A free trade agreement is a pact between two countries or a group of countries to allow trade with reduced duty or no duty. Applicability of these agreements is based on the notion of preferential origin. The difficulty lies in whether a product manufactured in a North American Free Trade Agreement (NAFTA) region using a portion of components from outside NAFTA qualifies based on any other preferential rules. Rules of origin and origin criteria are two key concepts in determining NAFTA preference.

Rules of origin refer to two basic categories to define preference criteria:

• A change in tariff classification (tariff shift): Classification of the finished product must be different from the classification of nonoriginating products used for manufacturing.
• Regional value-content requirement (RVC): Minimum proportion of materials is prescribed (NAFTA).

The following definitions of different types of goods help clarify requirements for NAFTA origin criteria:

• Wholly obtained or produced goods. These goods are wholly obtained or produced entirely in one or more NAFTA countries. For goods to qualify under this criterion, it must contain no non-North American parts or materials.
• Goods containing nonoriginating materials and meeting origin rules. These goods are made from nonoriginating materials and may also qualify for NAFTA treatment as long as each non-NAFTA input undergoes a tariff classification change as specified in Originating Goods (Article 401) and meets other requirements that may apply.
• Goods produced in the NAFTA region wholly from originating materials. Another way for goods to originate is if they are produced entirely in one or more NAFTA countries using only originating materials. This provision encompasses goods made of parts and materials that meet NAFTA rules of origin, even though they contain some non-North American inputs. This rule relates to preference criterion C on the NAFTA certificate of origin.

NAFTA Trade Preference Process: Key Process Steps

The NAFTA preference determination process using SAP BusinessObjects Global Trade Service involves the following steps:

1. Request a long-term vendor declaration (LTVD) from a supplier or a vendor
2. Maintain an LTVD
3. Aggregate an LTVD
4. Determine a NAFTA preference
5. Issue an LTVD to the customer

Step 1. Request an LTVD from a supplier or a vendor. A vendor LTVD must exist for the calculation of NAFTA eligibility. Without an LTVD, the component is deemed to be of non-NAFTA origin. In SAP BusinessObjects Global Trade Services, a worklist is generated based on purchase orders and goods receipts creation in a feeder system. Figure 1 shows the worklist when you start procuring the components where no prior LTVD exists.

Figure 1

The process of requesting a vendor declaration

While you create a purchase order in the feeder system, SAP BusinessObjects Global Trade Services checks whether an LTVD exists for a combination of product or supplier. If no such LTVD is found, you create an entry in the worklist and use a follow-on function to request a vendor declaration directly from the worklist (Figure 2). Follow menu path SAP GTS Area Menu > SAP Risk Management > Preference Processing > select NAFTA tab > Monitoring section > Display Worklist for Vendor Declaration.

Figure 2

A worklist to request an LTVD

Step 2. Maintain an LTVD in SAP BusinessObjects Global Trade Services. Maintain an LTVD response in SAP BusinessObjects Global Trade Services with reference to a previously issued request (Figure 2). Maintain an eligibility indicator and country of origin as applicable. You can also use these responses to an LTVD for audit purposes (Figure 3). Follow SAP GTS Area Menu > SAP Risk Management > Preference Processing > select NAFTA tab > Administration section > Maintain Vendor Declaration.

Figure 3

Maintain the vendor declaration process

Maintain an LTVD response using the long-term vendor declaration monitor (Figure 4). Use transaction code /SAPSLL/PREVD0_08 or follow menu path SAP GTS Area menu > Preference Processing > NAFTA Tab > Vendor Based Long-Term Vendor Declaration > Monitoring: Display Vendor Declaration.

Figure 4

Maintain a vendor-based LTVD

Select the vendor and the product combination and click the pencil icon. This action calls up the screen shown in Figure 5.

Figure 5

Maintain an LTVD and specify a preference indicator and origin of product

Step 3. Aggregate an LTVD. A product can be supplied from several suppliers. Each supplier can declare a preferential origin of product, and consolidation of the indicator must be performed at the product level (Figure 6). This transaction allows you to aggregate by the product, if they are supplied by multiple vendors.

Figure 6

Aggregate the LTVD process

The results of consolidation appear in the product master of component. Use transaction code /SAPSLL/PREVDI_15 or follow menu path SAP GTS Area Menu > SAP Risk Management > Preference Processing > select NAFTA tab > Administration section > Aggregate Vendor Declaration. The aggregation process summarizes the various statements for a product according to the worst-case scenario (Figure 7). In the worst-case scenario, if one of the results is not favorable (i.e., if the goods are not from the preference country and are not eligible), then the whole aggregation is considered not eligible.

Figure 7

Aggregation results at the product master level

Step 4. Determine the NAFTA preference: The eligibility of a finished product is always calculated for NAFTA preferential agreement, and a third-party content provider manually defines or provides associated rules. Based on the nature of the product, some rules contain regional value content (RVC), and a determination is made by comparing the proportion of non-originating material with respect to the value of the finished product.

First, determine a preference for intermediate materials. The finished product preference determination is calculated as shown in Figures 8 and 9. Use transaction code  /SAPSLL/PRECA03 or follow menu path SAP GTS Area Menu > SAP Risk Management > Preference Processing > select NAFTA tab > Under Long-Term Vend. Declaration for Customer’s Purposes > Preference Determination section > under Bills of Product > Perform Preference Determination.

Figure 8

Preference determination procedures

In the selection screen shown in Figure 8 enter the Logical System Group (defined for your feeder system) and Populate the Product field. In the Preference Model section in the Model row  choose the Preference model from the drop-down menu (the WG Cross-Plant Preference Model in this case). In the BOM Explosion section enter B (Top-Down [Entire Explosion]) and click the execute icon.

Figure 9

Preference determination results

Step 5. Issue an LTVD to the customer. Create a worklist for an LTVD for customers with reference to invoices from the feeder system (SAP ERP Central Component  [SAP ECC]). You issue worklist LTVDs to the customers of the company using the functionality upon request (Figure 10).

Figure 10

Create a worklist for an LTVD for a customer

To issue an LTVD, follow menu path SAP GTS Area Menu > SAP Risk Management > Preference Processing > select NAFTA tab > Under Long-Term Vend. Declaration for Customer’s Purposes > Administration section > Issue Vendor Declaration. This activity calls up the screen shown in Figure 11. You can also access Figure 11 through transaction code /SAPSLL/PREVDO_06.

Figure 11

Issue an LTVD for customers

NAFTA Trade Preference Process: ECC Configurations Steps

Now I walk you through the configuration steps within the SAP ECC side for identifying the document type, bill of material, and other setup for transferring necessary data for the preference determination within SAP BusinessObjects Global Trade Services.

Step 1. Perform feeder system settings for MM0A, MM0C, and SD0C Application area. The first step in the configuration starts with setting up the feeder system documents that are identified for transfer to SAP BusinessObjects Global Trade Services and are used for customs declarations (Figure 12). In SAP ERP Central Component (SAP ECC), follow IMG menu path Sales and Distribution > Foreign Trade/Customs > SAP Global Trade Services - Plug in > Control Data for Transfer to SAP Global Trade Services > Configure Control Settings for Document Transfer. Select the Application Level MM0A and click the Document Types folder, which brings up the list of document types shown in Figure 13.

Figure 12

Document transfer at application level in feeder system

Figure 13

Document transfer configuration set up with SAP ECC

Step 2. Make the purchase order type FNB and schedule agreement type LLP and LZP active for the risk management and check the Generate Worklist of Vendor-Based Long-Term Vendor Declarations in SAP BusinessObjects Global Trade Services (Figure 14). While you are in Figure 13, click the details icon (the magnifying glass) to call up the screen shown in Figure 14. You can use customized PO types, but the latest release of SAP BusinessObjects Global Trade Services does not allow use of customized agreement types.

Figure 14

Document types details set up for control settings

Step 3. Configure the goods receipt or materials document. Select the Application Level MM0C and click the folder named Document Types. This step calls up a list of movement types (Figure 15). The system generates goods movement documents during goods receipts reference to inbound delivery or directly with a purchase order.

Figure 15

Document transfer setup for goods receipt material document

Select the movement type 101B and click the details icon. In the details screen shown in  Figure 16 select the check box labeled Generate Worklist of Vendor-Based Long-Term Vendor Declarations. Click the save icon (not shown in Figure 16).

Figure 16

Document types details set up for control settings

Step 4. Configure the billing documents or customer invoices. After you save the entries in Figure 16, click the enter icon twice. This action takes you to the screen shown in Figure 12. Select the Application Level – SD0C and click the Document types folder. This action takes you to the screen shown in Figure 17. Select the specific Doc. Type (example, F2) and click the details icon. This step takes you to the screen shown in Figure 18.

Figure 17

Document transfer setup for billing documents

Check the boxes labeled Generate Worklist of Long-Term Vendor Declarations for Customers’ Purposes (Figure 18) and Set Preference Indicator in Feeder System. Now click the save icon.

Figure 18

Document types details set up for control settings

Step 5. Configure the Bill of Materials (BOM) Usage Control. Follow IMG menu path Sales and Distribution > Foreign trade / Customs > SAP Global Trade Services – Plug-In > Control Data for transfer to SAP Global Trade Services > Control Transfer of Bills of Product of Preference and Re-Export (Figure 19). (There is no transaction in this case.) Select the country level for BOM usage control. Enter US in the Country Organization field and press the New Entries button to create new entries. Select Production and Sales and distribution as BOM Usage.

Figure 19

BOM usage control at country level

While you are in Figure 19, click the folder Exclusion of Material Types – Country Level. This step brings you to Figure 20. Select the material types to be excluded during the transfer of the bill of material (BOM) into SAP BusinessObjects Global Trade Services.

Figure 20

Material types excluded from BOM transfer

BOM and Preference Determination

The relationships between a finished product and its primary materials are established by means of BOMs.  BOMs are transferred from the feeder system to SAP BusinessObjects Global Trade Services and subsequently exploded to identify their components and characteristics (e.g., procurement type and manufacturing cost) relevant for preference.

(Note: When BOMs are exploded they are expanded from the parent product to its components. There are different types of BOMs. For example for computer manufacturing, the body is assembled with the internal component to make the desktop as a finished product, and the internal components  [e.g., a motherboard might consist of a board, chips, and connections]).

The BOMs are multilevel, so you have two methods to transfer and explode for preference determination:

• Bottom up
• Top down

In the bottom-up method, the system transfers a separate BOM for each assembly in a multilevel BOM. In the explosion, the system treats each assembly separately. The preference determination is done on the lowest assembly level first, and uses this result in subsequent levels of assembly for preference determination.

In the top-down method the system transfers a multilevel BOM from the feeder system without making any changes to the structure, and the system explodes the BOM by taking into account all the product components and all levels. The preference determination is carried out at the highest BOM level considering all the components from all subassemblies.

Plant-Specific or Cross-Plant-Based Preference Determination Model

In a plant-specific model request for long-term vendor declarations, you carry out aggregation and preference determination individually in each plant. In the cross-plant model, aggregation results are presented based on the worst-case scenario. So if you have a multiple plant situation and the result of one plant is not favorable, that result is taken into account, even if the majority of them are favorable — in other words, of five plants, if one is not favorable and four are favorable, the SAP system takes the unfavorable result and presents the worst case as the output.

SAP BusinessObjects Global Trade Services Configuration

In the previous steps, I went over the configuration steps within SAP ERP. Now I detail what you need to do in SAP BusinessObjects Global Trade Services.

Step 1. Define a cross-plant group in SAP BusinessObjects Global Trade Services to represent all plants geographically located in country USA. Follow IMG menu path SAP Global Trade Services > General Settings > Organizational Structure > Define Cross-Plant BOM Evaluation (Figure 21).

Figure 21

Define a cross-plant group

Step 2. Assign a logical system and plants to a cross-plant group. Click the Assignment of Plants folder in Figure 21. The screen shown in Figure 22 appears.

Figure 22

Assign logical system and plants in plant group

Step 3. Define country groups for all three countries (USA, Canada, and Mexico) under NAFTA. Follow IMG menu path SAP Global Trade Services > General Settings > Legal Regulation > Define Country Group. The screen in Figure 23 appears.

Figure 23

Define country group

Step 4. Assign countries to country groups: Assign USA to country group US, Mexico to country group MX, and Canada to CA (Figure 24). The fields for Canada and Mexico are not shown in Figure 24. The configuration step can be maintained through menu path SAP Reference IMG > SAP Global Trade Services > General Settings > Legal Regulations > Assign Countries to Country Group (Note: SAP only has a generic transaction for this: SPRO. Therefore, you have to use the SAP Reference IMG and the menu path for this step).

Figure 24

Assign country to country group

Step 5. Define the legal regulation. Define the trade preference regulations in SAP BusinessObjects Global Trade Services to represent the NAFTA trade preference regulation (Figure 25). Follow IMG menu path SAP Global Trade Services > General Settings > Legal Regulations > Define Legal Regulations. Review the predefined legal regulation (NAFTA for US). Ensure that the Type of Legal Code field is 06 Preference Law and that the Import/Export field is 3 Import/Arrival and Export/Dispatch. Leave the field for Original Ctry of LR blank.

Figure 25

Define legal regulation for NAFTA

Step 6. Assign the country groups previously created in Step 3 under NAFTA regulation. Select the Legal Regulation folder and click the Assign Country Group subfolder. The screen in Figure 26 appears.

Figure 26

Assign all the three country groups to legal regulation for NAFTA

Step 7. Set the determination procedure. SAP BusinessObjects Global Trade Services has a default determination procedure that you can use or change as required. When the documents are transferred to SAP BusinessObjects Global Trade Services, the system refers to the procedure to determine if a country or country group is used for legal regulation determination. Follow IMG menu path SAP Global Trade Services > Custom Management > Define Procedure for Active Legal Regulations (Figure 27). Click the Assignment of Determination folder to see the screen in Figure 28. Review the default settings for the determination procedure delivered. In some situations (e.g., you want to use a country group instead of the default country as the key for determining the legal regulation), define custom determination procedures.

Figure 27

Create the determination procedure

Figure 28

Define the determination strategy

Step 8. Activate the legal regulation. Follow IMG menu path SAP Global Trade Services > General Settings > Legal Regulation > Activate Legal Regulations (Figure 29).

Figure 29

Choose NAFTA regulation for activation

You can choose the Country Group folder for trade preference and add all the country groups under NAFTA. In Figure 29, select the Activate Legal Regulation folder and click the Country Group folder. The screen shown in Figure 30 appears.

Figure 30

Activate legal regulation with relevant country groups

Under the Country Group folder, choose one country group and open the Country Group/Country Group subfolder and add the three NAFTA country groups as shown in Figure 31. (This step establishes the relationship among the NAFTA countries.) While you are in Figure 31, click the Country Group/Country Group subfolder. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > General Settings > Activate Document type (Figure 32).

Figure 31

Assign for each country group with other country groups from agreement

Step 9. Activate the document types for trade preference. Follow IMG menu path Global Trade Services > General Settings > Document Structure > Activate Document Types for Application Area. Click the folder Activate Document Types for Preference Processing. Open the Activate Document Types for Preference Processing folder and add the document types (Figure 32).

Figure 32

Activate document type and item category for preference processing

Step 10. Activate the item category for trade preference. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > General Settings > Activate Item Category type. Open the Activate Item Categories for Preference Processing folder and add the item category types shown in Figure 33.

Figure 33

Define administrative unit to manage trade preference

Step 11. Define the administrative unit that is responsible for managing vendor declaration, calculating preference determination, and issuing long-term vendor declaration for customer purposes. Typically, a previously defined foreign trade organization for compliance/customs is used as an administrative unit for trade preference by assigning the business partner role SLLMGR.

Follow IMG menu path SAP Global Trade Services > SAP Risk Management > “Preference Processing” Service > Organizational Structure > Define Administrative Unit Attributes. Assign the key attribute plant group to the Administr. Unit field in Figure 34.

Figure 34

Define administrative unit attributes

Step 12. Assign the determination procedure for active preference agreements as previously defined in step 7. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Assign the Determination Procedure for Active Preference Agreements (Figure 35).

Figure 35

Assign the determination procedure for legal regulation

Step 13. Activate NAFTA trade preference agreements in two steps. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Activate Preference Agreements. In the first step, activate at the country group level and choose indicator option 4 for Preference Import and Preference Export as shown in Figure 36. Once your country group level is activated, choose each country group of NAFTA agreement and open the Country Group/Country Group folder and assign all three countries in the group.

Figure 36

Activate legal regulations for trade preference with reference to a country group

Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Activate Preference Agreements. Choose indicator option 4 (in these fields 4 is an index number) under the Prefer. Import (Preference Import) and Preference Export columns shown in Figure 37.

Figure 37

Activate preference agreements

Step 14. Define a rule set for a preference agreement. This rule set is key to building NAFTA rules manually or uploading NAFTA rules from a third-party XML content provider. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Define Rule Set (Figure 38). If you want to load the rule by XML, you can go to menu path SAP GTS Area Menu > SAP Risk Management > Preference Processing – Master Data > under section Rule Set > Load Preference from XML File.

Figure 38

Define a rule set for the preference agreement

Step 15. Assign the rule set to the trade preference agreement. In Figure 38 click the New Entries button and select the preference agreement and the rule set from the drop-down menus. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Assign Preference Agreement to Rule Set (Figure 39).

Figure 39

Assign a rule set to the trade preference legal regulation

Step 16. Set the control settings for the LTVD and administrative unit. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Vendor Declaration > Control Settings for Long-Term Vendor Declaration and Administrative Unit.

Assign currency and exchange rate types as shown in Figure 40. In the Currency field enter the currency in use (USD) and the exchange rate (M for Monthly).  Do not check the boxes for Specific Activation of Vendor-Based LTVD and Specific Activation of LTVD for Customers purpose as these two are only required if activation is done per vendor or on a customer basis.

Figure 40

Control settings for vendor declaration for administrative unit

Step 17. Assign various administrative unit print control settings for output form printing. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Vendor Declaration > Define Standard Texts and Logo for Printing Documents (Figure 41).  Assign the form fields for Letter Header, Address Text, Form Logo, and Graphic Type that you wanted to printed in the print form.

Figure 41

Assign address text and logo outputs for administrative unit

Step 18. Set control settings for vendor-based long-term vendor declaration such as residence time, dunning level, and either Smart Form or PDF. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Vendor Declaration > Control Settings for Vendor Based Long-Term Vendor Declaration (Figure 42). Assign a letter for each dunning level for a vendor-based LTVD request. Click the folder Dunning Levels, and the screen shown in Figure 43 appears.

Figure 42

Control settings for vendor-based long term vendor declaration

Figure 43

Assign letter text for dunning for a vendor-based LTVD

Step 19. Set the control settings for the LTVD for the customer’s purpose such as residence time and either Smart Form or PDF forms. Follow IMG menu path SAP Global Trade Services > SAP Risk Management > Preference Processing Service > Vendor Declaration > Control Settings for Long-Term Vendor Declaration for Customer’s Purpose (Figure 44).

Figure 44

Control settings for vendor declaration for customer’s purpose

Step 20. Load preference rules. You can either manually manage NAFTA preference rules in SAP BusinessObjects Global Trade Services or upload the rules from a third-party content provider in an XML format. Follow the menu path SAP GTS Area menu > Preference Processing > Master Data > Load Preference Rules from XML. Choose a previously defined harmonized tariff system (HTS) schema for an alternative numbering schema. Deselect the default Simulation Mode option once you are ready to upload (Figure 45). The system now uploads the schema with without simulation.

Figure 45

Loading of preference rules through XML