This Quick Guide To Origin and Rules of Origin introduces the basic principles of the concept of Origin and its application.
Origin is often described as the “economic” nationality of goods traded internationally. The determination of the country of origin is the last step in the customs clearance procedures. The first step being the classification, then the valuation and finally, the Country of Origin.
There are two types of origin: Preferential Origin and Non-Preferential Origin. In this article we’ll look at:
- The principle of Origin
- Non-Preferential Origin
- Preferential Origin
- Rules of Origin
The Principle of Origin
Origin is a tool for trade policy. Governments use “Origin” to implement trade policies and pursue trade objectives. There are two types of origin: Non-Peferential Origin used in commercial policies and Preferential Origin used in trade agreements..
Non-Preferential Origin is a critical element of global trade regulations and yet, businesses often underestimate its impact on their ability to trade.
Legal Framework: WTO Agreement & National Legislations
There isn’t a clear, binding, multilateral rule for Non-Preferential Origin. Non-Preferential Origin is defined in national legislation. In some legislations, in details; in others, with just a few lines.
Scope of application of Non-Preferential Origin
Contrary to Preferential Origin, Non-Preferential Origin is not related to Free Trade Agreement, Customs Union or any unilateral, autonomous trade regimes that would provide a duty reductions.
Non-Preferential Rules of Origin are used to determine the country of origin of a product to apply WTO rules as follows:
Anti-dumping and countervailing duties
Under the WTO rules (Article VI of the GATT), countries can apply measures against dumping where dumped imports damage domestic industry. Dumped imports are products that have an export price below its normal value. For instance below the price of the product in the domestic market of the exporting country.
In order to offset or prevent dumping, countries can introduced duties on any dumped product, a “anti-dumping duty”. Countries can also introduced “countervailing duty”. This is a duty collected at import to offset any subsidy received by the manufacturer for the production or export of the goods. Non-Preferential Rules of Origin of the importing country will be used to determine the application of anti-dumping or countervailing duties.
Countries can also apply Safeguard measure against an unforeseen increase of imports of products that is causing, or is likely to cause serious injury to the domestic industry (Article XIX of the GATT 1994). The measures can take the form of quantitative restrictions or quotas. The origin of the imported products will be determined by the Non-Preferential Rules of Origin of the importing country.
Origin marking requirements
Countries can required that marks of origin be affixed on the goods to identify the origin at the time of importation (Article IX of GATT 1994). In such instance, the Non-Preferential Rules of Origin of the importing country will apply to determine the origin of the goods.
In most countries, international trade statistics are based on import and export data collected by customs authorities at the time of the customs declarations. The country of origin in trade statistics is based on Non-Preferential Rules of Origin.
Impact on business of Non-Preferential Origin
The impact of Non-Preferential Origin is often underestimated by businesses. Yet it has a profound impact on industry sectors that are facing trade defence measures because of the restriction to trading and market access.
It is critical for traders to ensure that the non-preferential origin of goods is correct. This is particularly important where the manufacture of goods involves several countries. The Non-Preferential Origin will be the most important element to determine whether a product is subject to quantitative restrictions, quotas, anti-dumping duties or countervailing duties.
The complexities of national rules result in burdensome administration and increased costs for businesses. Businesses operating in industry sectors where Non-Preferential Rules of Origin are affecting imports should ensure they identify all costs relating to managing this type of origin.
Preferential Origin is the cornerstone of trade agreements.
Legal Framework:Trade Agreements and National Legislations
Preferential Origin is defined in Free Trade Agreements (FTA) and in national legislations.
Scope of Application of Preferential Origin
In the context of trade agreements, “Preferential Origin” refers to the rules that determine whether a product is eligible for preferential treatment under the agreement, such as reduced tariffs or other trade benefits.
Under the terms of a Free Trade Agreement, no customs duty (or reduced duty) will apply to trade between the countries that are parties to the Trade Agreement. To benefit from this “Preferential” treatment of reduced tariff and other trade benefit, the rules and conditions specified in the agreement must be met.
Where all the requirements of a Free Trade Agreement are met, goods with Preferential Origin are eligible to be imported with lower duty rates or at zero rate, depending on the Preferential tariff treatment provided for in the FTA.
Rules of Origin
Definition of Rules of Origin
“Rules of origin” means the specific provisions, developed from principles established by national legislation or international agreements (“origin criteria”), applied by a country to determine the origin of goods.
- To correct “unfair trade” with anti-dumping or countervailing duties.
- To protect local industry with safeguard measures.
- To implement “buy national” policies.
- To control access to the domestic market by foreign exporters with quotas, quantitative restrictions.
- To implement environmental or sanitary measures: prohibitions of dangerous products.
ensure national security or political policy for export controls and sanctions.
- To give preference to products from developing countries under the GSP schemes.
- To give preference to products from from partner countries in a Free Trade Agreement or Customs Unions.
Rules of Origin Criteria
There are two basic criteria to determine the country of origin of goods: “Wholly Obtained” and “Substantial and sufficient transformation”.
Wholly Obtained Rules of Origin
Goods that are exclusively and entirely obtained or produced in the country or territory without incorporating materials from any other country. This includes live animals born and raised in a given country; or plants harvested in a given country; or minerals extracted or taken in a single country.
Substantial/sufficient transformation Rules of Origin
Substantial or sufficient transformation is determined according to 3 criteria defined in national legislations and the trade agreements.
- Change in Tariff Classification : the product is considered “substantially transformed” when it is classified in a heading or subheading different from all non- originating materials used in its production.
- Value added: under this criterion, a product is considered “substantially transformed” when the value added locally to the goods meet a specified level. The is value expressed as a percentage can have 2 different calculations:
- the maximum value of foreign material in the finish goods.
- the minimum value required for domestic content in a final product.
- Manufacturing or processing operations: the good must have undergone a specific manufacturing operation.
Criteria are defined per commodity code.
Common aspects to Preferential and Non preferential Rules of Origin
There are a few common Customs compliance requirements for both Preferential and Non-Preferential Origin as follows:
Proof of Origin
A certificate or a declaration that certifies that goods are coming from a specific country is usually required as a proof of the origin of the goods being imported. It is required for the application of:
- Preferential customs duties. The format of the document or declarations is specified in each Trade Agreement.
- Non-Preferential duties for Economic or Commercial Measures. The format of the evidence of origin is specified in national legislations.
In most cases, the proof of origin requires the approval from the authorities. Sanctions relating to false documentary evidence depend on national legislations.
Legislation for both Non-Preferential Rules of Origin and Trade Agreements contains a list of manufacturing operations that are insufficient to confer origin. For instance labelling, packing…
De minimis or tolerance rule
The “de minimis” or “tolerance” rule permits a specific share (often between 10% and 15%) of the value or volume of the final product to be non-originating without the final product loosing its originating status. In some agreements, the components to which the rule applies are specifically identified. Alternatively, there may be a negative list of components that may not be included in the allowance or a list of products (e.g. HS Chapters) to which the tolerance rule does not apply.
Customs verification of errors, omissions and possible fraud
Origin is a difficult area to implement due to the complexity of the Rules of Origin. Furthermore, Origin has a direct impact on the level of import duties, it is therefore an area that can be subject to fraud. Attention must therefore be given to the verification of origin as part of Customs internal processes.
Incorrect origin declaration can be discovered during a physical inspection of the goods, a check of documents, an customs audit at the traders’ premises, an exchange of information between countries, an information from trade associations, studies on cargo vessels itineraries or other traffic studies through statistical tools.
Penalties for incorrect origin and fraud depend on the national legislations.
- Origin errors and fraud can have various reasons:
- False indication of the country of origin is usually aimed at:
- Keeping a customer happy by providing incorrect (illegal) documentation.
- Benefit from preferential duty rates
- Evade quantitative restrictions
- Evading import prohibitions
- Avoid anti-dumping or countervailing duties.
Non-Preferential Rules of Origin
Although at the WTO, Members agreed to establish the Agreement on Rules of Origin. This is still a work in progress. Until we get an harmonisation agreement, all WTO Members can apply their own Non- Preferential Rules of Origin. As a consequence, the rules varies between countries.
Not all countries have Non-Preferential Origin in their legislation. In certain countries, the legislator has just briefly mentioned Non-Preferential Origin. In others, the domestic legislation contains detailed provisions.
Definition of Non-Preferential Rules of Origin
The definition in the text of the WTO Agreement on Rules of Origin (Article 1) can be summarised as those laws, regulations and administrative determinations of general application applied by any Member to determine the country of origin of goods. Rules of origin shall include all rules of origin used in non-preferential commercial policy instruments, such as in the application of most-favoured-nation treatment, anti-dumping and countervailing duties, safeguard measures, origin marking requirements and any discriminatory quantitative restrictions or tariff quotas. They shall also include rules of origin used for government procurement and trade statistics.
Preferential Rules of Origin
The Preferential Rules of Origin aim to prevent non-members from benefiting from the “Preferential Trade Agreement” by simply transshipping goods through a member country, without actually producing or adding any value to the product in that country. The preferential origin criteria also help to ensure that the trade benefits go to the intended beneficiaries, which are typically the countries that are party to the trade agreement.
To be eligible for this preferential treatment, a product must meet the agreed-upon Rules of Origin criteria listed in the Free Trade Agreement. The rules therefore specify the amount of local content or value-added that must be present in the product for it to be considered as originating from the exporting country.
Preferential Rules of Origin therefore determine whether goods qualify as originating from certain countries and can benefit from Preferential duty rate.
The determination of origin is done by applying the Preferential Rules of Origin.
Structure of Preferential Rules of Origin
Free Trade Agreements contain two types of rules of Origin, the general and the specific rules.
General Provisions and Specific Rules
Preferential Rules of Origin consist of General Provisions and Specific Rules:
- General Provision apply to all products being traded under preference.
- Specific Rules apply to specific HS codes.
- Change in Classification.
- Value added.
- Manufacturing or processing operations.
Most Rules of Origin apply one of these three criteria. However, some Rule of Origin can require that two criteria must be met to obtain Origin. In other cases, a Rule of Origin can give traders a choice between 2 criteria.
Goods are typically considered to be non-originating unless proven otherwise.
Preferential Rules of Origin in Free Trade Agreements: Common Principles
There are common principles that are found in the majority of Free Trade Agreements.
Cumulation of origin
Cumulation allows products originating in a country that is part of a trade agreement to be further processed or added to products originating in another country also part of the same agreement. With cumulation the working or processing carried out in each partner country on originating products does not have to be ‘sufficient working or processing’ however, it must be beyond minimal processing.
Cumulation will be set out in the trade agreement if it applies. As a result, each trade agreement will have its own set of cumulation. There are 3 types of cumulation:
- Bilateral: apply between two countries. Materials originating in either country in the Preference Agreement (Free Trade Agreement) will be considered as material covered by the Rule of Origin.
- Diagonal: apply to more than two countries. Materials originating in a defined country or countries parties to a trade agreement, may be used as materials originating in the country of export.
- Full cumulation: allows for the working or processing undertaken on non-originating products. Products that been worked or processed in a country not part of the agreement may be consider as originating.
Minimal operations (insufficient working or processing)
Minimal operations are minor processes that are not sufficient to change the origin of a product. For instance labelling, packaging… Manufacturing and processing operations must be more than simple operations or processes. Each trade agreement contains a list of these specific operations. The list of minimal operations can vary between agreements so you should check the relevant agreement for your transactions.
General tolerance rule
The general tolerance rule allows manufacturers to use non-originating materials up to a specific weight or percentage value. However, if there is a specific rule for a product allowing the use of non-originating materials, the tolerance cannot be used to exceed the percentage amount specified in the rule. The maximum tolerance will always be that allowed by the specific rule.
No drawback rule
All customs duties and equivalent charges must be paid on any materials, components or parts imported to manufacture a finished product on which preference will be claimed. For instance, this means that trade agreements are often not compatible with IPR. Some agreements allow for partial drawback for a limited period.
Accessories, spare parts and tools
Accessories, spare parts and tools which are supplied with a finished product are treated as being a single product, if they:
- make up the standard equipment usually included in the sale of such items
- are included in the price of the item or are not separately invoiced
- are classified with the item in the tariff of the importing country
These are elements that are used in the production of a product which do not form part of the finished product so are not considered when determining the origin of a product. Neutral elements include:
- fuel, energy, catalysts, and solvents
- equipment, plant, devices, and supplies used to test or inspect the product
- gloves, glasses, footwear, clothing, safety equipment, and supplies
- machines, tools, dies, and moulds
- spare parts and materials used in the maintenance of equipment and buildings
- lubricants, greases, compounding materials, and other materials used in production or used to operate equipment and buildings
It can also include any other material that does not enter the final product if both:
- the material is not intended to enter the final product
- you can demonstrate that the material use was only used in the production process
Accounting segregation for fungible materials
Fungible materials mean materials that are of the same kind and commercial quality, with the same technical and physical characteristics, and which cannot be distinguished from one another once they are incorporated into the finished product.
When using both originating and non-originating materials in the production of products, the producer must make sure their physical segregation otherwise all materials stored together would be considered as non-originating.
But you can use accounting segregation to store originating and non-originating fungible materials together if it would be difficult for you to do this because:
- of the cost
- it’s not practicable
Accounting segregation means the originating materials will not lose their originating status.
This method must make sure that the quantity of finished products obtained, which are originating, is no more than that which would have been obtained if there had been a physical segregation of the materials used.
When using accounting segregation, the origin of the materials that will be physically used in the production process does not matter. At the date of determining the origin of the product, the producer must hold sufficient quantities of originating materials, as reflected in the stock records, to produce that originating product.
Your records must follow a stock management method using accounting principles. This is so that the customs authorities can make sure that no more final products receive originating status than would have been the case if the materials had been physically segregated.
Principle of territoriality
The principle of territoriality makes sure that a product which has originating status is not subsequently exported to a country not included in the agreement for alteration before being exported again under preference. If your goods do not meet this condition they’re not entitled to preference.
Returned goods keep their originating status if you can demonstrate they have not undergone any operation beyond keeping them in good condition.
Goods re-imported after working or processing outside the territory of a partner country
There is limited scope for operations to be carried out in countries not party to the Trade Agreement using Outward Processing but only if all following requirements are met the:
- Total added value acquired in the country not part of the agreement does not exceed a set percentage of the ex-works price of the product.
- Total value of the non-originating materials incorporated in a country in the agreement, taken together with the total added value acquired outside that country in the agreement, does not exceed the value allowed in the list rules.
- Person exporting the goods must give all the documentation needed to verify the total value acquired in the country not in the agreement.
‘Total added value’ means all the costs arising, including transport costs and the value of non-originating materials incorporated there.
Non-alteration – Non manipulation – Direct transport
Originating goods being imported must be the same as those which left the country of export. Goods can move through or be stored in countries not in the agreement. If consignments are split or domestic legal requirements (such as labelling) are carried out, the goods must remain under customs supervision.
The importer may be required to submit evidence, for example:
- A single transport document.
- A certificate of non-manipulation issued by the customs authorities of the country of transit
- Factual or concrete evidence based on marking or numbering of packages
If the goods were transported from a feeder vessel and then consolidated with other consignments in a seaport, then there should be a transport document (for example, a bill of lading) for each leg of the journey.
Proof of Origin
All trade agreements specify the type, format, content and wording that must be used to prove the origin of the goods. The type of proof of origin required depends therefore on the trade agreement.
Proof of Origin can for instance take the form of:
- Paper Certificate of Origin: EUR1 or EUR-MED movement certificate
- Origin declaration
- Importers knowledge
- Generalised Scheme of Preferences form A
The Trade Agreement will also specify the length of time a proof of origin is valid.
Origin Ruling – Binding Origin Information
Traders can apply for an origin ruling from local customs authorities. This can provide certainty, however, it is important to remember that Customs binding decisions can be reversed.
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