BENEFITS OF NAFTA FOR NON-NAFTA CONTROLLED COMPANIES
The North American Free Trade Agreement ("NAFTA") confers on eligible entities and goods numerous benefits, such as preferential tariffs and the benefits of various substantive rules, such as national treatment.
Non-North American entities may qualify for the benefits of NAFTA's preferential tariffs and substantive rules such as national treatment because NAFTA does not (i) limit its preferential tariffs to companies ultimately owned by North American investors or (ii), with respect to a NAFTA investor, a NAFTA cross-border service provider or a NAFTA financial service provider, impose an ultimate control test requiring that such entities be owned by a North American person (except for Canada with respect to financial service providers established in the United States or Mexico). As a result, a foreign-owned subsidiary or, in some cases, even a branch of a company established in a North America country may (i) produce a good in North America that qualifies for NAFTA's preferential tariff rates or (ii) qualify as a NAFTA investor, NAFTA cross-border service provider or a cross-border financial service provider with respect to such entity's investments or provision of services in another NAFTA country.
NAFTA basically bestows two types of benefits. The first and better known benefits are preferential tariff rates for goods that are produced in the North American market and that meet certain rules of origin, which are designed to ensure that significant manufacturing takes place in the North American market. Importantly, NAFTA does not limit preferential tariffs to goods produced by companies ultimately owned or controlled by U.S., Canadian or Mexican capital. Any good, regardless of the ultimate ownership of the company that manufactures the good, may qualify for NAFTA's preferential tariff rates so long as the good meets one of NAFTA's rules of origin. Therefore, although the rules of origin are at times quite complex, they do not, for example, necessarily block a German toy manufacturing company from establishing a Mexican subsidiary and producing toys in Mexico that meet NAFTA's rules of origin. Assuming that such a subsidiary were to produce a toy meeting the relevant rule of origin for toys in NAFTA, that subsidiary would be able to export that good anywhere in North America without having to pay a tariff.
Even with respect to those goods, such as automobiles and textiles and apparel goods, with the most difficult-to-meet rules of origin, no ultimate control test is imposed. For these sensitive goods, instead of prohibiting foreign-owned producers from producing goods that qualify for NAFTA's preferential tariffs, NAFTA requires that such companies source inputs in the North American market. By requiring that local companies source inputs in the North American market, NAFTA's rules of origin may provide obstacles to some foreign companies that depend on sourcing of inputs from affiliates unless such companies are willing to produce those inputs in the North American market as well.
NAFTA's second type of benefits relates to certain obligations that each NAFTA country agreed to with respect to that NAFTA country's treatment of NAFTA investors, NAFTA cross-border service providers and NAFTA financial service providers. For example, national treatment requires, with respect to a NAFTA investor's investment in any NAFTA county (besides the country of its establishment), that such NAFTA country afford such NAFTA investor treatment at least as favorable as that country gives to its own investors.
Importantly, unlike in the United States - Canada Free Trade Agreement, NAFTA does not limit the benefits of NAFTA to investors ultimately controlled by U.S., Canadian or Mexican capital. Instead, NAFTA's definition of, for example, a NAFTA investor includes a wide range of persons, including companies incorporated in a NAFTA country but owned by persons from a third country and, even, a branch of a company incorporated in a non-NAFTA country. Similar rules govern whether an entity qualifies as a NAFTA cross-border service provider or a NAFTA financial service provider, although for the latter, branches of non-NAFTA financial service providers do not qualify as a NAFTA cross-border service provider.
These rules are qualified by a number of exceptions. For example, a company owned by nationals of a country, such as Cuba, that does not have diplomatic relations with one of the NAFTA countries does not qualify as a NAFTA investor. Furthermore, the subsidiary or branch must do business in a NAFTA country as opposed to being a mere shell corporation in order to qualify as a NAFTA investor and, thus, for NAFTA's benefits. Nonetheless, a German company's U.S., Mexican or Canadian branch or subsidiary would, for example, qualify as a NAFTA investor and, as a result, the branch or subsidiary would enjoy the benefits that NAFTA imparts on NAFTA investors with respect to that subsidiary's or branch's investments in another NAFTA country. The implication of NAFTA's rules of origin for both goods and entities is that non-NAFTA controlled companies can take advantage of NAFTA benefits.
