Best Practices for Navigating the Annual (Pain) of Free Trade Agreement
It’s time to get to work on your yearly Trade Agreement solicitations and internal analyses. Why, aren’t you excited? As you handle the in and outflow of your Certificates of Origin, simply avoid weeping on them so they’ll be legible for government audit. Free Trade Agreements or “FTAs” can be a deceptive title – there is nothing free about this onerous process. While these complex tools of foreign trade policy negotiations may offer a certain amount of relief for importers through substantial import fees and duty government payments, they’re not pain-free for the importers or exporters who participate.
The voluntary programs require significant technical expertise to grasp and properly implement applicable FTAs and avoid an audit. Mistakes can mean refunding FTA savings to the government (plus interest). In cases of intentional fraud, a firm will face substantial penalties as well. For example, see http://www.insidecounsel.com/2007/12/01/ford-loses-nafta-recordkeeping-case that was partially overturned upon appeal. Without doing serious records retention, any company that attempts to cut corners can be audited to their detriment. So, how can you use these challenging programs and still stay compliant? Proceed with utmost care and use our tips listed below.
Importing under a Free Trade Agreement
Some agreements like the North American Free Trade Agreement (NAFTA) require the Importer to be “in possession” of a “facially valid” proscribed-format (See US Customs Form 434 at http://forms.cbp.gov/pdf/CBP_Form_434.pdf ). Other FTAs do not have that requirement. However, an importer’s “knowledge” is relied upon instead. This is deceptively simple sounding because, in reality, firms are left determine which goods are duty-free or reduced tariff eligible. Unfortunate pitfalls are rampant within the process and it is crucial to avoid them and head off the ravages of a government audit.
How can a business rely on an individual’s “knowledge”?
When the government calls upon an importer, the importer must always prove and substantiate their FTA claim for preferential treatment. If (a) the ‘knowledgeable’ individual has left the company; (b) potential errors were made or the “knowledgeable” individual didn’t correctly determine the eligibility, requiring a thorough understanding of the specific Rules of Origin for the given product under the given Agreement; or worse (c), the “knowledgeable” individual flaunted the requirements and committed fraud knowingly from the beginning. Best practice is each importer should always possess a facially valid and sometimes validated Certificate of origin prior to claiming applicable FTA on imported goods. Any importer can then produce proof during each government inquiry into their FTA claims with Certificates of Origin, including an internal audit review for facial validity by a duly appointed and licensed Customs Broker.
Trade Compliance members will face a daunting task to request, receive, review and retain all this evidence. Some firms use web-portals that require all suppliers to provide the Certificates of origin (“COOs”) via the portal; others outsource this onerous task altogether; still others employ knowledgeable and hard-working internal staff to accomplish the feat. Most COOs are issued for a period of one year from January 1 to December 31, so getting claims finished on time this year for next year is vitally important.
Exporting under a Free Trade Agreement
Exporters must know all about their product’s FTAs and eligibility. You discover what FTA’s apply by analyzing the origin-dewtiantion pairs. If you identify any eligible products, each FTA must be customized by the exporter’s data like: are you a manufacturer, a distributor, or a 3PL? Usually, manufacturers alone are in the position to do this as most FTAs base preferential origin eligibility on one of these two methods:
After you perform the analysis, you can create and distribute certificates to customers. Best practice is to keep a recipient list of everyone issued COOs. That way, any changes affecting sourcing or manufacturing processes during the effective period of the issued COOs can be amended to your certificates (with time to apprise all affected parties). This arduous chore is handled in many firms with purchased bolt-on software programs for goods analyses or outsourced altogether.
General Requirements Keep all supporting documentation as legal evidence to support your FTA claims, whose savings are at high risk of audit by the government. Statutory periods for supporting records should also be maintained to prove all of your import and export FTA claims. If you handle this process in-house, make sure to keep a robust retention of records in an adequate system. This will ensure all records are properly created, indexed, and retained. It is also wise to guarantee they are destroyed quickly at the statutory period’s end. Records for previous years, which are not destroyed, can certainly be subpoenaed in conjunction with any year audit that does fall within the statutory period. Destroying expired records will prevent any excessive government subpoenas beyond the standard statute of limitations.
 N.B. that the country of export is NOT the country of [preferential] origin under FTAs.