NAFTA Case Highlights Importance of Technical Compliance

International Alert
01.24.06

The U.S. Court of Appeals for the Federal Circuit has issued a ruling that underscores the importance of timeliness and accuracy in claims for duty preference under the North American Free Trade Agreement (NAFTA). The NAFTA regime offers significant opportunity for duty savings by importers in the United States, Canada, and Mexico on qualifying goods they import from the other two countries.

Products may enter a NAFTA country duty-free if they satisfy the relevant rules of origin and if the importer properly files a claim for the duty preference. Such claims may be made at the time the goods enter the country, if the importer has in its possession a properly executed NAFTA certificate of origin from the exporter of the goods. Or, if the importer does not receive the certificate in time to make the claim at the time of entry, it must pay duties at the normal rate and then, once it receives the NAFTA certificate, it may file a retroactive claim for the duty preference (and obtain a refund of the duties paid).
Under NAFTA, technical compliance is paramount -- even goods that would otherwise qualify under the NAFTA rules of origin will be denied the duty preference if the documents are not properly completed or if the claim is not timely filed. This month’s ruling from the Federal Circuit (Corrpro Co. v. United States, Case No. 05-1073) serves as an important reminder that importers must closely monitor their NAFTA activities and ensure compliance with the technical requirements.

In the Corrpro case, the Federal Circuit reversed a decision of the Court of International Trade (CIT) with regard to the importer’s ability to file a NAFTA claim more than a year after the original date of importation. The importer had not filed a NAFTA claim at the time of entry, and had paid duties on the imported goods. Over a year later, after the time period for retroactive NAFTA claims had elapsed, the importer sought to claim the preference by filing an administrative protest and providing copies of the certificates of origin to U.S. Customs and Border Protection (Customs) at that time.

Customs denied Corrpro’s protest, and the importer filed suit in the CIT, which ruled in the importer’s favor and held that the NAFTA claim should be granted. However, the Federal Circuit reversed the lower court’s decision on appeal, on the grounds that the NAFTA claim was never properly asserted either at the time of entry or within a year afterward. “Because Customs could not have considered and did not consider the merits of NAFTA eligibility in the initial classification decision,” wrote the Federal Circuit, “it did not make a protestable decision at that time. For the same reason, we disagree with Corrpro’s argument that Customs’ liquidation of the goods is a protestable decision. Customs could not have engaged in any sort of decision-making as to NAFTA eligibility in liquidating the goods because Corrpro had not yet raised the NAFTA issue.” Thus, the importer’s claim for the NAFTA preference ultimately failed.

This case highlights the importance of timely NAFTA claims. It also comes in the context of other developments signaling increased governmental focus on NAFTA compliance. Several months ago, for example, Customs issued a new, nine-page directive to the trade on NAFTA procedures and certificate of origin requirements. (CBP Directive 3810-014A, July 26, 2005.) The Canadian and Mexican customs authorities continue to conduct verification proceedings of U.S. companies’ NAFTA claims in certificates of origin those companies have issued to Canadian and Mexican customers. (These proceedings can be time-consuming and burdensome, and can result in significant liability for the U.S. companies and their customers if the NAFTA claims prove unsupportable or the documentation is insufficient.)

Furthermore, U.S. Customs continues to scrutinize NAFTA claims as a potential risk area in its regulatory audit proceedings, and periodically conducts specialized “NAFTA audits” of U.S. companies that have claimed the preference on their imports. And in November 2005, in one of the first criminal prosecutions for NAFTA violations, a California importer was sentenced to pay a fine of $2.1 million and $3.5 million in restitution. Employees of the Mexican exporter and the U.S. customs broker were also criminally sanctioned.

NAFTA compliance can pay huge dividends by allowing a company to avoid duties that it would otherwise have to pay on qualifying imports. Yet, as the Corrpro case and other recent developments make clear, the benefits are available only where a company ensures technical compliance with the legal requirements. Inattention to these requirements not only can prevent a company from achieving these benefits, but also can result in denial of past preference claims and the assessment of significant penalties for non-compliance. Strong internal controls, coupled with periodic reviews to ensure the effectiveness of those controls, are needed for U.S. companies that either import under NAFTA preference claims or provide NAFTA certificates to their customers, in order to preserve the benefits and protect against liability.

For further information, please contact:

Richard Abbey, rabbey@milchev.com, 202-626-5901

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