Although requiring a change in tariff classification is a very simple principle, it requires that all non-originating materials undergo the required change. A very low percentage of the materials may not undergo the tariff change, thus preventing the goods from originating. Therefore, the Agreement contains a de minimis provision that allows goods to qualify as originating provided such materials are not more than a certain percentage (seven percent in most cases) of the transaction value of the goods adjusted to an FOB basis or, in some cases, of the total cost of the goods.
In addition, where failure of materials to undergo a required change in tariff classification triggers a requirement for a minimum regional value content, the calculation of that content is waived if the value of all non-originating materials used in the production of the goods is not more than the specified de minimis amount.
However, if after application of the de minimis allowance the goods must still meet a regional value-content requirement in order to qualify as originating (that is, if the value of all non-originating materials exceeds the applicable de minimis allowance), the value of all non-originating materials must be taken into account in calculating the regional value content.
A manufacturer purchases inexpensive textile watch straps made in Taiwan (HTS 91.13), to be assembled with originating mechanical watch movements (HTS 91.08) and originating cases (HTS 91.12). The value of the straps is less than seven percent of the transaction value of the final watch (HTS 91.02) adjusted to an FOB basis.
The Annex 401 origin criterion for HTS 91.02 is:
- A change to heading 91.01 through 91.07 from any other chapter; or
- A change to heading 91.01 through 91.07 from 91.14, whether or not there is also a change from any other chapter, provided there is a regional value content of not less than:
- 60 percent where the transaction value method is used, or
- 50 percent where the net cost method is used.
Only non-originating materials need undergo the required tariff classification change: in this case, the textile straps. The straps do not satisfy either of the indicated tariff changes but since their value is less than seven percent of the transaction value of the finished watch adjusted to an FOB basis, the de minimis rule applies and the watches can be considered originating.
Textiles. For textile goods classified in Chapters 50 through 63 of the Harmonized System, the de minimis rule is applied by weight (instead of value) to the component of the good that determines its tariff classification, as determined in accordance with the General Rules of Interpretation of the Harmonized System.
A Mexican manufacturer produces women's shirts which have knit bodies and woven sleeves. The composition of the knit bodies is 60 percent cotton, 35 percent wool, and 5 percent rayon, by weight. The sleeves are made of Japanese fabric that is 100 percent polyester. Since the knit bodies give the garments their essential character, the shirts are classified under HTS 6106.10. The Annex 401 rule of origin criterion for HTS 6106.10 is "yarn forward" (see Chapter 5 of this publication for rules of origin for textiles). Assuming the cotton and wool portions of the bodies meet the yarn-forward rule, the garment can still be considered originating even if the rayon yarn was from China since it falls under the de minimis provision. The sleeves are ignored in determining whether the shirts originate because only the component that determines the tariff classification of the goods is considered when applying the de minimis provision.
Agricultural Products. The Article 405 de minimis rule does not apply to agricultural goods provided for in Chapters 1 through 27 of the Harmonized System unless the non-originating materials are classified in subheadings different from the subheadings in which the finished goods are classified.
Ground coffee, sold in retail packages, is produced in Mexico (HTS 0901.21). Most of the beans are grown and roasted in Mexico but to give the coffee a unique flavor the producer adds some roasted beans from Kenya (HTS 0901.21). The value of the beans from Kenya is 5 percent of the transaction value, adjusted to an FOB basis, of each retail package. The Annex 401 origin criterion for HTS 09.01 is:
- A change to heading 09.01 through 09.10 from any other chapter.
The coffee cannot be considered originating because the Kenyan beans do not undergo the required tariff change. The de minimis rule does not apply because the Kenyan beans are classified in the same subheading as the final good.
Note: If green (unroasted) coffee were imported from Kenya and roasted in Mexico, the de minimis rule would apply because green coffee beans are classified in HTS 0901.11, a different subheading. Thus, the ground coffee in retail packages would qualify as originating.
Cigars, Cheroots, Cigarrillos and Cigarettes. The de minimis amount for these products is nine percent, not seven percent, of the transaction value adjusted to an FOB basis.
Excluded Products. The Article 405 de minimis rule does not apply to the following materials:
- certain dairy products and preparations that are used in the production of goods provided for in Chapter 4 of the HTS;
- goods provided for in Chapter 4 of the HTS and some dairy preparations that are used in the production of certain goods containing milk, milk solids or butterfat;
- some fruits and juices used in the production of certain juices and juice concentrates;
- coffee beans used in the production of unflavored instant coffee (note: the Annex 401 origin criterion for unflavored instant coffee allows up to 60 percent non-originating coffee, so substantial allowance is already made for non-originating inputs);
- fats, lards, oils and related products provided for in Chapter 15 of the HTS that are used in the production of Chapter 15 goods (except olive, palm, and coconut oils, where the de minimis rule does apply);
- Cane and beet sugar used in the production of sugars, syrups and other products provided for in HTS headings 1701-1703;
- Sugar, molasses, sugar confectionery and other goods provided for in Chapter 17 of the HTS and cocoa powder provided for in HTS 18.05 that are used in the production of chocolate and other food preparations containing cocoa;
- beer wine and other fermented beverages provided for in HTS headings 22.03-22.08 used in the production of alcoholic beverages and related products provided for in HTS headings 22.07 and 22.08; any non-originating material used in the production of many major appliances such as refrigerators, freezers, air conditioners, stoves, ranges, trash compactors, clothes-dryers and washing machines;
- printed circuit assemblies used in the production of a good if the change in tariff classification prescribed by Annex 401 for that good places restrictions on their use.