Title 19

Appendix to Part 181 - Rules of Origin Regulations

19:2.0.1.1.26.12.2.3.9 :

Appendix to Part 181 - Rules of Origin Regulations SECTION 1. CITATION

This appendix may be cited as the NAFTA Rules of Origin Regulations.

PART I SECTION 2. DEFINITIONS AND INTERPRETATION Definitions (1) For purposes of this appendix, “accessories, spare parts or tools that are delivered with a good and form part of the good's standard accessories, spare parts or tools” means goods that are delivered with a good, whether or not they are physically affixed to that good, and that are used for the transport, protection, maintenance or cleaning of the good, for instruction in the assembly, repair or use of that good, or as replacements for consumable or interchangeable parts of that good; “adjusted to an F.O.B. basis” means, with respect to a good, adjusted by (a) deducting (i) the costs of transporting the good after it is shipped from the point of direct shipment, (ii) the costs of unloading, loading, handling and insurance that are associated with that transportation, and (iii) the cost of packing materials and containers, where those costs are included in the transaction value of the good, and (b) adding (i) the costs of transporting the good from the place of production to the point of direct shipment, (ii) the costs of loading, unloading, handling and insurance that are associated with that transportation, and (iii) the costs of loading the good for shipment at the point of direct shipment, where those costs are not included in the transaction value of the good; “Agreement” means the North American Free Trade Agreement; “applicable change in tariff classification” means, with respect to a non-originating material used in the production of a good, a change in tariff classification specified in a rule set out in Schedule I for the tariff provision under which the good is classified; “automotive component” means a good that is referred to in column I of an item of Schedule V; “automotive component assembly” means a good, other than a heavy-duty vehicle, that incorporates an automotive component; “costs incurred in packing” means, with respect to a good or material, the value of the packing materials and containers in which the good or material is packed for shipment and the labor costs incurred in packing it for shipment, but does not include the costs of preparing and packaging it for retail sale; “customs value” means (a) in the case of Canada, value for duty as defined in the Customs Act, except that for purposes of determining that value the reference in section 55 of that Act to “in accordance with the regulations made under the Currency Act” shall be read as a reference to “in accordance with subsection 3(1) of these Regulations”, (b) in the case of Mexico, the valor en aduana as determined in accordance with the Ley Aduanera, converted, in the event such value is not expressed in Mexican currency, to Mexican currency at the rate of exchange determined in accordance with subsection 3(1) of these Regulations, and (c) in the case of the United States, the value of imported merchandise as determined by the Customs Service in accordance with section 402 of the Tariff Act of 1930, as amended, converted, in the event such value is not expressed in United States currency, to United States currency at the rate of exchange determined in accordance with subsection 3(1) of these Regulations. “days” means calendar days, and includes weekends and holidays; “direct labor costs” means costs, including fringe benefits, that are associated with employees who are directly involved in the production of a good; “direct material costs” means the value of materials, other than indirect materials and packing materials and containers, that are used in the production of a good; “direct overhead” means costs, other than direct material costs and direct labor costs, that are directly associated with the production of a good; “enterprise” means any entity constituted or organized under applicable laws, whether or not for profit and whether privately owned or governmentally owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association; “excluded costs” means sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs; “fungible goods” means goods that are interchangeable for commercial purposes and the properties of which are essentially identical; “fungible materials” means materials that are interchangeable for commercial purposes and the properties of which are essentially identical; “Harmonized System” means the Harmonized Commodity Description and Coding System, including its General Rules of Interpretation, Section Notes and Chapter Notes, as set out in (a) in the case of Canada, the Customs Tariff, (b) in the case of Mexico, the Tarifa de la Ley del Impuesto General de Importación, and (c) in the case of the United States, the Harmonized Tariff Schedule of the United States; “heavy-duty vehicle” means a motor vehicle provided for in any of heading 8701, tariff items 8702.10.30 and 8702.90.30 (vehicles for the transport of 16 or more persons), subheadings 8704.10, 8704.22, 8704.23, 8704.32 and 8704.90 and heading 8705 and 8706; “identical goods” means, with respect to a good, goods that (a) are the same in all respects as that good, including physical characteristics, quality and reputation but excluding minor differences in appearance, (b) were produced in the same country as that good, and (c) were produced (i) by the producer of that good, or (ii) by another producer, where no goods that satisfy the requirements of paragraphs (a) and (b) were produced by the producer of that good; “identical materials” means, with respect to a material, materials that (a) are the same as that material in all respects, including physical characteristics, quality and reputation but excluding minor differences in appearance, (b) were produced in the same country as that material, and (c) were produced (i) by the producer of that material, or (ii) by another producer, where no materials that satisfy the requirements of paragraphs (a) and (b) were produced by the producer of that material; “incorporated” means, with respect to the production of a good, a material that is physically incorporated into that good, and includes a material that is physically incorporated into another material before that material or any subsequently produced material is used in the production of the good; “indirect material” means a good used in the production, testing or inspection of a good but not physically incorporated into the good, or a good used in the maintenance of buildings or the operation of equipment associated with the production of a good, and includes (a) fuel and energy, (b) tools, dies and molds, (c) spare parts and materials used in the maintenance of equipment and buildings, (d) lubricants, greases, compounding materials and other materials used in production or used to operate equipment and buildings, (e) gloves, glasses, footwear, clothing, safety equipment and supplies, (f) equipment, devices and supplies used for testing or inspecting the other goods, (g) catalysts and solvents, and (h) any other goods that are not incorporated into the good but the use of which in the production of the good can reasonably be demonstrated to be part of that production; “interest costs” means all costs paid or payable by a person to whom credit is, or is to be advanced, for the advancement of credit or the obligation to advance credit; “intermediate material” means a self-produced material that is used in the production of a good and is designated as an intermediate material under section 7(4) ; “light-duty automotive good” means a light-duty vehicle or a good of a tariff provision listed in Schedule IV that is subject to a regional value-content requirement and is for use as original equipment in the production of a light-duty vehicle; “light-duty vehicle” means a motor vehicle provided for in any of tariff items 8702.10.60 and 8702.90.60 (vehicles for the transport of 15 or fewer persons) and subheadings 8703.21 through 8703.90, 8704.21 and 8704.31; “listed material” means a good that is referred to in column II of an item of Schedule V; “location of the producer” means, (a) where the warehouse or other receiving station at which a producer receives materials for use by the producer in the production of a good is located within a radius of 75 km (46.60 miles) from the place at which the producer produces the good, the location of that warehouse or other receiving station, and (b) in any other case, the place at which the producer produces the good in which a material is to be used; “material” means a good that is used in the production of another good, and includes a part or ingredient; “motor vehicle assembler” means a producer of motor vehicles and any related person with whom, or joint venture in which, the producer participates with respect to the production of motor vehicles; “month” means a calendar month; “NAFTA country” means a Party to the Agreement; “national” means a natural person who is a citizen or permanent resident of a NAFTA country, and includes (a) with respect to Mexico, a national or citizen according to Articles 30 and 34, respectively, of the Mexican Constitution, and (b) with respect to the United States, a “national of the United States” as defined in the Immigration and Nationality Act on the date of entry into force of the Agreement; “net cost method” means the method of calculating the regional value content of a good that is set out in section 6(3); “non-allowable interest costs” means interest costs incurred by a producer on the producer's debt obligations that are more than 700 basis points above the yield on debt obligations of comparable maturities issued by the federal government of the country in which the producer is located; “non-originating good” means a good that does not qualify as originating under this appendix; “non-originating material” means a material that does not qualify as originating under this appendix; “original equipment” means a material that is incorporated into a motor vehicle before the first transfer of title or consignment of the motor vehicle to a person who is not a motor vehicle assembler, and that is (a) a good of a tariff provision listed in Schedule IV, or (b) an automotive component assembly, automotive component, sub-component or listed material; “originating good” means a good that qualifies as originating under this appendix; “originating material” means a material that qualifies as originating under this appendix; “other costs,” with respect to total cost, means all costs that are not product costs or period costs; “packaging materials and containers” means materials and containers in which a good is packaged for retail sale; “packing materials and containers” means materials and containers that are used to protect a good during transportation, but does not include packaging materials and containers; “payments” means, with respect to royalties and sales promotion, marketing and after-sales service costs, the costs expensed on the books of a producer, whether or not an actual payment is made; “period costs” means costs, other than product costs, that are expensed in the period in which they are incurred; “person” means a natural person or an enterprise; “person of a NAFTA country” means a national, or an enterprise constituted or organized under the laws of a NAFTA country; “point of direct shipment” means the location from which a producer of a good normally ships that good to the buyer of the good; “producer” means a person who grows, mines, harvests, fishes, traps, hunts, manufactures, processes or assembles a good; “product costs” means costs that are associated with the production of a good, and includes the value of materials, direct labor costs and direct overhead; “production” means growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good; “related person” means a person related to another person on the basis that (a) they are officers or directors of one another's businesses, (b) they are legally recognized partners in business, (c) they are employer and employee, (d) any person directly or indirectly owns, controls or holds 25 percent or more of the outstanding voting stock or shares of each of them, (e) one of them directly or indirectly controls the other, (f) both of them are directly or indirectly controlled by a third person, or (g) they are members of the same family (members of the same family are natural or adopted children, brothers, sisters, parents, grandparents, or spouses); “reusable scrap or by-product” means waste and spoilage that is generated by the producer of a good and that is used in the production of a good or sold by that producer; “right to use,” for purposes of the definition of royalties, includes the right to sell or distribute a good; “royalties” means payments of any kind, including payments under technical assistance agreements or similar agreements, made as consideration for the use of, or right to use, any copyright, literary, artistic, or scientific work, patent, trademark, design, model, plan, secret formula or process, excluding those payments under technical assistance agreements or similar agreements that can be related to specific services such as (a) personnel training, without regard to where performed, and (b) if performed in the territory of one or more of the NAFTA countries, engineering, tooling, die-setting, software design and similar computer services, or other services; “sales promotion, marketing and after-sales service costs” means the following costs related to sales promotion, marketing and after-sales service: (a) sales and marketing promotion; media advertising; advertising and market research; promotional and demonstration materials; exhibits; sales conferences, trade shows and conventions; banners; marketing displays; free samples; sales, marketing and after-sales service literature (product brochures, catalogs, technical literature, price lists, service manuals, sales aid information); establishment and protection of logos and trademarks; sponsorships; wholesale and retail restocking charges; entertainment; (b) sales and marketing incentives; consumer, retailer or wholesaler rebates; merchandise incentives; (c) salaries and wages, sales commissions, bonuses, benefits (for example, medical, insurance, pension), traveling and living expenses, membership and professional fees, for sales promotion, marketing and after-sales service personnel; (d) recruiting and training of sales promotion, marketing and after-sales service personnel, and after-sales training of customers' employees, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on the financial statements or cost accounts of the producer; (e) product liability insurance; (f) office supplies for sales promotion, marketing and after-sales service of goods, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on the financial statements or cost accounts of the producer; (g) telephone, mail and other communications, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on the financial statements or cost accounts of the producer; (h) rent and depreciation of sales promotion, marketing and after-sales service offices and distribution centers; (i) property insurance premiums, taxes, cost of utilities, and repair and maintenance of sales promotion, marketing and after-sales service offices and distribution centers, where such costs are identified separately for sales promotion, marketing and after-sales service of goods on the financial statements or cost accounts of the producer; and (j) payments by the producer to other persons for warranty repairs; “self-produced material” means a material that is produced by the producer of a good and used in the production of that good; “shipping and packing costs” means the costs incurred in packing a good for shipment and shipping the good from the point of direct shipment to the buyer, excluding the costs of preparing and packaging the good for retail sale; “similar goods” means, with respect to a good, goods that (a) although not alike in all respects to that good, have similar characteristics and component materials that enable the goods to perform the same functions and to be commercially interchangeable with that good, (b) were produced in the same country as that good, and (c) were produced (i) by the producer of that good, or (ii) by another producer, where no goods that satisfy the requirements of paragraphs (a) and (b) were produced by the producer of that good; “similar materials” means, with respect to a material, materials that (a) although not alike in all respects to that material, have similar characteristics and component materials that enable the materials to perform the same functions and to be commercially interchangeable with that material, (b) were produced in the same country as that material, and (c) were produced (i) by the producer of that material, or (ii) by another producer, where no materials that satisfy the requirements of paragraphs (a) and (b) were produced by the producer of that material; “subject to a regional value-content requirement” means, with respect to a good, that the provisions of this appendix that are applied to determine whether the good is an originating good include a regional value-content requirement; “sub-component” means a good that comprises a listed material and one or more other materials or listed materials; “tariff provision” means a heading, subheading or tariff item; “territory” means, with respect to (a) Canada, the territory to which its customs laws apply, including any areas beyond the territorial seas of Canada within which, in accordance with international law and its domestic law, Canada may exercise rights with respect to the seabed and subsoil and their natural resources, (b) Mexico, (i) the states of the Federation and the Federal District, (ii) the islands, including the reefs and keys, in adjacent seas, (iii) the islands of Guadalupe and Revillagigedo situated in the Pacific Ocean, (iv) the continental shelf and the submarine shelf of such islands, keys and reefs, (v) the waters of the territorial seas, in accordance with international law, and its interior maritime waters, (vi) the space located above the national territory, in accordance with international law, and (vii) any areas beyond the territorial seas of Mexico within which, in accordance with international law, including the United Nations Convention on the Law of the Sea, and its domestic law, Mexico may exercise rights with respect to the seabed and subsoil and their natural resources, and (c) the United States, (i) the customs territory of the United States, which includes the 50 states, the District of Columbia and Puerto Rico, (ii) the foreign trade zones located in the United States and Puerto Rico, and (iii) any areas beyond the territorial seas of the United States within which, in accordance with international law and its domestic law, the United States may exercise rights with respect to the seabed and subsoil and their natural resources; “total cost” means the total of all product costs, period costs and other costs incurred in the territory of one or more of the NAFTA countries; “transaction value method” means the method of calculating the regional value content of a good that is set out in subsection 6(2); “used” means used or consumed in the production of a good; “verification of origin” means a verification of origin of goods under (a) in the case of Canada, paragraph 42.1(1)(a) or subsection 42.2(2) of the Customs Act, (b) in the case of Mexico, Article 506 of the Agreement, and (c) in the case of the United States, section 509 of the Tariff Act of 1930, as amended. Interpretation: “similar” (2) For purposes of the definitions of “similar goods” and “similar materials,” the quality of the goods or materials, their reputation and the existence of a trademark are among the factors to be considered for purposes of determining whether goods or materials are similar. Interpretation: terms used to refer to HTSUS; use of term “books” (3) For purposes of this appendix, (a) “chapter,” unless otherwise indicated, refers to a chapter of the Harmonized System; (b) “heading” refers to any four-digit number, or the first four digits of any number, set out in the column “Heading/Subheading” in the Harmonized System; (c) “subheading” refers to any six-digit number, or the first six digits of any number, set out in the column “Heading/Subheading” in the Harmonized System; (d) “tariff item” refers to any eight-digit number set out in the column “Heading/Subheading” in the Harmonized System; (e) any reference to a tariff item in Chapter Four of the Agreement or this appendix that includes letters shall be reflected as the appropriate eight-digit number in the Harmonized System as implemented in each NAFTA country; and (f) “books” refers to, (i) with respect to the books of a person who is located in a NAFTA country, (A) books and other documents that support the recording of revenues, expenses, costs, assets and liabilities and that are maintained in accordance with Generally Accepted Accounting Principles set out in the publications listed in Schedule XII with respect to the territory of the NAFTA country in which the person is located, and (B) financial statements, including note disclosures, that are prepared in accordance with Generally Accepted Accounting Principles set out in the publications listed in Schedule XII with respect to the territory of the NAFTA country in which the person is located, and (ii) with respect to the books of a person who is located outside the territories of the NAFTA countries, (A) books and other documents that support the recording of revenues, expenses, costs, assets and liabilities and that are maintained in accordance with generally accepted accounting principles applied in that location or, where there are no such principles, in accordance with the International Accounting Standards, and (B) financial statements, including note disclosures, that are prepared in accordance with generally accepted accounting principles applied in that location or, where there are no such principles, in accordance with the International Accounting Standards. Use of Examples to illustrate the application of a provision (4) Where an example, referred to as an “Example,” is set out in this appendix, the example is for purposes of illustrating the application of a provision, and where there is any inconsistency between the example and the provision, the provision prevails to the extent of the inconsistency. References to domestic laws (5) Except as otherwise provided, references in this appendix to domestic laws of the NAFTA countries apply to those laws as they may be amended or superseded. Calculation of total cost (6) For purposes of sections 5(9), 6(11) and 7(6) and sections 10(1)(a) (i) and (ii), (a) total cost consists of all product costs, period costs and other costs that are recorded, except as otherwise provided in paragraphs (b) (i) and (ii), on the books of the producer without regard to the location of the persons to whom payments with respect to those costs are made; (b) in calculating total cost, (i) the value of materials, other than intermediate materials, indirect materials and packing materials and containers, shall be the value determined in accordance with section 7(1), (ii) the value of intermediate materials used in the production of the good or material with respect to which total cost is being calculated shall be calculated in accordance with section 7(6), (iii) the value of indirect materials and the value of packing materials and containers shall be the costs that are recorded on the books of the producer for those materials, and (iv) product costs, period costs and other costs, other than costs referred to in subparagraphs (i) and (ii), shall be the costs thereof that are recorded on the books of the producer for those costs; (c) total cost does not include profits that are earned by the producer, regardless of whether they are retained by the producer or paid out to other persons as dividends, or taxes paid on those profits, including capital gains taxes; (d) gains related to currency conversion that are related to the production of the good shall be deducted from total cost, and losses related to currency conversion that are related to the production of the good shall be included in total cost; (e) the value of materials with respect to which production is accumulated under section 14 shall be determined in accordance with that section; and (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. (7) For purposes of calculating total cost under sections 5(9) and 7(6) and sections 10(1)(a) (i) and (ii), (a) where the regional value content of the good is calculated on the basis of the net cost method and the producer has chosen under section 6(15), 11 (1), (3) or (6), 12(5) or 13(4) to calculate the regional value content over a period, the total cost shall be calculated over that period; and (b) in any other case, the producer may choose that the total cost be calculated over (i) a month, (ii) any consecutive three month or six month period that falls within and is evenly divisible into the number of months of the producer's fiscal year remaining at the beginning of that period, or (iii) the producer's fiscal year. (8) A choice made under subsection (7) may not be rescinded or modified with respect to the good or material, or the period, with respect to which the choice is made. (9) Where a producer chooses a one, three or six month period under subsection (7) with respect to a good or material, the producer shall be considered to have chosen under that subsection a period or periods of the same duration for the remainder of the producer's fiscal year with respect to that good or material. (10) With respect to a good exported to a NAFTA country, a choice to average is considered to have been made (a) in the case of a choice referred to in section 11 (1), (3) or (6) or 13(4), if the choice is received by the customs administration of that NAFTA country; and (b) in the case of a choice referred to in section 2(7), 6(15) or 12(1), if the customs administration of that NAFTA country is informed in writing during the course of a verification of the origin of the good that the choice has been made. SECTION 3. CURRENCY CONVERSION (1) Where the value of a good or a material is expressed in a currency other than the currency of the country in which the producer of the good is located, that value shall be converted to the currency of the country in which that producer is located on the basis of (a) in the case of the sale of that good or the purchase of that material, the rate of exchange used by the producer for purposes of recording that sale or purchase, as the case may be; and (b) in the case of a material that is acquired by the producer other than by a purchase, (i) where the producer used a rate of exchange for purposes of recording another transaction in that other currency that occurred within 30 days of the date on which the producer acquired the material, that rate, and (ii) in any other case, (A) with respect to a producer located in Canada, the rate of exchange referred to in section 5 of the Currency Exchange for Customs Valuation Regulations for the date on which the material was shipped directly to the producer, (B) with respect to a producer located in Mexico, the rate of exchange published by the Banco de Mexico in the Diario Oficial de la Federacion, under the title “TIPO de cambio para solventar obligaciones denominadas en moneda extranjera pagaderas en la Republica Mexicana”, for the date on which the material was shipped directly to the producer, and (C) with respect to a producer located in the United States, the rate of exchange referred to in 31 U.S.C. 5151 for the date on which the material was shipped directly to the producer. (2) Where a producer of a good has a statement referred to in section 9, 10 or 14 that includes information in a currency other than the currency of the country in which that producer is located, the currency shall be converted to the currency of the country in which the producer is located on the basis of (a) if the material was purchased by the producer in the same currency as the currency in which the information in the statement is provided, the rate of exchange used by the producer for purposes of recording the purchase; (b) if the material was purchased by the producer in a currency other than the currency in which the information in the statement is provided, (i) where the producer used a rate of exchange for purposes of recording a transaction in that other currency that occurred within 30 days of the date on which the producer acquired the material, that rate, and (ii) in any other case, (A) with respect to a producer located in Canada, the rate of exchange referred to in section 5 of the Currency Exchange for Customs Valuation Regulations for the date on which the material was shipped directly to the producer, (B) with respect to a producer located in Mexico, the rate of exchange published by the Banco de Mexico in the Diario Oficial de la Federacion, under the title “TIPO de cambio para solventar obligaciones denominadas en moneda extranjera pagaderas en la Republica Mexicana”, for the date on which the material was shipped directly to the producer, and (C) with respect to a producer located in the United States, the rate of exchange referred to in 31 U.S.C. 5151 for the date on which the material was shipped directly to the producer; and (c) if the material was acquired by the producer other than by a purchase, (i) where the producer used a rate of exchange for purposes of recording a transaction in that other currency that occurred within 30 days of the date on which the producer acquired the material, that rate, and (ii) in any other case, (A) with respect to a producer located in Canada, the rate of exchange referred to in section 5 of the Currency Exchange for Customs Valuation Regulations for the date on which the material was shipped directly to the producer, (B) with respect to a producer located in Mexico, the rate of exchange published by the Banco de Mexico in the Diario Oficial de la Federacion, under the title “TIPO de cambio para solventar obligaciones denominadas en moneda extranjera pagaderas en la Republica Mexicana”, for the date on which the material was shipped directly to the producer, and (C) with respect to a producer located in the United States, the rate of exchange referred to in 31 U.S.C. 5151 for the date on which the material was shipped directly to the producer. PART II SECTION 4. ORIGINATING GOODS Identification of goods which are “wholly obtained or produced” (1) A good originates in the territory of a NAFTA country where the good is (a) a mineral good extracted in the territory of one or more of the NAFTA countries; (b) a vegetable or other good harvested in the territory of one or more of the NAFTA countries; (c) a live animal born and raised in the territory of one or more of the NAFTA countries; (d) a good obtained from hunting, trapping or fishing in the territory of one or more of the NAFTA countries; (e) fish, shellfish or other marine life taken from the sea by a vessel registered or recorded with a NAFTA country and flying its flag; (f) a good produced on board a factory ship from a good referred to in paragraph (e), where the factory ship is registered or recorded with the same NAFTA country as the vessel that took that good and flies that country's flag; (g) a good taken by a NAFTA country or a person of a NAFTA country from or beneath the seabed outside the territorial waters of that country, where a NAFTA country has the right to exploit that seabed; (h) a good taken from outer space, where the good is obtained by a NAFTA country or a person of a NAFTA country and is not processed outside the territories of the NAFTA countries; (i) waste and scrap derived from (i) production in the territory of one or more of the NAFTA countries, or (ii) used goods collected in the territory of one or more of the NAFTA countries, where those goods are fit only for the recovery of raw materials; or (j) a good produced in the territory of one or more of the NAFTA countries exclusively from a good referred to in any of paragraphs (a) through (i), or from the derivatives of such a good, at any stage of production. Goods made from non-originating materials: change in tariff classification requirement; regional value-content requirement (2) A good originates in the territory of a NAFTA country where (a) each of the non-originating materials used in the production of the good undergoes the applicable change in tariff classification as a result of production that occurs entirely in the territory of one or more of the NAFTA countries, where the applicable rule in Schedule I for the tariff provision under which the good is classified specifies only a change in tariff classification, and the good satisfies all other applicable requirements of this appendix; (b) each of the non-originating materials used in the production of the good undergoes the applicable change in tariff classification as a result of production that occurs entirely in the territory of one or more of the NAFTA countries and the good satisfies the applicable regional value-content requirement, where the applicable rule in Schedule I for the tariff provision under which the good is classified specifies both a change in tariff classification and a regional value-content requirement, and the good satisfies all other applicable requirements of this appendix; or (c) the good satisfies the applicable regional value-content requirement, where the applicable rule in Schedule I for the tariff provision under which the good is classified specifies only a regional value-content requirement, and the good satisfies all other applicable requirements of this appendix. Goods made exclusively from originating materials (3) A good originates in the territory of a NAFTA country where the good is produced entirely in the territory of one or more of the NAFTA countries exclusively from originating materials. Exceptions to the change in tariff classification requirement (4) A good originates in the territory of a NAFTA country where (a) except in the case of a good provided for in any of Chapters 61 through 63, (i) the good is produced entirely in the territory of one or more of the NAFTA countries, (ii) one or more of the non-originating materials used in the production of the good do not undergo an applicable change in tariff classification because the materials were imported together, whether or not with originating materials, into the territory of a NAFTA country as an unassembled or disassembled good, and were classified as an assembled good pursuant to Rule 2(a) of the General Rules for the Interpretation of the Harmonized System, (iii) the regional value content of the good, calculated in accordance with section 6, is not less than 60 percent where the transaction value method is used, or is not less than 50 percent where the net cost method is used, and (iv) the good satisfies all other applicable requirements of this appendix, including any applicable, higher regional value-content requirement provided for in section 13 or Schedule I; or (b) except in the case of a good provided for in any of Chapters 61 through 63, (i) the good is produced entirely in the territory of one or more of the NAFTA countries, (ii) one or more of the non-originating materials used in the production of the good do not undergo an applicable change in tariff classification because (A) those materials are provided for under the Harmonized System as parts of the good, and (B) the heading for the good provides for both the good and its parts and is not further subdivided into subheadings, or the subheading for the good provides for both the good and its parts, (iii) the non-originating materials that do not undergo a change in tariff classification in the circumstances described in subparagraph (ii) and the good are not both classified as parts of goods under the heading or subheading referred to in subparagraph (ii)(B), (iv) each of the non-originating materials that is used in the production of the good and is not referred to in subparagraph (iii) undergoes an applicable change in tariff classification or satisfies any other applicable requirement set out in Schedule I, (v) the regional value content of the good, calculated in accordance with section 6, is not less than 60 percent where the transaction value method is used, or is not less than 50 percent where the net cost method is used, and (vi) the good satisfies all other applicable requirements of this appendix, including any applicable, higher regional value-content requirement provided for in section 13 or Schedule I. Interpretation: heading or subheading which provides for both a good and parts of the good (5) For purposes of subsection (4)(b), (a) the determination of whether a heading or subheading provides for a good and its parts shall be made on the basis of the nomenclature of the heading or subheading and the relevant Section or Chapter Notes, in accordance with the General Rules for the Interpretation of the Harmonized System; and (b) where, in accordance with the Harmonized System, a heading includes parts of goods by application of a Section Note or Chapter Note of the Harmonized System and the subheadings under that heading do not include a subheading designated “Parts”, a subheading designated “Other” under that heading shall be considered to cover only the goods and parts of the goods that are themselves classified under that subheading. (6) For purposes of subsection (2), where Schedule I sets out two or more alternative rules for the tariff provision under which a good is classified, if the good satisfies the requirements of one of those rules, it need not satisfy the requirements of another of the rules in order to qualify as an originating good. Special rule for certain goods (7) A good originates in the territory of a NAFTA country if the good is referred to in Table 308.1.1 of Section B of Annex 308.1 to Chapter Three of the Agreement and is imported from the territory of a NAFTA country at a time when the NAFTA countries' most-favored-nation rate of duty for that good is in accordance with paragraph 1 of Section A of that Annex. Self-produced material may be a material for determining applicability of rules of origin (8) For purposes of determining whether non-originating materials undergo an applicable change in tariff classification, a self-produced material may, at the choice of the producer of a good into which the self-produced material is incorporated, be considered as an originating material or non-originating material, as the case may be, used in the production of that good. (9) The following example is an “Example” as referred to in section 2(4). Example: section 4(8), Self-produced Materials as Materials for Purposes of Determining Whether Non-originating Materials Undergo an Applicable Change in Tariff Classification

Producer A, located in a NAFTA country, produces Good A. In the production process, Producer A uses originating Material X and non-originating Material Y to produce Material Z. Material Z is a self-produced material that will be used to produce Good A.

The rule set out in Schedule I for the heading under which Good A is classified specifies a change in tariff classification from any other heading. In this case, both Good A and the non-originating Material Y are of the same heading. However, the self-produced Material Z is of a heading different than that of Good A.

For purposes of determining whether the non-originating materials that are used in the production of Good A undergo the applicable change in tariff classification, Producer A has the option to consider the self-produced Material Z as the material that must undergo a change in tariff classification. As Material Z is of a heading different than that of Good A, Material Z satisfies the applicable change in tariff classification and Good A would qualify as an originating good.

SECTION 5. DE MINIMIS De minimis rule for non-originating materials that do not undergo subject to authorization, a required tariff change (1) Except as otherwise provided in subsection (4), a good shall be considered to originate in the territory of a NAFTA country where the value of all non-originating materials that are used in the production of the good and that do not undergo an applicable change in tariff classification as a result of production occurring entirely in the territory of one or more of the NAFTA countries is not more than seven percent (a) of the transaction value of the good determined in accordance with Schedule II with respect to the transaction in which the producer of the good sold the good, adjusted to an F.O.B. basis, or (b) of the total cost of the good, where there is no transaction value for the good under section 2(1) of Schedule III or the transaction value of the good is unacceptable under section 2(2) of that Schedule, provided that, (c) if, under the rule in which the applicable change in tariff classification is specified, the good is also subject to a regional value-content requirement, the value of those non-originating materials shall be taken into account in calculating the regional value content of the good in accordance with the method set out for that good, and (d) the good satisfies all other applicable requirements of this appendix. (2) For purposes of subsection (1), where (a) Schedule I sets out two or more alternative rules for the tariff provision under which the good is classified, and (b) the good, in accordance with subsection (1), is considered to originate under one of those rules, the good is not required to satisfy the requirements specified in any alternative rule referred to in paragraph (a). (3) For purposes of subsection (1), in the case of a good that is provided for in heading 2402, the percentage shall be nine percent instead of seven percent. Exceptions (4) Subsections (1) and (2) do not apply to (a) a non-originating material provided for in Chapter 4 or tariff items 1901.90.31, 1901.90.41 and 1901.90.81 (dairy preparations containing over 10 percent by weight of milk solids) that is used in the production of a good provided for in Chapter 4; (b) a non-originating material provided for in Chapter 4 or tariff items 1901.90.31, 1901.90.41 and 1901.90.81 (dairy preparations containing over 10 percent by weight of milk solids) that is used in the production of a good provided for in any of tariff items 1901.10.10 (infant preparations containing over 10 percent by weight of milk solids), 1901.20.10 (mixes and doughs, containing over 25 percent by weight of butterfat, not put up for retail sale), 1901.90.31, 1901.90.41 and 1901.90.81 (dairy preparations containing over 10 percent by weight of milk solids), heading 2105 and tariff items 2106.90.05, 2106.90.13, 2106.90.41, 2106.90.51 and 2106.90.61 (preparations containing over 10 percent by weight of milk solids), 2202.90.10 and 2202.90.20 (beverages containing milk) and 2309.90.31 (animal feeds containing over 10 percent by weight of milk solids); (c) a non-originating material provided for in any of heading 0805 and subheadings 2009.11 through 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 (concentrated fruit or vegetable juice of any single fruit or vegetable, fortified with minerals or vitamins) and 2202.90.30, 2202.90.35 and 2202.90.36 (fruit or vegetable juice of any single fruit or vegetable, fortified with minerals or vitamins); (d) a non-originating material provided for in Chapter 9 that is used in the production of a good provided for in tariff item 2101.11.21 (instant coffee, not flavored); (e) a non-originating material provided for in Chapter 15 that is used in the production of a good provided for in any of headings 1501 through 1508, 1512, 1514 and 1515; (f) a non-originating material provided for in heading 1701 that is used in the production of a good provided for in any of headings 1701 through 1703; (g) a non-originating material provided for in Chapter 17 or heading 1805 that is used in the production of a good provided for in subheading 1806.10; (h) a non-originating material provided for in any of headings 2203 through 2208 that is used in the production of a good provided for in any of headings 2207 through 2208; (i) a non-originating material that is used in the production of any non-portable gas stoves or ranges of subheading 7321.11 or 7321.19, subheadings 8415.10, 8415.20 through 8415.83, 8418.10 through 8418.21, household type refrigerators, other than electrical absorption type of subheading 8418.29, subheadings 8418.30 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 stoves or ranges); (j) a printed circuit assembly that is a non-originating material used in the production of a good, where the applicable change in tariff classification for the good places restrictions on the use of that non-originating material, such as by prohibiting, or limiting the quantity of, that non-originating material; (k) a non-originating material that is a single juice ingredient provided for in heading 2009 that is used in the production of a good provided for in any of subheading 2009.90 and tariff items 2106.90.18 (concentrated mixtures of fruit or vegetable juice, fortified with minerals or vitamins) and 2202.90.37 (mixtures of fruit or vegetable juices, fortified with minerals or vitamins); (l) a non-originating material that is used in the production of a good provided for in any of Chapters 1 through 27, unless the non-originating material is of a different subheading than the good for which origin is being determined under this section; or (m) a non-originating material that is used in the production of a good provided for in any of Chapters 50 through 63. De minimis rule for regional value-content requirement (5) A good that is subject to a regional value-content requirement shall be considered to originate in the territory of a NAFTA country and shall not be required to satisfy that requirement where (a) the value of all non-originating materials used in the production of the good is not more than seven percent (i) of the transaction value of the good determined in accordance with Schedule II with respect to the transaction in which the producer of the good sold the good, adjusted to an F.O.B. basis, or (ii) of the total cost of the good, where there is no transaction value for the good under section 2(1) of Schedule III or the transaction value of the good is unacceptable under section 2(2) of that Schedule; and (b) the good satisfies all other applicable requirements of this appendix. De minimis rule for textile goods (6) A good provided for in any of Chapters 50 through 63, that does not originate in the territory of a NAFTA country because certain fibers or yarns that are used in the production of the component of the good that determines the tariff classification of the good do not undergo an applicable change in tariff classification as a result of production occurring entirely in the territory of one or more of the NAFTA countries, shall be considered to originate in the territory of a NAFTA country if (a) the total weight of all those fibers or yarns is not more than seven percent of the total weight of that component; and (b) the good satisfies all other applicable requirements of this appendix. (7) For purposes of subsection (6), (a) the component of a good that determines the tariff classification of that good shall be identified in accordance with the first of the following General Rules for the Interpretation of the Harmonized System under which the identification can be determined, namely, Rule 3(b), Rule 3(c) and Rule 4; and (b) where the component of the good that determines the tariff classification of the good is a blend of two or more yarns or fibers, all yarns and fibers used in the production of the component shall be taken into account in determining the weight of fibers and yarns in that component. (8) For purposes of subsections (1) and (5), the value of non-originating materials shall be determined in accordance with sections 7(1) through (4). Calculation of “total cost” for de minimis rules: choice of methods (9) For purposes of subsection (1)(b) and subsection (5)(a)(ii), the total cost of a good shall be, at the choice of the producer of the good, (a) the total cost incurred with respect to all goods produced by the producer that can be reasonably allocated to that good in accordance with Schedule VII; or (b) the aggregate of each cost that forms part of the total cost incurred with respect to that good that can be reasonably allocated to that good in accordance with Schedule VII. Calculation of total cost; application of Schedules IX and X for determining value of non-originating materials (10) Total cost under subsection (9) consists of the costs referred to in section 2(6), and is calculated in accordance with that subsection and section 2(7). (11) For purposes of determining the value under subsection (1) of non-originating materials that do not undergo an applicable change in tariff classification, where Schedule X is not being used to determine the value of those non-originating materials, (a) if the value of those non-originating materials is being determined as a percentage of the transaction value of the good and the producer chooses under section 6(10) that one of the methods set out in Schedule IX be used to determine the value of those non-originating materials for purposes of calculating the regional value content of the good, the value of those non-originating materials shall be determined in accordance with that method; (b) if (i) the value of those non-originating materials is being determined as a percentage of the total cost of the good, (ii) under the rule in which the applicable change in tariff classification is specified, the good is also subject to a regional value-content requirement and subsection (5)(a) does not apply with respect to that good, (iii) the regional value content of the good is calculated on the basis of the net cost method, and (iv) the producer chooses under section 6(15), 11(1), (3) or (6), 12(1) or 13(4) that the regional value content of the good be calculated over a period, the value of those non-originating materials shall be the sum of the values of non-originating materials determined in accordance with that choice, divided by the number of units of the goods with respect to which the choice is made; (c) if (i) the value of those non-originating materials is being determined as a percentage of the total cost of the good, (ii) under the rule in which the applicable change in tariff classification is specified, the good is not also subject to a regional value-content requirement or subsection (5)(a) applies with respect to that good, and (iii) the producer chooses under section 2(7)(b) that, for purposes of section 5(9), the total cost of the good be calculated over a period, the value of those non-originating materials shall be the sum of the values of non-originating materials divided by the number of units produced during that period; and (d) in any other case, the value of those non-originating materials may, at the choice of the producer, be determined in accordance with one of the methods set out in Schedule IX. (12) For purposes of subsection (5), the value of the non-originating materials used in the production of the good may, at the choice of the producer, be determined in accordance with one of the methods set out in Schedule IX. Examples illustrating de minimis rules (13) Each of the following examples is an “Example” as referred to in section 2(4). Example 1: section 5(1)

Producer A, located in a NAFTA country, uses originating materials and non-originating materials in the production of copper anodes provided for in heading 7402. The rule set out in Schedule I for heading 7402 specifies a change in tariff classification from any other chapter. There is no applicable regional value-content requirement for this heading. Therefore, in order for the copper anode to qualify as an originating good under the rule set out in Schedule I, Producer A may not use in the production of the copper anode any non-originating material provided for in Chapter 74.

All of the materials used in the production of the copper anode are originating materials, with the exception of a small amount of copper scrap provided for in heading 7404, that is in the same chapter as the copper anode. Under section 5(1), if the value of the non-originating copper scrap does not exceed seven percent of the transaction value of the copper anode or the total cost of the copper anode, whichever is applicable, the copper anode would be considered an originating good.

Example 2: section 5(2)

Producer A, located in a NAFTA country, uses originating materials and non-originating materials in the production of ceiling fans provided for in subheading 8414.51. There are two alternative rules set out in Schedule I for subheading 8414.51, one of which specifies a change in tariff classification from any other heading. The other rule specifies both a change in tariff classification from the subheading under which parts of the ceiling fans are classified and a regional value-content requirement. Therefore, in order for the ceiling fan to qualify as an originating good under the first of the alternative rules, all of the materials that are classified under the subheading for parts of ceiling fans and used in the production of the completed ceiling fan must be originating materials.

In this case, all of the non-originating materials used in the production of the ceiling fan satisfy the change in tariff classification set out in the rule that specifies a change in tariff classification from any other heading, with the exception of one non-originating material that is classified under the subheading for parts of ceiling fans. Under section 5(1), if the value of the non-originating material that does not satisfy the change in tariff classification specified in the first rule does not exceed seven percent of the transaction value of the ceiling fan or the total cost of the ceiling fan, whichever is applicable, the ceiling fan would be considered an originating good. Therefore, under section 5(2), the ceiling fan would not be required to satisfy the alternative rule that specifies both a change in tariff classification and a regional value-content requirement.

Example 3: section 5(2)

Producer A, located in a NAFTA country, uses originating materials and non-originating materials in the production of plastic bags provided for in subheading 3923.29. The rule set out in Schedule I for subheading 3923.29 specifies both a change in tariff classification from any other heading, except from subheadings 3920.20 or 3920.71, under which certain plastic materials are classified, and a regional value-content requirement. Therefore, with respect to that part of the rule that specifies a change in tariff classification, in order for the plastic bag to qualify as an originating good, any plastic materials that are classified under subheading 3920.20 or 3920.71 and that are used in the production of the plastic bag must be originating materials.

In this case, all of the non-originating materials used in the production of the plastic bag satisfy the specified change in tariff classification, with the exception of a small amount of plastic materials classified under subheading 3920.71. Section 5(1) provides that the plastic bag can be considered an originating good if the value of the non-originating plastic materials that do not satisfy the specified change in tariff classification does not exceed seven percent of the transaction value of the plastic bag or the total cost of the plastic bag, whichever is applicable. In this case, the value of those non-originating materials that do not satisfy the specified change in tariff classification does not exceed the seven percent limit.

However, the rule set out in Schedule I for subheading 3923.29 specifies both a change in tariff classification and a regional value-content requirement. Therefore, under section 5(1)(c), in order to be considered an originating good, the plastic bag must also, except as otherwise provided in section 5(5), satisfy the regional value-content requirement specified in that rule. As provided in section 5(1)(c), the value of the non-originating materials that do not satisfy the specified change in tariff classification, together with the value of all other non-originating materials used in the production of the plastic bag, will be taken into account in calculating the regional value content of the plastic bag.

Example 4: section 5(5)

Producer A, located in a NAFTA country, primarily uses originating materials in the production of shoes provided for in heading 6405. The rule set out in Schedule I for heading 6405 specifies both a change in tariff classification from any subheading other than subheadings 6401.10 through 6406.10 and a regional value-content requirement.

With the exception of a small amount of materials provided for in Chapter 39, all of the materials used in the production of the shoes are originating materials.

Under section 5(5), if the value of all of the non-originating materials used in the production of the shoes does not exceed seven percent of the transaction value of the shoes or the total cost of the shoes, whichever is applicable, the shoes are not required to satisfy the regional value-content requirement specified in the rule set out in Schedule I in order to be considered originating goods.

Example 5: section 5(5)

Producer A, located in a NAFTA country, produces barbers' chairs provided for in subheading 9402.10. The rule set out in Schedule I for goods provided for in heading 9402 specifies a change in tariff classification from any other chapter. All of the materials used in the production of these chairs are originating materials, with the exception of a small quantity of non-originating materials that are classified as parts of barbers' chairs. These parts undergo no change in tariff classification because subheading 9402.10 provides for both barbers' chairs and their parts.

Although Producer A's barbers' chairs do not qualify as originating goods under the rule set out in Schedule I, section 4(4)(b) provides, among other things, that, where there is no change in tariff classification from the non-originating materials to the goods because the subheading under which the goods are classified provides for both the goods and their parts, the goods shall qualify as originating goods if they satisfy a specified regional value-content requirement.

However, under section 5(5), if the value of the non-originating materials does not exceed seven percent of the transaction value of the barbers' chairs or the total cost of the barbers' chairs, whichever is applicable, the barbers' chairs will be considered originating goods and are not required to satisfy the regional value-content requirement set out in section 4(4)(b)(v).

Example 6: sections 5 (6) and (7)

Producer A, located in a NAFTA country, produces women's dresses provided for in subheading 6204.41 from fine wool fabric of heading 5112. This fine wool fabric, also produced by Producer A, is the component of the dress that determines its tariff classification under subheading 6204.41.

The rule set out in Schedule I for subheading 6204.41, under which the dress is classified, specifies both a change in tariff classification from any other chapter, except from those headings and chapters under which certain yarns and fabrics, including combed wool yarn and wool fabric, are classified, and a requirement that the good be cut and sewn or otherwise assembled in the territory of one or more of the NAFTA countries.

Therefore, with respect to that part of the rule that specifies a change in tariff classification, in order for the dress to qualify as an originating good, the combed wool yarn and the fine wool fabric made therefrom that are used by Producer A in the production of the dress must be originating materials.

At one point Producer A uses a small quantity of non-originating combed wool yarn in the production of the fine wool fabric. Under section 5(6), if the total weight of the non-originating combed wool yarn does not exceed seven percent of the total weight of all the yarn used in the production of the component of the dress that determines its tariff classification, that is, the wool fabric, the dress would be considered an originating good.

PART III SECTION 6. REGIONAL VALUE CONTENT (1) Except as otherwise provided in subsection (6), the regional value content of a good shall be calculated, at the choice of the exporter or producer of the good, on the basis of either the transaction value method or the net cost method. Transaction Value Method (2) The transaction value method for calculating the regional value content of a good is as follows: $$ where RVC is the regional value content of the good, expressed as a percentage; TV is the transaction value of the good, determined in accordance with Schedule II with respect to the transaction in which the producer of the good sold the good, adjusted to an F.O.B. basis; and VNM is the value of non-originating materials used by the producer in the production of the good, determined in accordance with section 7. Net Cost Method (3) The net cost method for calculating the regional value content of a good is as follows: $$ where RVC is the regional value content of the good, expressed as a percentage; NC is the net cost of the good, calculated in accordance with subsection (11); and VNM is the value of non-originating materials used by the producer in the production of the good, determined, except as otherwise provided in sections 9 and 10, in accordance with section 7. VNM does not include value of non-originating materials used in originating material (4) Except as otherwise provided in section 9 and section 10(1)(d), for purposes of calculating the regional value content of a good under subsection (2) or (3), the value of non-originating materials used by a producer in the production of the good shall not include (a) the value of any non-originating materials used by another producer in the production of originating materials that are subsequently acquired and used by the producer of the good in the production of that good; or (b) the value of any non-originating materials used by the producer in the production of a self-produced material that is an originating material and is designated as an intermediate material. (5) For purposes of subsection (4), (a) in the case of any self-produced material that is not designated as an intermediate material, only the value of any non-originating materials used in the production of the self-produced material shall be included in the value of non-originating materials used in the production of the good; and (b) where a self-produced material that is designated as an intermediate material and is an originating material is used by the producer of the good with non-originating materials (whether or not those non-originating materials are produced by that producer) in the production of the good, the value of those non-originating materials shall be included in the value of non-originating materials. Net Cost Method required in certain circumstances (6) The regional value content of a good shall be calculated only on the basis of the net cost method where (a) there is no transaction value for the good under section 2(1) of Schedule III; (b) the transaction value of the good is unacceptable under section 2(2) of Schedule III; (c) the good is sold by the producer to a related person and the volume, by units of quantity, of sales by that producer of identical goods or similar goods, or any combination thereof, to related persons during the six month period immediately preceding the month in which the goods are sold exceeds 85 percent of the producer's total sales to all persons, whether or not related and regardless of location, after “the producer's total sales”of identical goods or similar goods, or any combination thereof, during that period; (d) the good is (i) a motor vehicle provided for in any of headings 8701 and 8702, subheadings 8703.21 through 8703.90 and headings 8704, 8705 and 8706, (ii) a good provided for in a tariff provision listed in Schedule IV or an automotive component assembly, automotive component, sub-component or listed material, and is for use in a motor vehicle referred to in subparagraph (i), either as original equipment or as an after-market part, (iii) a good provided for in any of subheadings 6401.10 through 6406.10, or (iv) a good provided for in heading 8469; (e) the exporter or producer chooses to accumulate with respect to the good in accordance with section 14; or (f) the good is an intermediate material and is subject to a regional value-content requirement. Option to change from TVM to NCM for calculation of regional value content (7) If the exporter or producer of a good calculates the regional value content of the good on the basis of the transaction value method and the customs administration of a NAFTA country subsequently notifies that exporter or producer in writing, during the course of a verification of origin, that (a) the transaction value of the good, as determined by the exporter or producer, is required to be adjusted under section 4 of Schedule II or is unacceptable under section 2(2) of Schedule III, there is no transaction value for the good under section 2(1) of Schedule III or the transaction value method may not be used because of the application of subsection (6)(c), or (b) the value of any material used in the production of the good, as determined by the exporter or producer, is required to be adjusted under section 5 of Schedule VIII or is unacceptable under section 2(3) of Schedule VIII, or there is no transaction value for the material under section 2(2) of Schedule VIII or the transaction value method may not be used to calculate the regional value content of the material because of the application of subsection (6)(c), the exporter or producer may choose that the regional value content of the good be calculated on the basis of the net cost method, in which case the calculation must be made within 60 days after the producer receives the notification, or such longer period as that customs administration specifies. Change from NCM to TVM not permitted (8) If the exporter or producer of a good chooses that the regional value content of the good be calculated on the basis of the net cost method and the customs administration of a NAFTA country subsequently notifies that exporter or producer in writing, during the course of a verification of origin, that the good does not satisfy the applicable regional value-content requirement, the exporter or producer of the good may not recalculate the regional value content on the basis of the transaction value method. (9) Nothing in subsection (7) shall be construed as preventing any review and appeal under Article 510 of the Agreement, as implemented in each NAFTA country, of an adjustment to or a rejection of (a) the transaction value of the good; or (b) the value of any material used in the production of the good. Application of Schedule IX for determining value of “identical” non-originating materials under TVM (10) For purposes of the transaction value method, where non-originating materials that are the same as one another in all respects, including physical characteristics, quality and reputation but excluding minor differences in appearance, are used in the production of a good, the value of those non-originating materials may, at the choice of the producer of the good, be determined in accordance with one of the methods set out in Schedule IX. Options for calculating the net cost of a good (11) For purposes of subsection (3), the net cost of a good may be calculated, at the choice of the producer of the good, by (a) calculating the total cost incurred with respect to all goods produced by that producer, subtracting any excluded costs that are included in that total cost, and reasonably allocating, in accordance with Schedule VII, the remainder to the good; (b) calculating the total cost incurred with respect to all goods produced by that producer, reasonably allocating, in accordance with Schedule VII, that total cost to the good, and subtracting any excluded costs that are included in the amount allocated to that good; or (c) reasonably allocating, in accordance with Schedule VII, each cost that forms part of the total cost incurred with respect to the good so that the aggregate of those costs does not include any excluded costs. Calculation of total cost (12) Total cost under subsection (11) consists of the costs referred to in section 2(6), and is calculated in accordance with that subsection. Calculation of net cost; excluded costs (13) For purposes of calculating net cost under subsection (11), (a) excluded costs shall be the excluded costs that are recorded on the books of the producer of the good; (b) excluded costs that are included in the value of a material that is used in the production of the good shall not be subtracted from or otherwise excluded from the total cost; and (c) excluded costs do not include any amount paid for research and development services performed in the territory of a NAFTA country. Non-allowable interest; determination under Schedule XI (14) For purposes of calculating non-allowable interest costs, the determination of whether interest costs incurred by a producer are more than 700 basis points above the yield on debt obligations of comparable maturities issued by the federal government of the country in which the producer is located shall be made in accordance with Schedule XI. Use of “averaging” over a period to calculate RVC under NCM; period cannot be changed (15) For purposes of the net cost method, the regional value content of the good, other than a good with respect to which a choice to average may be made under section 11(1), (3) or (6), 12(1) or 13(4), may be calculated, where the producer chooses to do so, by (a) calculating the sum of the net costs incurred and the sum of the values of non-originating materials used by the producer of the good with respect to the good and identical goods or similar goods, or any combination thereof, produced in a single plant by the producer over (i) a month, (ii) any consecutive three month or six month period that falls within and is evenly divisible into the number of months of the producer's fiscal year remaining at the beginning of that period, or (iii) the producer's fiscal year; and (b) using the sums referred to in paragraph (a) as the net cost and the value of non-originating materials, respectively. (16) The calculation made under subsection (15) shall apply with respect to all units of the good produced during the period chosen by the producer under subsection (15)(a). (17) A choice made under subsection (15) may not be rescinded or modified with respect to the goods or the period with respect to which the choice is made. Choice of averaging period cannot be changed for remainder of fiscal year (18) Where a producer chooses a one, three or six month period under subsection (15) with respect to goods, the producer shall be considered to have chosen under that subsection a period or periods of the same duration for the remainder of the producer's fiscal year with respect to those goods. Choice of net cost method cannot be changed for remainder of the fiscal year (19) Where the net cost method is required to be used or has been chosen and a choice has been made under subsection (15), the regional value content of the good shall be calculated on the basis of the net cost method over the period chosen under that subsection and for the remainder of the producer's fiscal year. Obligation to perform self-analysis and give notification of changed circumstance if RVC calculated on basis of estimated costs (20) Except as otherwise provided in sections 11(10), 12(11) and 13(10), where the producer of a good has calculated the regional value content of the good under the net cost method on the basis of estimated costs, including standard costs, budgeted forecasts or other similar estimating procedures, before or during the period chosen in subsection (15)(a), the producer shall conduct an analysis at the end of the producer's fiscal year of the actual costs incurred over the period with respect to the production of the good and, if the good does not satisfy the regional value-content requirement on the basis of the actual costs during that period, immediately inform any person to whom the producer has provided a Certificate of Origin for the good, or a written statement that the good is an originating good, that the good is a non-originating good. Option to treat any material as non-originating (21) For purposes of calculating the regional value content of a good, the producer of that good may choose to treat any material used in the production of that good as a non-originating material. Examples of Calculation of RVC under TVM and NCM (22) Each of the following examples is an “Example” as referred to in section 2(4). Example 1: example of point of direct shipment (with respect to adjusted to an F.O.B. basis)

A producer has only one factory, at which the producer manufactures finished office chairs. Because the factory is located close to transportation facilities, all units of the finished good are stored in a factory warehouse 200 meters from the end of the production line. Goods are shipped worldwide from this warehouse. The point of direct shipment is the warehouse.

Example 2: examples of point of direct shipment (with respect to adjusted to an F.O.B. basis)

A producer has six factories, all located within the territory of one of the NAFTA countries, at which the producer produces garden tools of various types. These tools are shipped worldwide, and orders usually consist of bulk orders of various types of tools. Because different tools are manufactured at different factories, the producer decided to consolidate storage and shipping facilities and ships all finished products to a large warehouse located near the seaport, from which all orders are shipped. The distance from the factories to the warehouse varies from 3 km to 130 km. The point of direct shipment for each of the goods is the warehouse.

Example 3: examples of point of direct shipment (with respect to adjusted to an F.O.B. basis)

A producer has only one factory, located near the center of one of the NAFTA countries, at which the producer manufactures finished office chairs. The office chairs are shipped from that factory to three warehouses leased by the producer, one on the west coast, one near the factory and one on the east coast. The office chairs are shipped to buyers from these warehouses, the shipping location depending on the shipping distance from the buyer. Buyers closest to the west coast warehouse are normally supplied by the west coast warehouse, buyers closest to the east coast are normally supplied by the warehouse located on the east coast and buyers closest to the warehouse near the factory are normally supplied by that warehouse. In this case, the point of direct shipment is the location of the warehouse from which the office chairs are normally shipped to customers in the location in which the buyer is located.

Example 4: section 6(3), net cost method

A producer located in NAFTA country A sells Good A that is subject to a regional value-content requirement to a buyer located in NAFTA country B. The producer of Good A chooses that the regional value content of that good be calculated using the net cost method. All applicable requirements of this appendix, other than the regional value-content requirement, have been met. The applicable regional value-content requirement is 50 percent.

In order to calculate the regional value-content of Good A, the producer first calculates the net cost of Good A. Under section 6(11)(a), the net cost is the total cost of Good A (the aggregate of the product costs, period costs and other costs) per unit, minus the excluded costs (the aggregate of the sales promotion, marketing and after-sales service costs, royalties, shipping and packing costs and non-allowable interest costs) per unit. The producer uses the following figures to calculate the net cost: