Supporting Free Trade Agreement Eligibility – Preparing Documents Needed to Respond to a CF 28

The US is party to 14 FTA’s involving 20 countries. Maybe you wear a shirt or own a towel marked “Made in Jordan?” If so the textile was likely entered duty- free under the Jordan Free Trade Agreement ((JOFTA). Maybe you own a household item made in the Dominican Republic or Honduras? If so the item was likely entered duty free under the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). There are another dozen FTA’s, including the granddaddy of them all, NAFTA, which will be re-worked and relabeled as the forthcoming U.S. – Mexico – Canada Agreement (USMCA).

This blog article does not delineate the specifics of these FTA programs. You can refer to the USTR website, the General Notes of the HTSUS, or the regulations1 for specifics. A common feature is that the finished good is shipped directly to the US from the participating country. There is usually a tariff-shift requirement which has to be satisfied, to ensure that components which enter from a third country jurisdiction undergo sufficient processing that results in a “substantial transformation” to the goods so that they can be considered “originating.” Alternatively, or additionally, there is often a regional value content feature in which the percentage of local value can vary depending on the HTS of the finished article. Finally, there is normally a de minimis rule, that allows a limited number of parts or raw materials to be non-originating. The rules for FTA eligibility can be quite complex — our law firm guides clients through the layers of rules.

This brief article will focus on the supporting documents which the foreign producer and US importer should have on hand when claiming FTA eligibility.  We know of importers, caught flat-footed, who had trouble meeting the 30-day obligation to respond to a CF 28. A harried importer, sometimes sitting half way around the world, who calls a customs lawyer in the middle of the the night at the 11th hour to ask, “How should the BOM be organized?” will complete the response to the CF 28 in a timely manner, if at all, only through heroic efforts.

The Customs Modernization Act requires importers to act with reasonable care, but CBP does not require an importer to first obtain a binding ruling2 prior to making entry under an FTA program. The documentation requirements vary depending upon the FTA program in question and CBP and the regulations should be consulted to confirm precisely what documents are required at what particular stage.  In some cases, Manufacturer’s or Exporter’s Certificates vouching for origin must be obtained prior to entry, while in others the importer can wait until after entry is made and only upon CBP’s request.

It is important to consider that CBP has the right to ask any importer to support eligibility for an entry made under an FTA3. Often the request will be made pursuant to a CF 28, the standard form used to question an importer. The following questions are typical of the sort issued post-entry to an importer claiming FTA status — this set, recently issued to an ITC client, asks the importer to produce two sets of records.

In this first set, CBP was looking to verify the CF 7501 claims corresponding to Classification, Value, Origin, and Quantity.

Please provide documents translated into English:

1. Documentation substantiating the HTSUS classification number (schematics, pictures, end use of the good, how it functions and analysis), as appropriate.

2. Entry packet documents (invoice, packing list, bill of lading, etc.)

3. Contract (if any).

4. Purchase Order.

5. Proof of Payment.

6. Statement that the value of all assists (engineering, equipment, materials, etc.) provided to the producer at less than market value have been declared.

In the second set of questions, CBP focused on the FTA and the importer was asked to prove program eligibility. The CF 28 stated:

In order to substantiate that your good originates by means of a tariff-shift rule, please provide the following translated documentation, as appropriate:

1. Manufacturing process flow chart, narrative, description, etc.

2. Bill of Materials (BOM) indicating the HTSUS number (six digits) and the originating status of each material.

3. A statement that the BOM is complete.

4. For those materials that must originate for the good to meet a tariff-shift rule, provide a certification of origin under the terms of the CAFTA-DR Free Trade Agreement.

5. Manufacturer’s Affidavits should state where the material is manufactured and that it originates under the terms of the CAFTA-DR Free Trade Agreement.

6. If the tariff-shift rule requires an RVC analysis, provide the RVC formula and computation. And clearly state the composition of all values.

7. If an inventory management method (FIFO, LIFO, average) is used to differentiate originating from non-originating goods or materials, elaborate on the methodology.

8. Other document or explanation as appropriate.

Many importers claim entry under an FTA without much or any thought given to the documentation needed to prove the claim. This is a mistake because, in many situations, 30 days is inadequate for the importer to pull together the necessary paperwork, especially since some of the material is only available from the foreign seller (e.g., the BOM) or a supplier to the seller in the case of a Manufacturer’s Affidavit. My advice to an importer participating in an FTA program is to keep these CF 28 questions in mind and to prepare the documents before the first entry. 

Focusing on the second set of documents, the flow chart is typically prepared in Power Point or Excel. It should be as detailed as possible and break down each step and sub-step. The flow chart should start at the beginning, when components or raw materials enter the FTA country. Ideally, it would state that the material is entered into inventory4 and only later pulled from the same inventory. Every stage of fabrication/assembly should be described in detail, with attention given to the investment made, the capital equipment used and the training of the personnel. The flow chart should proceed through testing and final packaging. Ancillary material such as pictures or videos can be included.

The Bill of Materials, or BOM, is arguably the most important element of the entire submission. A BOM is usually a table prepared in an EXCEL spreadsheet program that lists the part name, internal part number or SKU, price and origin of the part.

Most FTA programs impose a tariff-shift rule in which each component / material piece must either be produced in country or, if brought in from another jurisdiction, it must experience a tariff shift. The HTS number assigned to the imported component must undergo a requisite shift to the HTS number/classification assigned to the final good that is imported into the US. Obviously this requires a close tariff classification study of the finished product and the components on the BOM.

CBP will verify whether the final good is an “originating good” of the FTA country by analyzing the BOM. If a tariff shift is required, CBP will validate that the component HTS numbers have “shifted” to the HTS number of the finished good. Local country of origin for a material, if claimed, can be supported, if the component was self-produced by the manufacturer or by a Manufacturer’s Affidavit provided by a local supplier.

A good narrative should tie together the flow chart and BOM and describe how each component in the BOM is used in the fabrication process. It could also discuss staffing levels and training and equipment used.  

I will close by saying that an actual submission to CBP in response to a CF 28 should also include a carefully drafted cover letter to CBP that explains the submission and serves as a road map.  Every document submitted would be assigned an exhibit number (this could mean a dozen or more exhibits) and the cover letter would explain how all the exhibits are tied together in support of the FTA.  

With the exception of the cover letter, I advocate that an importer making entry under an FTA program gather together all of its supporting records well in advance of the first entry. This would avoid making an FTA eligibility claim without doing the homework first, which in some cases could be violation of the importer’s reasonable care obligations. I also make that recommendation after seeing importers thrust into chaos struggling to understand CBP’s questions and produce the necessary documents and explanations under an ever-shrinking, fast-approaching deadline.