Just participated in a KPMG Tax Watch webinar on Country of Origin- Substantial Transformation.

The presenters did an excellent job, as usual, covering a lot of detail. Some of the information served as a refresher to me, while other segments offered new material. Here are my takeaways:

• Marking rules of origin- Part 34….articles wholly obtained from one country.
• Rules of origin- Part 102…pertain to NAFTA and other FTAs
• Preferential rules of origin can be found in FTA General Notes…HTUS
• Other…Product of Jurisprudence applies substantial transformation test
• Note- 2 sets of rules can apply to same transaction…marking or tariff rules

Substantial Transformation Rule….used to determine country of origin if articles or components are not wholly obtained from one country…Does article have new name, character, or use?

• Change in character- altered physical characteristics of article or components. Were changes cosmetic? What was the process that resulted in change?
• Change in use- Is end use of article interchangeable with end use of components? Is end use of component predetermined at time of importation? What was the process that resulted in change of use? Predetermined end use generally precludes substantial transformation but subject to specifics of article/components in question.
• Change in name- this is the least compelling of the factors supporting substantial transformation. Do components retain original name after processing?
• Subsidiary/Additional Factors- extent and nature of operations (complex or simple); value added and/or cost incurred during transformation process; essential character of article (components transformed into finished product); change from producer to consumer good; tariff shift.

The Role of Software of Firmware

• Mere downloading of software or firmware does not generally result in substantial transformation.
• Software development location is given more weight than where downloaded.
• Software which enhances existing functionality is generally not considered substantial transformation.
• PCB manufacturing is complex and each situation needs to be considered separately re: Country of Origin and Substantial Transformation.

KPMG Recommended Action Steps for Importers

• Develop well documented analysis or obtain binding rulings before importation.
• Train suppliers and trade partners and communicate plans.
• Conduct periodic internal audits and risk assessments.
• Documents policies and procedures.