Tax Insights: United States-Mexico-Canada Agreement - Customs considerations for Canadian traders

October 04, 2018

Issue 2018-34

In brief

On September 30, 2018, Canada, the United States and Mexico agreed to a new and modern trade agreement called the United States-Mexico-Canada Agreement (USMCA). The USMCA:

  • revises and updates the terms of the existing North American Free Trade Agreement (NAFTA) between the three countries and will replace NAFTA once it enters into force
  • maintains the predominantly tariff-free market access that is currently available under NAFTA

The USMCA will only enter into force after the ratification process to implement the agreement is completed by all three countries.

This Tax Insights provides selected highlights of this agreement from a Canadian customs perspective. Additional commentary will follow on how this comprehensive and complex agreement may otherwise impact your business. 

In detail

Automotive rules of origin  

Under the USMCA, the automotive rules of origin will require:

  • a 75% regional value content (RVC) for passenger vehicles (up from 62.5% under NAFTA)
  • the value of non-originating material to be calculated under a different means, which will impact the level of RVC that is achieved
  • a 70% North American steel and aluminum requirement
  • specific content requirements for major components such as engines and transmissions
  • a significant portion of a vehicle to be produced by workers earning US$16 per hour or more (not required under NAFTA)

PwC Canada observes

Importers, producers and exporters that operate within the automotive industry in the United States, Mexico and Canada need to review these new USMCA requirements in detail to determine whether their vehicles and parts continue to qualify for preferential tariffs once the USMCA is implemented.

Tariffs and trade facilitation

The original NAFTA eliminated virtually all tariffs between Canada, the United States and Mexico, with some exceptions. The USMCA maintains these benefits and ensures that the vast majority of USMCA trade will continue to be duty-free. In addition, the Customs Administration and Trade Facilitation chapter intends to standardize and modernize customs procedures throughout North America, which is intended to facilitate the free-flow of goods between the three countries.

PwC Canada observes

Importers, producers and exporters may gain possible synergies from the alignment in customs procedures across the USMCA area, thus ensuring a greater compliance footprint and potentially saving money and resources in their supply chain. The Canadian, US and Mexican customs administrations will also collaborate and share information on many aspects relevant to customs and the flow of goods within the USMCA area.

Customs advance rulings

The USMCA expands the pool of applicants that can apply for a written advance ruling on certain decisions to be rendered by customs officials. Under the USMCA, the application for a written advance ruling can be made by a representative, as well as any other person with a justifiable cause (which is not currently the case in Canada).

PwC Canada observes

The expansion of the ruling applicant pool allows others with an interest in the transaction to gain clarity and certainty by requesting an advance ruling, and potentially having the ability to manage the risks associated with possible unwanted tariff assessments and penalties.

Customs penalties

Under the USMCA, clerical or minor errors will not be treated as a breach of customs law.

PwC Canada observes

The distinction of clerical and minor errors does not currently exist in Canada from a customs perspective, therefore this new provision may provide for greater fairness when dealing with the Canada Border Services Agency for certain types of minor clerical errors.

E-commerce

The USMCA increases the limit for express courier shipments from the current CA$20 to CA$150 for duties, and to CA$40 for taxes at the point or time of importation in Canada.

PwC Canada observes

This increased threshold doubles the current available limit for eligible goods with no requirement to file a customs entry. Goods valued between CA$40 and CA$150 will be subject to sales taxes where applicable, but no customs duties; and goods valued at CA$40 or less will not be subject to either duty or sales tax.

How PwC can help 

The PwC customs practice can help your business:

  • decipher the new provisions in the USMCA
  • assess the changes necessary to assume the seamless transition from NAFTA to the USMCA

It is critical for your business to preserve the tariff and trade benefits that will be available under the USMCA.

 

Contact us

Jaime Seidner

Partner, PwC Canada

Tel: +1 416 687 8492

Eric Paton

National Indirect Tax Leader, PwC Canada

Tel: +1 416 869 2878

Andrew Vanderwal

Partner, PwC Canada

Tel: +1 416 869 2316

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