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(continued)
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 subheading
8469.11;
(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:





------------------------------------------------------------------------

Product costs:
Value of originating materials......................... $30.00
Value of non-originating materials..................... 40.00
Other product costs.................................... 20.00
Period costs............................................... 10.00
Other costs................................................ 0.00
------------
Total cost of Good A, per unit............................. $100.00
Excluded costs:
Sales promotion, marketing and after-sales service cost $5.00
Royalties.............................................. 2.50
Shipping and packing costs............................. 3.00
Non-allowable interest costs........................... 1.50
------------
Total excluded costs....................................... $12.00
------------------------------------------------------------------------







The net cost is
the total cost of
Good A, per unit,
minus the excluded
costs.





------------------------------------------------------------------------

Total cost of Good A, per unit:............................ $100.00
Excluded costs............................................. -12.00
------------
Net cost of Good A, per unit............................... $88.00
------------------------------------------------------------------------







The value for net
cost ($88) and the
value of non-
originating
materials ($40)
are needed in
order to calculate
the regional value
content. The
producer
calculates the
regional value
content of Good A
under the net cost
method in the
following manner:









Therefore, under
the net cost
method, Good A
qualifies as an
originating good,
with a regional
value-content of
54.5 percent.
Example 5: section
6(6)(c), net cost
method required
for certain sales
to related persons
On January 15,
1994, a producer
located in NAFTA
country A sells
1,000 units of
Good A to a
related person,
located in NAFTA
country B. During
the six month
period beginning
on July 1, 1993
and ending on
December 31, 1993,
the producer sold
90,000 units of
identical goods
and similar goods
to related persons
from various
countries,
including that
buyer. The
producer's total
sales of those
identical goods
and similar goods
to all persons
from all countries
during that six
month period were
100,000 units.
The total quantity
of identical goods
and similar goods
sold by the
producer to
related persons
during that six
month period was
90 percent of the
producer's total
sales of those
identical goods
and similar goods
to all persons.
Under section
6(6)(c), the
producer must use
the net cost
method to
calculate the
regional value
content of Good A
sold in January
1994, because the
85 percent limit
was exceeded.
Example 6: section
6(11)(a)
A producer in a
NAFTA country
produces Good A
and Good B during
the producer's
fiscal year.
The producer uses
the following
figures, which are
recorded on the
producer's books
and represent all
of the costs
incurred with
respect to both
Good A and Good B,
to calculate the
net cost of those
goods:





------------------------------------------------------------------------

Product costs:
Value of originating materials......................... $2,000
Value of non-originating materials..................... 1,000
Other product costs.................................... 2,400
Period costs: (including $1,200 in excluded costs)......... 3,200
Other costs................................................ 400
------------
Total cost of Good A and Good B............................ $9,000
The net cost is the total cost of Good A and Good B, minus
the excluded costs incurred with respect to those goods.
Total cost of Good A and Good B............................ $9,000
Excluded costs............................................. -1,200
------------
Net cost of Good A and Good B.............................. $7,800
------------------------------------------------------------------------







The net cost must
then be reasonably
allocated, in
accordance with
Schedule VII, to
Good A and Good B.
Example 7: section
6(11)(b)
A producer located
in a NAFTA country
produces Good A
and Good B during
the producer's
fiscal year. In
order to calculate
the regional value
content of Good A
and Good B, the
producer uses the
following figures
that are recorded
on the producer's
books and incurred
with respect to
those goods:





------------------------------------------------------------------------

Product costs:
Value of originating materials......................... $2,000
Value of non-originating materials..................... 1,000
Other product costs.................................... 2,400
Period costs: (including $1,200 in excluded costs)......... 3,200
Other costs................................................ 400
------------
Total cost of Good A and Good B............................ $9,000
------------------------------------------------------------------------







Under section
6(11)(b), the
total cost of Good
A and Good B is
then reasonably
allocated, in
accordance with
Schedule VII, to
those goods. The
costs are
allocated in the
following manner:






------------------------------------------------------------------------
Allocated to Allocated to
Good A Good B
------------------------------------------------------------------------
Total cost ($9,000 for both Good A $5,220 $3,780
and Good B)........................
------------------------------------------------------------------------







The excluded costs
($1,200) that are
included in total
cost allocated to
Good A and Good B,
in accordance with
Schedule VII, are
subtracted from
that amount.






------------------------------------------------------------------------
Excluded Excluded
Cost Cost
Allocated Allocated
to Good A to Good B
------------------------------------------------------------------------
Total excluded costs:
Sales promotion, marketing 500 290 210
and after-sale service costs
Royalties.................... 200 116 84
Shipping and packing costs... 500 290 210
--------------------------------------
Net cost (total cost minus ........... $4,524 $3,276
excluded costs).................
------------------------------------------------------------------------







The net cost of
Good A is thus
$4,524, and the
net cost of Good B
is $3,276.
Example 8: section
6(11)(c)
A Producer located
in a NAFTA country
produces Good C
and Good D. The
following costs
are recorded on
the producer's
books for the
months of January,
February and
March, and each
cost that forms
part of the total
cost are
reasonably
allocated, in
accordance with
Schedule VII, to
Good C and Good D.






------------------------------------------------------------------------
Total cost: Allocated Allocated
Good C and to Good C to Good D
Good D (in (in (in
thousands thousands thousands
of dollars) of dollars) of dollars)
------------------------------------------------------------------------
Product costs:
Value of originating 100 0 100
materials...................
Value of non-originating 900 800 100
materials...................
Other product costs.......... 500 300 200
Period costs (including $420 in 5,679 3,036 2,643
excluded costs).................
Minus Excluded Costs............. 420 300 120
Other costs...................... 0 0 0
--------------------------------------
Total cost (aggregate of product 6,759 3,836 2,923
costs, period costs and other
costs)..........................
------------------------------------------------------------------------







Example 9: section
6(12)
Producer A,
located in a NAFTA
country, produces
Good A that is
subject to a
regional value-
content
requirement. The
producer chooses
that the regional
value content of
that good be
calculated using
the net cost
method. Producer A
buys Material X
from Producer B,
located in a NAFTA
country. Material
X is a non-
originating
material and is
used in the
production of Good
A. Producer A
provides Producer
B, at no charge,
with tools to be
used in the
production of
Material X. The
cost of the tools
that is recorded
on the books of
Producer A has
been expensed in
the current year.
Pursuant to
section
5(1)(b)(ii) of
Schedule VIII, the
value of the tools
is included in the
value of Material
X. Therefore, the
cost of the tools
that is recorded
on the books of
Producer A and
that has been
expensed in the
current year
cannot be included
as a separate cost
in the net cost of
Good A because it
has already been
included in the
value of Material
X.
Example 10: section
6(12)
Producer A,
located in a NAFTA
country, produces
Good A that is
subject to a
regional value-
content
requirement. The
producer chooses
that the regional
value content of
that good be
calculated using
the net cost
method and
averages the
calculation over
the producer's
fiscal year under
section 6(15).
Producer A
determines that
during that fiscal
year Producer A
incurred a gain on
foreign currency
conversion of
$10,000 and a loss
on foreign
currency
conversion of
$8,000, resulting
in a net gain of
$2,000. Producer A
also determines
that $7,000 of the
gain on foreign
currency
conversion and
$6,000 of the loss
on foreign
currency
conversion is
related to the
purchase of non-
originating
materials used in
the production of
Good A, and $3,000
of the gain on
foreign currency
conversion and
$2,000 of the loss
on foreign
currency
conversion is not
related to the
production of Good
A. The producer
determines that
the total cost of
Good A is $45,000
before deducting
the $1,000 net
gain on foreign
currency
conversion related
to the production
of Good A. The
total cost of Good
A is therefore
$44,000. That
$1,000 net gain is
not included in
the value of non-
originating
materials under
section 7(1).
Example 11: section
6(12)
Given the same
facts as in
example 10, except
that Producer A
determines that
$6,000 of the gain
on foreign
currency
conversion and
$7,000 of the loss
on foreign
currency
conversion is
related to the
purchase of non-
originating
materials used in
the production of
Good A. The total
cost of Good A is
$45,000, which
includes the
$1,000 net loss on
foreign currency
conversion related
to the production
of Good A. That
$1,000 net loss is
not included in
the value of non-
originating
materials under
section 7(1).








PART IV
SECTION 7.
MATERIALS
Valuation of
materials used in
the production of a
good other than
certain automotive
goods
(1) Except as
otherwise provided
for non-
originating
materials used in
the production of
a good referred to
in section 9(1) or
10(1), and except
in the case of
indirect
materials,
intermediate
materials and
packing materials
and containers,
for purposes of
calculating the
regional value
content of a good
and for purposes
of sections 5(1)
and (5), the value
of a material that
is used in the
production of the
good shall be
(a) except as
otherwise
provided in
subsection (2),
where the
material is
imported by the
producer of the
good into the
territory of the
NAFTA country in
which the good
is produced, the
customs value of
the material
with respect to
that
importation, or
(b) where the
material is
acquired by the
producer of the
good from
another person
located in the
territory of the
NAFTA country in
which the good
is produced
(i) the
transaction
value,
determined in
accordance
with section
2(1) of
Schedule VIII,
with respect
to the
transaction in
which the
producer
acquired the
material, or
(ii) the value
determined in
accordance
with sections
6 through 11
of Schedule
VIII, where,
with respect
to the
transaction in
which the
producer
acquired the
material,
there is no
transaction
value under
section 2(2)
of that
Schedule or
the
transaction
value is
unacceptable
under section
2(3) of that
Schedule,
and shall include
the following
costs if they are
not included under
paragraph (a) or
(b):
(c) the costs of
freight,
insurance and
packing and all
other costs
incurred in
transporting the
material to the
location of the
producer,
(d) duties and
taxes paid or
payable with
respect to the
material in the
territory of one
or more of the
NAFTA countries,
other than
duties and taxes
that are waived,
refunded,
refundable or
otherwise
recoverable,
including credit
against duty or
tax paid or
payable,
(e) customs
brokerage fees,
including the
cost of in-house
customs
brokerage
services,
incurred with
respect to the
material in the
territory of one
or more of the
NAFTA countries,
and
(f) the cost of
waste and
spoilage
resulting from
the use of the
material in the
production of
the good, minus
the value of any
reusable scrap
or by-product.
Valuation of
material if customs
value is not in
accordance with
Schedule VIII
(2) For purposes of
subsection (1)(a),
where the customs
value of the
material referred
to in that
paragraph was not
determined in a
manner consistent
with Schedule
VIII, the value of
the material shall
be determined in
accordance with
Schedule VIII with
respect to the
importation of
that material and,
where the costs
referred to in
subsections (1)(c)
through (f) are
not included in
that value, those
costs be added to
that value.
Costs recorded on
books
(3) For purposes of
subsection (1),
the costs referred
to in subsections
(1)(c) through (f)
shall be the costs
referred to in
those paragraphs
that are recorded
on the books of
the producer of
the good.
Designation of self-
produced material
as an intermediate
material;
limitation on
designations;
designation is
optional
(4) Except for
purposes of
determining the
value of non-
originating
materials used in
the production of
a light-duty
automotive good
and except in the
case of an
automotive
component
assembly,
automotive
component or sub-
component for use
as original
equipment in the
production of a
heavy-duty
vehicle, for
purposes of
calculating the
regional value
content of a good
the producer of
the good may
designate as an
intermediate
material any self-
produced material
that is used in
the production of
the good, provided
that where an
intermediate
material is
subject to a
regional value-
content
requirement, no
other self-
produced material
that is subject to
a regional value-
content
requirement and is
incorporated into
that intermediate
material is also
designated by the
producer as an
intermediate
material.
(5) For purposes of
subsection (4),
(a) in order to
qualify as an
originating
material, a self-
produced (continued)