By: John Vernon, Esq. Guest Contributor
NAFTA 2.0 or the USMCA
Since President Trump took office in January of 2017, he has shown his desire to follow through with trade policies that were a central part of his campaign. After the President officially withdrew the United States from the Trans-Pacific Partnership ("TPP"), he immediately focused on renegotiating the North American Free Trade Agreement ("NAFTA").
Following more than a year of deadlock, on December 19, 2019 the House passed an updated version of NAFTA, which eliminated trade barriers between the U.S., Mexico, and Canada. The newest version, entitled the U.S.–Mexico-Canada Agreement ("USMCA"), will need to be ratified by the legislative bodies of all three countries before becoming effective. The revised deal will require 75 percent of North American automobiles to be produced in region, and 40 percent of cars must eventually be made in factories that pay workers at least $16 an hour.
Open Items Could Still Affect Approval
Ratification could be impacted by several key changes still on the table:
- U.S. labor union support was achieved by requiring factories in Mexico to be inspected and by requiring modifications to Mexican labor laws that allow workers there to unionize. Failure to meet those obligations could be enforced under the USMCA in dispute resolution panels.
- The parties have agreed to protections for the ozone layer, marine environments, air quality, and fishery management. In addition, a clause will be included that presumes "an environmental violation affects trade and investment." To reinforce this, USMCA requires the creation of an interagency to monitor each country's commitment to environmental standards.
- As a result of last-minute negotiations, a clause that promised drug companies ten years of intellectual property protections for "biologics" is expected ultimately to be removed from the final agreement.
- Canada is required to open up its milk market to U.S. farmers, which was previously off limits under NAFTA.
- The revised agreement creates new safeguards against currency manipulation and establishes new rules for e-commerce which was not covered since 1994 when NAFTA went into effect.
- The USMCA is expected to strengthen dispute resolution protocols and force companies to comply with international dispute resolution panels.
Indirect Taxation, Duty Drawback, Foreign Trade Zones, and Customs Transfer Pricing Valuation Issues
At the dawn of 2020, the Trump administration and the governments of other countries are adapting trade and taxation policies to respond to the ever-changing landscape of global investment by multinational corporations. Now is a good time to double-check your international foreign investment strategy to determine if you are properly planning to realize the true benefits of free trade and multilateral agreements.
Indirect Taxation and Customs Transfer Pricing Valuation
As global companies continue to expand, countries around the world seek more aggressive methods of charging for intracompany transfers from one related company entity to another. Having an effective transfer pricing policy is essential to avoid unnecessary tax adjustments, interest charges, penalties, and unwarranted publicity. Our recommendations:
- Consider negotiating and consummating advance-pricing agreements for U.S. and non-U.S.-based global companies while diagnosing transfer pricing risks for direct and indirect taxation regimes.
- Conduct internal OECD and BEPS policy analysis to determine the convergence of Customs valuation and Transfer Pricing.
- Reevaluate your value chain on a current basis to be coterminous with your Transfer Pricing Policy.
- Make sure your intercompany agreements reflect the reality of your current business model. Remember that intercompany agreements are merely legal contracts and do not reflect your company's tax, Customs valuation, or relevant business Transfer Pricing position. Legal documents should be reviewed on a regular basis and internal audits conducted of your company's global supply chain to analyze Ruggie Principle compliance and value drivers.
- Know that Section 232 duties imposed on aluminum and steel imports were not contemplated before the Trump administration and that most Transfer Pricing Agreements did not anticipate the Section 301 duties on imported Chinese goods prior to 2017. Whether your adjustment is upwards or downwards, you should take the time to revisit your Transfer Pricing Agreement to ensure you are within the guidelines for an arm's length transaction and are aware of the Customs valuation reporting requirements and related issues.
Foreign Trade Zones and Duty Drawbacks
Foreign Trade Zones ("FTZs") and Duty Drawbacks can also provide significant benefits for benefitting from free trade and multilateral agreements. Consider FTZs and rules of origin for more effective sourcing and preferential duty programs. Review and apply for Drawbacks where applicable.
FTZs are secured areas under U.S. Customs supervision in or near a U.S. Customs port of entry. Customs entry procedures do not apply to the goods inside an FTZ until they are withdrawn for entry within the territory and jurisdiction of the U.S. and are exported or destroyed under Customs supervision.
In addition, there are no duties or quota charges on re-exports, and FTZ companies avoid the typical lengthy Customs duty drawback process. Customs duties and federal excise tax are deferred on imports until they leave the zone and enter U.S. Customs territory.
When a product has been assembled or finished in the FTZ, the manufacturing process will result in a lower U.S. Harmonized Tariff rate than rates on traditional foreign imports. FTZ users do not owe duty on labor, overhead, or profit due to their FTZ production operations. Also, FTZ users pay Merchandising Processing Fees only on goods entering U.S. Customs territory, and enjoy quota avoidance, streamlined logistics, cash flow, and security benefits.
Duty Drawback rules allow a refund of Customs duties, including certain Internal Revenue taxes, and certain fees that have been collected upon importation. Drawbacks can also be paid after export or destruction of goods or substituted goods. In addition, a refund of 99 percent of duties paid on import is available when goods are re-exported. To qualify for this treatment, the goods must be "unused."
Drawback allows for product substitution in most cases except for NAFTA exports. Further, the rights to benefits of any duty drawback, including rights developed by substitution and rights which may be acquired from the exporter's suppliers, are the property of the importer.
Finally, to be eligible for Drawback, the export must occur within five years of the import and manufacturing must take place within three years of receipt of the part from suppliers. This three-year period must be within the five-year import-to-export period under 19 U.S.C. 1313 (a) and (b).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.