On the date of provisional implementation of the Canada-European Union Comprehensive Economic and Trade Agreement (the “Canada-EU CETA”) (June 1 or July 1, 2017), EU-origin cosmetics will become duty free immediately. Cosmetics are in Chapter 33 of the Harmonized Commodity Description and Coding System. Canada committed in its Annex 2-A to immediately eliminate customs duties and all items in Chapter 33.
The cosmetics must meet the applicable rule of origin in the Canada-EU CETA (goods are not duty free if the only test that is satisfied is that they are shipped from an EU Member). The product specific rules are in Annex 5 of the Protocol on rules of origin and origin procedures in the Canada-EU CETA.
The CETA rules of origin for HS 33.03 (perfumes and toilet waters) is:
“A change from any other heading; or
A change from within this heading, whether or not there is also a change from any other heading, provided that the value of non-originating materials of this heading does not exceed 20 per cent of the transaction value or ex-works price of the product.”
The CETA rule of origin for HS 33.04-33.07 (lip make-up preparations, eye make-up preparations, manicure or pedicure make-up preparations, powders, etc.):
“A change from any other heading; or
A change from within any one of these headings, whether or not there is also a change from any other heading, provided that the value of non-originating materials classified in the same heading as the final product does not exceed 20 per cent of the transaction value or ex-works price of the product.”
This rule of origin is easy to meet if you have a single item, such as a lipstick because the tariff shift rule would most likely be applicable. The rule of origin for compilations or sets may require more detailed analysis because the tariff shift rule may not apply and the regional value content rule would be applicable.
The Canada-EU CETA will bring opportunities to EU-exporters of cosmetics if they ship directly to Canada from the EU.
An open issue is the treatment of EU-origin goods that are sold by a distributor or retailer located in a third country (e.g. the United States). Chapter 2 of the Canada-EU CETA does not contain a transshipment restriction (which is often found in Canadian FTAs). However, Article 2 of Annex 2-A, provides as follows:
“Except as otherwise provided in this Annex, the Parties shall eliminate all customs duties on originating goods, of Chapters 1 through 97 of the Harmonized System that provide for a most-favoured-nation (“MFN”) rate of customs duty, imported from the other Party upon the date of entry into force of this Agreement.”
Does this mean EU-origin goods shipped from another country (e.g., the United States) will not be entitled to CETA preferential duty rates? Article 2 of Annex 2-A does not contain the most restrictive language of NAFTA Article 411 (which states that “A good shall not be considered to be an originating good by reason of having undergone production that satisfies the requirements of Article 401 if, subsequent to that production, the good undergoes further production or any other operation outside the territories of the Parties, other than unloading, reloading or any other operation necessary to preserve it in good condition or to transport the good to the territory of a Party”). Article 2 of Annex 2-A does not contain the word “directly”. It could be interpreted to mean transshipment is allowed (it could also be interpreted to not allow transshipped goods to receive duty relief).
The Canadian regulations and Customs Notices have not yet been published. As a result, we do not yet know whether the Canada Border Services Agency is going to require direct shipment from the European Union for goods to be entitled to CETA duty rates.
There are many other important questions to ask – hopefully this gets you started asking questions. If you require any assistance, please contact Cyndee Todgham Cherniak at 416-307-4168 or Cyndee@lexsage.com. There are many useful articles posted on the LexSage website.