[Federal Register Volume 67, Number 63 (Tuesday, April 2, 2002)]
[Rules and Regulations]
[Pages 15480-15484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8053]


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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 181

[T.D. 02-15]
RIN 1515-AD08


North American Free Trade Agreement

AGENCY: U.S. Customs Service, Department of the Treasury.

ACTION: Final rule.

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SUMMARY: This document sets forth amendments to the Customs Regulations 
that implement the preferential tariff treatment and other Customs-
related provisions of the North American Free Trade Agreement (NAFTA) 
entered into by the United States, Canada and Mexico. The amendments 
involve technical rectifications and other conforming changes to 
reflect amendments to the NAFTA uniform regulations agreed upon by the 
three NAFTA parties and to reflect changes to the Harmonized Tariff 
Schedule of the United States.

EFFECTIVE DATE: These amendments are effective April 1, 2002.

FOR FURTHER INFORMATION CONTACT: John Valentine, International 
Agreements Staff, Office of Regulations and Rulings (202-927-2255).

SUPPLEMENTARY INFORMATION:

Background

    On December 17, 1992, the United States, Canada and Mexico entered 
into an agreement, the North American Free Trade Agreement (NAFTA), 
which, among other things, provides for preferential duty treatment on 
goods of those three countries. For purposes of the administration of 
the NAFTA preferential duty provisions, the three countries agreed to 
the adoption of (1) verbatim NAFTA Rules of Origin Regulations and (2) 
additional uniform regulatory standards to be followed by each country 
in promulgating NAFTA implementing regulations under its national law.
    The regulations implementing the NAFTA preferential duty and 
related provisions under United States law are set forth in part 181 of 
the Customs Regulations (19 CFR part 181) which incorporates, in the 
Appendix, the verbatim NAFTA Rules of Origin Regulations. When the 
final rule document setting forth those NAFTA implementing regulations 
was published in the Federal Register (at 60 FR 46334) on September 6, 
1995, Customs also published in that same issue of the Federal Register 
(at 60 FR 46464), in a general notice, the text of a document entitled 
``Uniform Regulations for the Interpretation, Application, and 
Administration of Chapters Three (National Treatment and Market Access 
for Goods) and Five (Customs Procedures) of the North American Free 
Trade Agreement'' that contained the additional uniform regulatory 
standards agreed to by the United States, Canada and Mexico. The 
principles contained in those additional uniform regulatory standards 
are reflected, as appropriate, in the part 181 regulatory provisions 
that precede the Appendix.
    On December 12, 2001, the United States Trade Representative, the 
Canadian Minister of International Trade, and the Mexican Secretary of 
the Economy in an exchange of letters agreed, among other things, to 
make certain technical rectifications to the NAFTA uniform regulation 
provisions referred to above, subject to the completion of each Party's 
domestic legal procedures. This rulemaking

[[Page 15481]]

effects these changes for the United States. The changes in question 
are described below.

Change to the Uniform Regulatory Standards

    In the document setting forth the additional uniform regulatory 
standards agreed to by the United States, Canada and Mexico, in Section 
B--Administration and Enforcement, under the heading ``Article VI: 
Origin Verifications,'' a new paragraph 32 was added after paragraph 31 
to read as follows:

    32. Each Party shall, through its customs administration when 
conducting a verification of origin to which Generally Accepted 
Accounting Principles may be relevant, apply and accept the 
Generally Accepted Accounting Principles applicable in the territory 
of the Party in which the good is produced or in which the exporter 
is located, as the case may be.

    This change was made in part because, as Article 506(8) of the 
NAFTA is currently worded, it would appear that a customs 
administration is conducting verification of the regional value content 
requirement in accordance with Generally Accepted Accounting Principles 
(GAAP) applicable in the territory of the exporting Party. In fact, as 
indicated in Article 413 of the NAFTA and throughout the NAFTA Rules of 
Origin Regulations, the use of GAAP relates to the manner in which 
costs are recorded and maintained, not the manner in which a 
verification of origin is conducted. This change was also made to 
reflect the fact that Article 413 of the NAFTA and the NAFTA 
regulations refer to the GAAP applicable in the territory of the Party 
in which the good is produced, the location where the books and records 
are maintained.

Changes to the NAFTA Rules of Origin Regulations

    In the verbatim NAFTA Rules of Origin Regulations, a number of 
numerical tariff reference and wording changes were made to reflect 
heading and subheading changes that have been made to the international 
Harmonized Commodity Description and Coding System (Harmonized System) 
which formed the basis for the tariff references in the NAFTA verbatim 
texts. In addition, in those verbatim NAFTA Rules of Origin 
Regulations, a number of provisions were revised, and some new 
provisions were added, in order to clarify issues or address problems 
that came to the attention of the NAFTA signatories after the NAFTA 
went into effect. The following points are noted regarding the latter 
substantive textual changes:
    1. In the definitions in Part I, Section 2, a new paragraph (6)(f) 
was added to provide that total cost includes the impact of inflation 
as recorded on the books of the producer if recorded in accordance with 
GAAP. Explanation: Reexpression costs are costs typically recorded in 
the accounting records based on GAAP in countries with a history of 
high inflation. Reexpression costs associated with inflation, in 
accordance with procedures to be followed by the GAAP applicable in a 
territory, are recorded on the books of a producer. Basically, the 
inventories, machinery and equipment, cost of sales, depreciation 
expenses, and capital are reexpressed to adjust values and costs for 
increases or decreases due to inflation. The computations are based on 
indices established in the prior years and applied consistently 
throughout the future years. Because these costs are recorded on the 
books in accordance with GAAP and are not otherwise listed with those 
costs specifically excluded from the net cost calculation, they are 
included in the total cost. New paragraph (6)(f) was added to make this 
clear.
    2. In the provisions regarding materials in Part IV, Section 7, 
subsection (16) was revised and new subsections (16.1) and (16.2) were 
added. Explanation: The revision of subsection (16) and the addition of 
new subsection (16.1) were intended to clarify two situations with 
respect to the use of an inventory management method for fungible 
materials and fungible goods. First, revised subsection (16) clarifies 
that, subject to subsection (16.1), a producer may use a single 
inventory management system for fungible materials that are maintained 
in two or more locations within the territories of the NAFTA parties 
and are withdrawn for use in the production of a good. Second, new 
subsection (16.1) makes it clear that, for a producer who withdraws 
both fungible materials and fungible goods from the same inventory, the 
producer must use the same inventory management method for that 
inventory, and the inventory management method must be one that is used 
for the fungible goods. New subsection (16.2) was added to establish 
the time at which a producer is determined to have made a choice with 
regard to an inventory management method for fungible materials or 
fungible commingled goods, in particular for purposes of applying the 
provisions of Sections 3 and 12 of Schedule X.
    3. In the automotive parts averaging provisions in Part V, Section 
12, paragraphs (a) and (b) of subsection (5) were revised. Explanation: 
As previously worded as a result of a textual change adopted by the 
NAFTA parties in 1995, the text of Section 12(5)(a) and (b) only 
referred to the one/three month periods that are evenly divisible into 
the remaining months of a parts producer's fiscal year. However, the 
one or three month period chosen by a parts producer may also be based 
on a motor vehicle producer's fiscal year. The 1995 amendment to 
Section 12(5)(a) and (b) had the unintentional effect of limiting the 
one or three month averaging period that is otherwise allowed by 
Article 403(4) of the NAFTA. The new revision of Section 12(5)(a) and 
(b) serves to align the regulations on the NAFTA text by including a 
reference to the motor vehicle producer's fiscal year. The amendment 
ensures that Sections 12(7) through 12(9) will apply to every situation 
that could arise in the event a parts producer wants to change the 
averaging period for its goods, and it will provide for a reasonable 
transition period in the event that the initial averaging period is 
less than a fiscal year as a result of the change in an averaging 
period.
    4. In Schedule VII, in the provisions regarding methods to 
reasonably allocate costs, a new Section 4.1 was added and Section 5 
was revised. Explanation: For purposes of determining total cost, 
certain costs, such as cots for research and development and costs of 
obsolete materials, are expensed in one period but are also allocated, 
for internal management purposes only, to goods to be produced in a 
different period. New section 4.1 is intended to provide guidance on 
when the allocation of these costs is considered to be ``reasonable'' 
for purposes of Section 4 of Schedule VII. Specifically, new Section 
4.1 states that the allocation of costs expensed during a previous 
period are reasonably allocated to goods of a current period if the 
allocation is based on a producer's accounting system that is 
maintained for its own internal management purposes. Therefore, if a 
producer does not have an accounting system to allocate, to current 
production, costs that are associated with goods produced in a prior 
period, then those costs are not reasonably allocated and may not be 
included in the total cost of the goods produced in the current period. 
New section 5 simply clarifies that any allocation method referred to 
in Section 3, 4, or 4.1

[[Page 15482]]

and used by a producer must be used throughout the producer's fiscal 
year.
    5. In Schedule VII, in the provisions regarding costs not 
reasonably allocated, paragraph (b) of Section 6 was revised. 
Explanation: In some circumstances, costs relating to the production of 
the good in the current period are recorded as part of the gain or loss 
relating to the disposition of a discontinued operation. In this cases, 
under the prior text of paragraph (b) of Section 6 of Schedule VII, 
these costs would not be reasonably allocated to the cost of the good. 
However, as part of amendments to the NAFTA Rules or Origin Regulations 
agreed to by the NAFTA parties in 1994, the definition of discontinued 
operations in Schedule VII was refined to link it to the definition as 
set out in each country's GAAP. Because both Canadian and American GAAP 
include, in the gain or loss, operating costs that are incurred between 
the time that there is a formal plan of disposal and the disposition 
date, the unintended effect of the prior paragraph (b) text after the 
1994 changes was to exclude these current production costs form net 
costs (this problem does not arise under the Mexican GAAP). Therefore, 
it was necessary to amend paragraph (b) of Section 6 to clarify that 
``gains or losses related to the production of the good'' are 
considered reasonably allocated for purposes of Schedule VII.
    6. In Schedule X which concerns inventory management methods. 
Section 3 in the Part 1 provisions regarding fungible materials, and 
Section 12 in the Part II provisions regarding fungible goods, were 
revised. Explanation: It had been noted that, under certain 
circumstances during a verification, a producer may not actually ``be 
determined to have made a choice'' with regard to an inventory 
management method until after the close of the fiscal year in which the 
production took place. The revision of Sections 3 and 12 were intended 
to make it clear that, when a producer makes a choice with regard to an 
inventory management method for fungible materials or goods, the 
producer is required to use the selected method for the remainder of 
the fiscal year of production of the materials of goods undergoing this 
verification, rather than for the remainder of the fiscal year in which 
the producer is considered to have made the choice.

Conforming Changes to Part 181 of the Customs Regulations

    In keeping with the regulatory obligations assumed by the United 
States under the NAFTA, the regulations in Part 181 of the Customs 
Regulations must be amended to reflect the triaterally-agreed changes 
referred to above. Accordingly, the document makes the following 
changes to the part 181 texts:
    1. In Sec. 181.72, which sets forth provisions regarding the scope 
and method of origin verifications, paragraph (b), which refers to the 
use of Generally Accepted Accounting Principles, is revised in response 
to the inclusion of new paragraph 32 in the additional uniform 
regulatory standards document. Although the revised paragraph (b) text 
is worded somewhat differently to reflect its U.S. regulatory context, 
it reflects the substance of the trilaterally-agreed text.
    2. The Appendix to part 181 has been amended to reflect the agreed 
numerical and text changes to the verbatim NAFTA Rules of Origin 
regulations. As in the case of amended paragraph (b) of Sec. 181.72, 
some slight changes have been made to the trialterally-agreed texts to 
reflect the U.S. regulatory context. Similarly, consistent with the 
general approach taken throughout the Appendix to part 181, the amended 
numerical tariff references reflect the subheadings as set forth in the 
Harmonized Tariff Schedule of the United States (HTSUS), in line with 
changes to the international Harmonized System and to reflect changes 
agreed for the triateral NAFTA texts.
    In addition, one additional conforming change, has been included in 
the Appendix to part 181. This change involves replacing the reference 
to tariff items ``2106.90.48 and 21006.90.52'' ``2106.90.16 and 
2106.90.17'' by a reference to tariff items within paragraph (c) of 
subsection (4) under section 5 of part II. This change is necessary to 
reflect the trilateral NAFTA texts and the current numbering of the 
subheadings in the HTSUS.

Inapplicability of Public Notice and Comment Procedures and Delayed 
Effective Date Requirements

    Pursuant to the provisions of 5 U.S.C. 553(a) public notice and 
comment procedures are inapplicable to these final regulations because 
they are within the foreign affairs function of the United States. In 
addition, for the above reason and because the Parties have agreed to 
promulgate these NAFTA implementing regulations changes no later than 
April 1, 2002, it is determined that good cause exists under the 
provisions of 5 U.S.C. 553(d)(3) for dispensing with a 30-day delayed 
effective date.

Executive Order 12866

    Because this document involves a foreign affairs function of the 
United States and implements an international agreement, it is not 
subject to the provisions of E.O. 12866.

Regulatory Flexibility Act

    Based on the supplementary information set forth above and because 
these regulations implement obligations of international agreements and 
statutory requirements relating to those agreements, pursuant to the 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) it 
is certified that the regulations will not have a significant economic 
impact on a substantial number of small entities. Accordingly, the 
regulations are not subject to the regulatory analysis or other 
requirements of 5 U.S.C. 603 and 604.

Drafting Information

    The principal author of this document was Francis W. Foote, Office 
of Regulations and Rulings, U.S. Customs Service. However, personnel 
from other offices participated in its development.

List of Subjects in 19 CFR Part 181

    Administrative practice and procedure, Canada, Customs duties and 
inspection, Exports, Imports, Mexico, Reporting and recordkeeping 
requirements, Trade agreements (North American Free-Trade Agreement).

Amendments to the Regulations

    For the reasons set forth in the preamble, Part 181, Customs 
Regulations (19 CFR part 181), is amended as set forth below.
    1. The authority citation for Part 181 is revised to read as 
follows:

    Authority 19 U.S.C. 66, 1202 (General Note 23, Harmonized Tariff 
Schedule of the United States), 1624, 3314.

    2. In Sec. 181.72, paragraph (b) is revised to read as follows:


Sec. 181.72  Verification scope and method.

* * * * *
    (b) Applicable accounting principles. When conducting a 
verification of origin to which Generally Accepted Accounting 
Principles may be relevant, Customs will apply and accept the Generally 
Accepted Accounting Principles applicable in the country in which the 
good is produced or in which the exporter is located.
* * * * *
    3. In the Appendix to part 181:
    a. In Part I, Section 2, under the heading ``Calculation Of Total 
Cost,'' subsection (6) is amended by removing the word ``and'' at the 
end of paragraph

[[Page 15483]]

(d), removing the period at the end of paragraph (e) and adding, in its 
place, a semicolon followed by the word ``and'', and adding a new 
paragraph (f);
    b. In Part II, Section 5, under the heading ``Exceptions,'' 
subsection (4) is amended:
    (i) In paragraph (c), by removing the words ``2009.30 that is used 
in the production of a good provided for in any of subheadings 2009.11 
through 2009.30 and tariff items 2106.90.16 and 2106.90.17'' and 
adding, in their place, the words ``2009.39 that is used in the 
production of a good provided for in any of subheadings 2009.11 through 
2009.39 and tariff items 2106.90.48 and 2106.90.52'';
    (ii) In paragraph (d), by removing the reference ``2101.10.21'' and 
adding, in its place, the reference ``2101.11.21''; and
    (iii) By revising paragraph (i);
    c. In Part III, Section 6, under the heading ``Net Cost Method 
Required in Certain Circumstances,'' subsection (6)(d)(iv) is revised;
    d. In Part IV, Section 7, under the heading ``Fungible Materials; 
Fungible Commingled Goods; Inventory Management Methods For Determining 
Whether Originating,'' subsection (16) is revised and new subsections 
(16.1) and (16.2) are added;
    e. In Part V, Section 12, under the heading ``Periods For Averaging 
RVC For Automotive Parts,'' subsection (5) is amended by revising 
paragraphs (a) and (b);
    f. In Part VI, Section 16, under the heading ``Exceptions For 
Certain Goods,'' subsection (3) is amended by removing the words 
``8542.11 through 8542.80'' and adding, in their place, the words 
``8542.10 through 8542.70'';
    g. In Schedule IV:
    (i) The listing ``4010.10'' is revised to read ``4010.31 through 
4010.34 and 4010.39.10 through 4010.39.20'';
    (ii) The listing ``8415.81 through 8415.83'' is revised to read 
``8415.20'';
    (iii) The listing ``8519.91'' is revised to read ``8519.93''; and
    (iv) The listing ``8537.10.30'' is revised to read ``8537.10.60'';
    h. In Schedule VII:
    (i) Under the heading ``Methods To Reasonably Allocate Costs,'' a 
new Section 4.1 is added after Section 4, and Section 5 is revised; and
    (ii) Under the heading ``Costs Not Reasonably Allocated,'' Section 
6 is amended by revising paragraph (b); and
    i. In Schedule X:
    (i) In Part I, under the heading ``General,'' Section 3 is revised; 
and
    (ii) In Part II, under the heading ``General,'' Section 12 is 
revised.
    The additions and revisions read as follows:

APPENDIX TO PART 181--RULES OF ORIGIN REGULATIONS

* * * * *

PART I

SECTION 2. DEFINITIONS AND INTERPRETATION

* * * * *

Calculation of Total Cost

    (6) * * *
    (f) total cost includes the impact of inflation as recorded on 
the books of the producer, if recorded in accordance with the 
Generally Accepted Accounting Principles of the producer's country.
* * * * *

PART II

* * * * *

SECTION 5. DE MINIMIS

* * * * *

Exceptions

    (4) * * *
    (i) a non-originating material that is used in the production of 
a good provided for in any of tariff item 7321.11.30 (gas stove or 
range), subheading 8415.10 through 8415.83, 8414.10 through 8418.21, 
8418.29 through 8418.40, 8421.12, 8422.11, 8450.11 through 8450.20 
and 8451.21 through 8451.29, and tariff items 8479.89.55 (trash 
compactors) and 8516.60.40 (electric stove or range);
* * * * *

PART III

SECTION 6. REGIONAL VALUE CONTENT

* * * * *

Net Cost Method Required in Certain Circumstances

    (6) * * *
    (d) * * *
    (iv) a good provided for in subheading 8469.11;
* * * * *

PART IV

SECTION 7. MATERIALS

Fungible Materials; Fungible Commingled Goods; Inventory Management 
Methods for Determining Whether Originating

    (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 subsection 
(16)(a) and fungible goods referred to in subsection (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 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.
* * * * *

PART V

Automotive Goods

* * * * *

SECTION 12. AUTOMOTIVE PARTS AVERAGING

* * * * *

Periods for Averaging RVC for Automotive Parts

    (5) * * *
    (a) with respect to goods referred to in subsection (4)(a), (b) 
or (d), or subsection 4(e) or (f) where the goods in that category 
are in a category referred to in subsection 4(a) or (b), any month, 
any consecutive three month period that is evenly divisible into the 
number of months of the producer's fiscal year, or of the fiscal 
year of the motor vehicle producer to whom those goods are sold, 
remaining at the beginning of that period, or the fiscal year of 
that motor vehicle producer to whom those goods are sold; and
    (b) with respect to goods referred to in subsection (4)(c), or 
subsection (4)(e) or (f) where the goods in that category are in a 
category referred to in subsection (4)(c), any month, any 
consecutive three month period that is evenly divisible into the 
number of months of the producer's fiscal year, or of the fiscal 
year of the motor vehicle producer to whom those goods are sold, 
remaining at the beginning of that period, or the fiscal year of 
that producer or of that motor vehicle producer to whom those goods 
are sold.
* * * * *

SCHEDULE VII

Reasonable Allocation of Costs

* * * * *

Methods to Reasonably Allocate Costs

* * * * *

[[Page 15484]]

SECTION 4.1

    Nothwithstanding section 3 and 7, where a producer allocates, 
for an internal management purpose, costs to a good that is not 
produced in the period in which the costs are expensed on the books 
of the producer (such as costs with respect to research and 
development, and obsolete materials), those costs shall be 
considered reasonably allocated if
    (a) for purposes of section 6(11), they are allocated to a good 
that is produced in the period in which the costs are expensed, and
    (b) the good produced in that period is within a group or range 
of goods, including identical goods or similar goods, that is 
produced by the same industry or industry sector as the goods to 
which the costs are expensed.

SECTION 5.

    Any cost allocation method referred to in section 3, 4 or 4.1 
that is used by a producer for the purposes of this appendix shall 
be used throughout the producer's fiscal year.

Costs Not Reasonably Allocated

SECTION 6.

* * * * *
    (b) gains or losses resulting from the disposition of a 
discontinued operation, except gains or losses related to the 
production of the good;
* * * * *

SCHEDULE X

Inventory Management Methods

PART I

Fungible Materials

* * * * *

General

* * * * *

SECTION 3.

    A producer of a good, or a person from whom the producer 
acquired the fungible materials that are used in the production of 
the good, may choose only one of the inventory management methods 
referred to in section 2, and, if the averaging method is chosen, 
only one averaging period in each fiscal year of that producer or 
person for the materials inventory.
* * * * *

PART II

Fungible Goods

* * * * *

General

* * * * *

SECTION 12.

    A producer of a good, or a person from whom the producer 
acquired the fungible good, may choose only one of the inventory 
management methods referred to in section 11, including only one 
averaging period in the case of the average method, in each fiscal 
year of that exporter or person for each finished goods inventory of 
the exporter or person.
* * * * *

Robert C. Bonner,
Commissioner of Customs.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 02-8053 Filed 3-29-02; 2:08 pm]
BILLING CODE 4820-02-M