PRACTIQUE LEGAL - International Procedures for Verifying the Origin of Products

Free trade agreements, including the Free Trade Agreement signed by Canada, United States of America and Mexico (NAFTA), contain provisions regulating the rules of origin for determining whether a product or merchandise originates in a member country of a free trade agreement, so that such item is entitled to receive preferential customs duty treatment and a reduction in regular customs duties upon its importation into countries that belong to the free trade agreement. In order to allow for verification of origin of merchandise, treaties and rules, issued by member countries of international trade agreements, exist in the domestic sphere and contain verification procedures used to corroborate the origin of a product that will be or has been imported to a member country of a free trade agreement. Such products are accompanied by certificates of origin issued by the producer or exporter of the product. These domestic administrative rules of local customs authorities establish, in general terms, two forms of verifying the origin of merchandise: (i) through the authority of a verification and internal auditing procedure exercised at the time of importation of the products covered by a certificate of origin and an import declaration, or after the importation of such products so long as the government’s authority to review verification has not expired; or (ii) through international verification of origin procedures initiated by customs officials of one country to be carried out in the territory of another country or countries, which are members of a free trade agreement. In the first case, the verification and auditing authority carried out in the country of importation seeks to verify whether procedures were followed by an importer. In the second case, such deals with verification procedures by customs officials carried out in the territory of other countries and are designed to review the origin designated by the producers or exporters of the product. Domestic verifications of origin fall within the auditing authority and jurisdiction of the various countries and are essentially prescribed by local legal provisions and presided over by local judicial authorities acting through the domestic court system. The fundamental problem with the second type of rule of origin verification procedure at the international level, when a country carries out verification and auditing authority in the territory of another country, arises when applying on an extraterritorial basis the administrative procedural rules of the country seeking to review product origin in another country’s territory, in addition to the international procedural rules that may be contained in a free trade agreement. This issue is very complex and has given rise to certain problems of application and a large number of lawsuits seeking to resolve the inefficiencies of such international procedures. In accordance with Article 506 of the NAFTA, any of the member countries of such free trade agreement may carry out verifications of origin procedures on merchandise in the territory of the other member countries through: (i) inspection visits made at the manufacturing or distribution point of the producers or importers; or (ii) international documentary requests made through the delivery of questionnaires seeking written information to be provided by the producers or exporters in question. In the case of Mexico, the most frequent practice is the second method of verification, which involves sending questionnaires abroad to verify the origin of goods that have been ultimately imported into Mexico. The NAFTA and its secondary regulations establish that a failure to answer such questionnaires is sufficient cause to legally conclude that goods imported into Mexico by the importer do not comply with the rules of origin claimed in the certificate of origin and which facilitate an exemption or reduction in import duties. What legal effects result when a producer or exporter does not answer verification questionnaires at the request of customs authorities seeking to confirm the origin of imported merchandise? Before answering this important question, one must put into perspective how dangerous this procedure can be when it is directed at the exporter or producer of the merchandise, and not the importer of such merchandise. In denying the origin of merchandise claimed because of a failure to answer a verification of origin questionnaire, local customs authorities will probably also seek to hold the importer responsible even when the importer has no knowledge or awareness of the verification of origin questionnaires that were sent to the producer, nor does such importer have any control over the actions and conduct of the producers or exporters who sold the merchandise or delivered the merchandise imported into Mexico. In such manner, customs authorities may issue tax penalties denying the claimed origin and preferential customs duty treatment, including fines, late charges and inflationary adjustments. Cases have arisen in which Mexico’s customs authorities have confiscated and expropriated the imported goods or assessed a fine for their commercial value. What is the commercial liability of producers or exporters from the United States of America or Canada to Mexican importers when Mexico’s customs authorities issue tax penalties and fines against the Mexican importer as a result of a negation of the recognition of origin when such producers or exporters fail to answer verification of origin questionnaires sent abroad by the Mexican government? The answer to this question is more than just fiscal or customs in nature, but instead relates to the contractual and mercantile agreements that the parties have expressly or implicitly established between themselves as buyers and sellers of the products sold as part of the international sale and distribution of such products. The reaction of producers or exporters from the United States or Canada, upon receiving a verification of origin questionnaire issued by Mexico’s customs authorities, is, generally, not to trust such questionnaire. The questionnaires often cause uncertainty in how to deal with the legal authorities of another country, and a possible lack of confidence in the proper use of commercial and confidential information arising from international sales transactions that may be provided by such producers and exporters. In addition, the original questionnaires are prepared in the Spanish language, not in English, although most of the time the questionnaires are delivered with some type of translation. These questionnaires are accompanied by rulings from the customs authorities citing the application of certain NAFTA rules, but also many legal provisions found in Mexican law, which are absolutely unfamiliar to foreign exporters or producers. In addition, in a fair number of cases, the manner in which notice of the verification of origin procedure delivering the questionnaires and related resolutions fails to comply with applicable rules, which gives rise to numerous lawsuits and defenses, as well as a potential judicial resolution rejecting the validity of the verification of origin procedure being carried out on the merchandise in question. In these cases, decisions have been issued in arbitration proceedings, or in lawsuits before judicial authorities, in which an implicit guarantee has been established or an express commercial guarantee, concerning the origin of the product, and as a result contractual liability of sellers of goods to pay damages and losses caused to their Mexican importer follows when such foreign sellers fail to timely respond to verification of origin questionnaires. Mexican customs authorities have also issued tax penalties regarding the merchandise imported into Mexico, and foreign producers/exporters have been ordered to reimburse the attorneys’ fees and expenses, which, generally, are quite high. The best recommendation for any exporter or producer in the United States or Canada, when receiving a verification of origin questionnaire of this nature, is to seek competent legal counsel who understand international customs issues and who may proceed to prepare timely responses to the questionnaires, providing the information and documentation that would support the claimed origin of the products that were accompanied by the certificates of origin in question. It would be a serious error to fail to respond to questionnaires, because the legal effect in Mexico is that Mexico’s customs authorities will disregard the claimed origin of the products and will proceed to issue tax penalties, fines and late interest against the party who imported the products into Mexico, which may constitute a breach of contract or cause non-contractual liability that will result in an international lawsuit and the payment of amounts much higher than the value of the products sold to the Mexican importer. There are some cases in which producers and exporters, in an effort to protect their confidential information or businesses, prefer to contest the legality of verification of origin procedures carried out through questionnaires, or state that the proceeding failed to provide proper notice of the possible resolution establishing the rejection of origin claimed for certain products. Even though at the end of the day it is possible that said producers or exporters will be successful in defending these types of cases, unfortunately, the time this takes is much longer than the time the Mexican authorities need to issue tax penalties against Mexican importers. This type of situation exposes exporters or producers to potential legal liability. The best course of action is to provide a timely response to verification of origin questionnaires, even though such possibly were not correctly delivered or notified, and work together with product importers in order to avoid legal responsibility derived from international sales of goods contracts and according to the general commercial warranty rules implicit in the quality and origin of the products. Finally, it is important to state that even though an exporter or producer has not responded to a verification of origin questionnaire, Mexican importers may defend themselves against tax liquidations and penalties issued by Mexico’s customs authorities and prove on their own that the origin of the products and merchandise is valid in order to rebut the Mexican government’s rejection of the claimed origin of the merchandise based on a failure of a foreign exporter or producer to respond to a verification origin questionnaire, or when such response is deficient. Nevertheless, for the importer, this procedure can be very costly and will normally lead the importer to try to collect the cost of defense from the original foreign exporter or producer.