the Chapter Rules Chapter Rule 4 - Notwithstanding chapter rule 2, a good of this chapter, other than a good of headings 6207 through 6208 (for boxers, pajamas, and nightwear only), containing sewing thread of heading 5204, 5401 or 5508 or yarn of heading 5402 used as sewing thread, shall be considered originating only if such sewing thread is both formed and finished in the territory of one or more of the parties to the Agreement

128 Applying the Chapter Rules Chapter Rule 3 - Notwithstanding chapter rule 2 to this chapter, a good of this chapter, other than a good of headings 6207 through 6208 (for boxers, pajamas, and nightwear only), containing fabrics of heading 6002 or subheading shall be considered originating only if such fabrics are both formed from yarn and finished in the territory of one or more of the parties to the Agreement

129 Boxer Shorts Result The tariff shift rule allows nonoriginating material from any other chapter so the yarn and fabric can be non-originating The chapter rules for sewing thread and narrow elastic fabric don t apply, because boxer shorts are excepted from these rules Originating shorts! And fewer documents will be required

130 Required Documents Commercial invoice (already mentioned) CAFTA certificate stating that the garment meets Gen. Note 29(n) Affidavit for the fabric not required Affidavit for the yarn not required Affidavit for the sewing thread not required Affidavit for the narrow elastic fabric not required

131 Production Records Purchase orders, invoices, bills of lading and import documents for the yarn, fabric, narrow elastic fabric, and sewing thread should not be required - CBP might request some evidence of receipt at factory of raw materials Records showing merely that the garments were cut and sewn in Guatemala (e.g., cutting tickets, production reports) are required

132 Ex 3: Pants of Short Supply Fabric Women s trousers of HTSUS subheading are cut and sewn in Guatemala with Chinese fabric The fabric is two-way stretch woven polyester, rayon, spandex fabric designated as in short supply under CAFTA designation number 89 on the OTEXA website ( Pocketing material and sewing thread are also Chinese, so all materials are non-originating

133 Classification of the Pants The classification is HTSUS subheading ; but the importer also must use the classification provision covering all CAFTA short supply garments: heading The commercial invoice should describe the trousers sufficiently to classify them

134 Short Supply Treatment Since this garment is made with short supply fabric, the rule applies to the outer shell, exclusive of collars, cuffs, and certain ribbed waistbands The short supply fabric may be of any origin As a garment made with a short supply fabric, the garment is exempt from all of the chapter rules about visible linings, narrow elastic fabric, sewing thread, and pocketing

135 Short Supply Pants Result Based on the facts in our example: - Chinese fabric, pocketing, and sewing thread - But fabric designated as short supply - And all cutting and sewing occurs in Guatemala Originating Pants! And fewer supporting documents required

136 Required Documents Commercial invoice (already mentioned) CAFTA certificate stating that the garment meets Gen. Note 29(m)(viii)(B) and referring to the designation number from the CITA website Affidavit for the fabric not required Affidavit for the yarn not required Affidavit for the sewing thread not required Affidavit for any narrow elastic fabric not required

137 Production Records Purchase orders, invoices, bills of lading, and import documents for the yarn, sewing thread, pocketing, and other materials should not be required CBP is likely to request evidence of purchase and delivery to the place of production of fabric meeting the short supply specifications (purchase order, invoice, bill of lading, fabric specification sheet) Records showing merely that the garments were cut and sewn in Guatemala (cutting tickets, production reports)

138 Common Pitfalls: Short Supply CBP conducts lab tests on garments entered under CAFTA short supply claims If the lab test results deviate from the designation specifications, CBP denies CAFTA treatment So far, CBP will only consider its lab test results; it will not accept documents proving that the factory used yarns and fabrics meeting the short supply specifications

139 The Recipe Problem Lab results will almost always deviate from the specifications for the inputs In other words, the cake has different characteristics than the ingredients in the recipe

140 The Recipe Problem Three sources of variation - Fabric specifications, such as fiber content and weight, are never an exact science - Weaving, knitting, dyeing and other processes tend to effect the characteristics of yarns and fabrics so that yarns or fabrics cut from sample garments have different characteristics than those of the original greige inputs - The test methods themselves are imprecise For example, ASTM D 1059 (used to test yarn linear density) says, Results should be considered as approximations of the yarn number since the procedures are based on short-length specimens

141 The Recipe Problem Lab tests should not disqualify short supply unless the results are unreasonably inconsistent with the factory s documents CBP does not agree; CBP accepts no tolerance between lab results and short supply specifications

142 Common Pitfalls: Short Supply An example: OTEXA short supply designation 52 is for a certain fabric for which the yarns per square centimeter must be 40.1, the weight must be g/m 2 and the average yarn number must be 39.4 Average yarn number is computed by multiplying yarns per square centimeter times 100 and dividing the result by grams per square meter As shown on the right, the average yarn number should be 26.28

143 The Math Problem The average yarn number in designation 52 is just wrong; it was erroneously computed with linear meters rather than square meters The error is harmless, because average yarn number is merely a function of yarns per square centimeter and grams per square meter Miami CBP sent samples of garments of this fabric to the CBP lab, and denied short supply treatment because the average yarn number was wrong

144 The Math Problem It turns out that average yarn number is incorrect in 17 CITA designations - 15 are incorrect because linear meters were used instead of square meters in the equation - 2 are incorrect for unclear reasons CBP refuses to disregard the erroneous part of the specifications, and CITA and USTR have declined to correct the errors; they say that interested persons should do the due diligence and start the application process over again

145 Common Pitfalls: Short Supply Short supply can unfortunately be a trap

146 Avoiding Short Supply Pitfalls Short supply designations without ranges or tolerances are meaningless unless CBP, CITA, and USTR change policies Short supply designations with math errors are meaningless for the same reason Even for designations with ranges and tolerances, companies should consider carefully whether random tests on garments will pass

147 Common Pitfalls: Affidavits CBP reasonably could propose to deny a CAFTA claim when: - An importer submits a fabric affidavit, but no supporting yarn affidavit - There is inconsistency between persons named on the CAFTA certificate and the affidavits - There are date discrepancies (affidavit dated 2012 for fabric supplied in 2013) - Information required on the affidavit is missing (address, contact person, etc.)

148 Common Pitfalls: Affidavits CBP has also proposed to deny affidavits on less reasonable bases Rulings interpreting the two recent TBTs caution import specialists to be less rigid But watch out for these statements on affidavits that CBP is likely to criticize:

149 Common Pitfalls: Affidavits Thread affidavits that refer to unfinished yarn Reference by fabric mill to two or more suppliers of fungible yarn Affidavits that refer to plying, Z-twisting and finishing, but do not specify whether the greige yarn supplier or the thread company performed these operations

150 Common Pitfalls: Affidavits Fabric affidavits that do not name the buyer Affidavit, signed by the parent, that says its subsidiary produced the fabric Affidavit with an inaccurate reference to season Accurate description of fabric with wrong HTSUS number

151 Common Pitfalls: Affidavits Affidavit describing fabric as tan when invoice describes garments as khaki Affidavit referring to material that will be sold or is to be sold CBP ruled this is ambiguous and, if an affidavit says this, CBP expects records showing when the sale took place

152 Avoiding Affidavit Pitfalls Keep affidavits and related documents (purchase orders, invoices, bills of lading) by shipment or entry so they are readily accessible Be sure to answer CBP information requests and proposed notices of action Request extensions if you need them Make responses concise and easy to understand and follow; don t expect CBP to figure it out

153 5. Suggestions and Conclusions Policy recommendations Suggestions for factories

154 Policy Recommendations The latest TBT indicates that CBP is trying to be reasonable; but there is still room for improvement CBP import specialists objections to affidavits should be quickly, informally reviewable Short supply claims should be accepted where lab tests are reasonably consistent with designations (and the math error should be addressed) CBP import specialists should be encouraged to call producers of yarn and fabric to confirm details of affidavits

155 Policy Recommendations Reputable U.S. yarn and fabric producers should enjoy a presumption that their affidavits are correct if not materially deficient Reputable U.S. importers should enjoy a presumption that their documents are correct if not materially deficient CBP import specialists should not require formats that conform to their individual preferences

156 Policy Recommendations Encourage governments to change or simplify the rules - Easier rules that accomplish the same general objectives (value added rules?) - Rules that allow more non-regional input (short supply, TPLs?) Insist on origin rules and flexibilities consistent with new agreements (TPP?)

157 So What Should We Do? Have an individual or individuals whose job is compliance Attend a compliance seminar - Today is a good first step - VESTEX and other trade associations regularly offer worthwhile seminars

158 Focus on Traceability Connection of materials to finished goods For each component, you want to be able to show a chain of documents that links the component to the finished garments Documents should demonstrate a direct correlation of the materials or components to the finished good by way of style numbers, fabric type and construction, or other means

159 Documents Showing Movement Show the movement of the goods from the place of production to the next place of production Documents might include purchase orders, invoices, bills of lading, and customs entry documents For non-us regional goods, documents might include delivery notices, truck receipts, and other locally produced documents

160 Standardized Practices and Forms Establish reliable practices and procedures, including checklists and written guidelines ensuring compliance Use standardized forms for certificates of origin, affidavits, invoices, etc. Notice, for example, that U.S. yarn and fabric companies have developed good, thorough affidavit forms

161 Periodically Audit Compliance Select random examples of export document packages and scrutinize them for errors or incomplete information In other words, review your work before CBP does

162 And Remember Be mindful of your audience (especially CBP) The primary goal is to use clear and precise documents to show we know the rules and we follow them