By: Paul Fudacz, Senior Attorney

Many trade compliance professionals have a general understanding of the De minimis rule found under NAFTA Note 12(f)(i) and 12 (f)(ii), which can be applied in certain cases to qualify a good as originating when the good otherwise fails to qualify on a tariff shift or RVC basis.

The 12(f)(i) De minimis rule in general provides that a good shall be considered to be an originating good if the value of all non-originating materials used in the production of the good that do not undergo an applicable change in tariff classification is not more than 7 percent of the transaction value of the good, adjusted to a F.O.B. basis, or, if the transaction value is unacceptable, the value of all such non-originating materials is not more than 7 percent of the total cost of the good.

The 12 (f)(ii) De minimis rule in general provides that a good that is otherwise subject to a regional value-content requirement shall not be required to satisfy such requirement if the value of all non-originating materials used in the production of the good is not more than 7 percent of the transaction value of the good, adjusted to a F.O.B. basis, or, if the transaction value of the good is unacceptable, the value of all non-originating materials is not more than 7 percent of the total cost of the good.

However, practitioners need to be aware of the numerous exceptions to the basic 12(f)(i) rule that applies to goods otherwise having a de minimis value of non-originating materials that do not undergo an applicable tariff shift.   Notes 12(f)(iii) through 12(f)(vi) provide a lengthy list of the  exceptions.  For example, the first exception disallows the application of the de minimis rule when certain non-originating materials classified under Chapter 19 of the HTS are used to produce certain dairy products classified under Chapter four of the HTS.  One will see from the language of this exception that it seeks to reinforce the restrictions on tariff shift stated in the underlying rule of origin and not allow the de minimis rule to otherwise circumvent the specific restrictions set forth in the rule of origin.  This is true for many of the other exceptions as well.

In general, the first eight exceptions relate to food products, food preparations, and beverages where the exceptions disallow the use of the de minimis rule when certain materials (ingredients) used to produce the final good (a food or beverage product) are non-originating. This appears to anticipate the fact that in many food and beverage products, key ingredients may account for less than 7% of the value of the products in the ordinary course, and without disallowance of the de minimis rule the intended purpose of the specific rule of origin might be undermined.

Another exception disallows the application of the de minims rule when the final good falls into the category of certain household and commercial type appliances such as stoves or ranges, air conditioners, refrigerators and freezers, clothes washers and dryers, and dishwashers, among others.

Another important exception to the application of the de minimis rule is found in rule 12(f)(v), which disallows the application of the de minimis rule for non-originating materials used in the production of any good provided for in chapters 1 through 27, inclusive, unless the non-originating material is provided for in a different subheading than the good for which origin is being determined.

The final exception, 12(f)(vi), applies to products classified under Section XI – Textiles and Textile Articles, HTS Chapters 50 through 63, and while this rule does not entirely disallow the use of the de minimis rule, it essentially changes the de minimis criteria, requiring that the value of all discrete non-originating fibers or yarns, potentially with different HTS numbers, be grouped together for purposes of calculating the 7% threshold.

The de minimis rule is a very practical and useful rule that allows for the qualification of certain goods that would not otherwise qualify based on strict rules of origin, provided that a basic objective of NAFTA is met – i.e., the good has a high percentage of originating content. However, before seeking to apply the de minimis rule in a particular NAFTA qualification analysis, practitioners should carefully review the NAFTA de minimis rule, and its numerous exceptions, especially if one is working with any of categories of merchandise described above, to assure correct application of the rule and to avoid potential errors.