Prsentation PowerPoint

Rules of Origin

18-19 June 2015

WCO Knowledge Academy for Customs and TradeMette Werdelin AzzamTechnical OfficerOrigin Sub-DirectorateWorld Customs OrganizationMette.azzam@wcoomd.org

1Master Class in Rules of OriginSessions I-VII2Day 1IBasic concepts of Rules of Origin and the role of WCO in Rules of OriginIIBenefits & Risks of preferential Rules of Origin

Day 2IIIPreferential Rules of Origin why should they be harmonized?IVRecap on the basic elements of Rules of OriginVGroup exercises and case studies VI Summary and closing remarksCopyright 2015 World Customs Organization2Objectives3By the end of this program, you will have acquired knowledge on: concept of origin

impact of rules of origin on world trade

difference between preferential and non-preferential treatment of goods

technical concepts related to the rules of origin

Copyright 2015 World Customs Organization3Rules of origin give the nationality of a product4Why do we have rules of origin?Collect statisticsTo apply the correct rate of dutyTo apply certain policy measures

Is knowing the origin important?Affects the price of goodsKnow if a good is foreign or domesticCan affect the image of a country Copyright 2015 World Customs OrganizationUse of origin in international trade5Preferential duty treatment; granted when the goods are "originating in XX";

Import/export statistics are referring to the origin of goods;

The application of trade policy measures requires the determination of the origin:anti-dumping;monitoring of goods;quantitative restrictions; Origin labelling; andimport/export embargo

The incorrect determination of the origin may lead to incorrect duty application, incorrect marking, etc., with consequential delays and interruption of the trade flowCopyright 2015 World Customs Organization5Definition of rules of origin6This is done by dictating the sufficient level of processing that must take place in a given country in order for the product to be considered as having its origin in that country.

Rules that determine the economic nationality of goods in international trade.Copyright 2015 World Customs Organization6There are two kinds of Rules of Origin7Rules of Origin1. Non-Preferential2. Preferential- The focus of this trainingCopyright 2015 World Customs OrganizationThey serve different purposes

They have different scopes

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Non-preferential rules of origin8Used for determining the economic nationality of products subject to commercial policy measuresanti-dumping tariff quotas etc.

For statistical purposes

For government procurement

For application of Made in-labelling in some countriesCopyright 2015 World Customs OrganizationWholly obtainable and substantial transformation still applies, but here not part of a FTA8Preferential rules of origin9Determine the nationality of a product subject to preferential tariff rates within an FTA/PTA

Except as otherwise provided in this Agreement, each Party shall eliminate its customs duties on originating goods of the other Party

Each FTA/PTA has its own sets of rules of origin

Copyright 2015 World Customs OrganizationThe need for the RoO are clearly defined by this line from a trade agreement (dont know which one, but standard)Every FTA has their own specific way of determining origin910define the conditions under which a product is deemed as originating and therefore suitable for preferential treatment

prevent deflection of trade and transhipment in an effort to (falsely) obtain origin and therefore preferential treatmentRules of origin in Free Trade AgreementsCopyright 2015 World Customs OrganizationWhy do we need to understand preferential rules of origin?11RoO can be used as a development policy tool

Traders?RoO need to be complied with in order to obtain trade preferencesRoO affect the ability to source inputsRoO require certain administrative steps such as acquiring an origin certificateCustoms officials?RoO discriminate between goodsRoO determine your countrys revenue from customs dutiesRoOs administrative requirements can distort tradeTrade officials/negotiators?Defining the origin of a good is increasingly difficult with globalizationRoO influence trade flows RoO can be used as a development policy toolCopyright 2015 World Customs Organization11Prevention of trade deflection12 Country CCountry BCountry AFree trade agreement/Preferential accessRest of the worldRest of the worldRest of the worldTrade deflectionTariff=10%Tariff=0%Tariff=20%Tariff=20%Copyright 2015 World Customs OrganizationThis is the core, the main purpose of why RoO existPreferential origin rules exist in order to prevent third country (C which has a 10 % tariff agreement with B) imports from taking advantage of the concessions which have been made by the parties (A and B) to the preferential agreement. There has to be rules that define what a B-country good is and an A-country good is, otherwise the FTA will be worthless.In a FTA individual members can have different tariff rates towards third country, this problem should not arise to the same extent in a customs union where a common external tariff exist12

13 Two apparent problems

The spaghetti bowl of overlapping FTAs

Restrictive rules of origin distort trade

Problems of rules of origin?Copyright 2015 World Customs Organization13INCREASING NUMBER OF PREFERENTIAL AGREEMENTS14

RTAs notified to the GATT/WTO (1948-2014) by year of entry into forceCopyright 2015 World Customs OrganizationAs of 15 January 2013, some 546 notifications of RTAs (counting goods, services and accessions separately) had been received by the GATT/WTO. Of these, 390 notifications were made under Article XXIV of the GATT 1947 or GATT 1994; 38 under the Enabling Clause; and 118 under Article V of the GATS. Of these 546 RTAs, 354 were in force.

Obligation to notify all agreements + their legal background

So more than 500 agreements have been notified to the WTO, but the statistics tend to overestimate the actual number, for several reason:Goods + services = 2 notificationAccession to existing FTA = new notification

All WCO Members are part of at least 1 FTA except Mongolia, who is currently negotiating its first FTA with Japan.

In general countries are part of around 9 agreements.

Why is there a proliferation?Waiting for the multilateral trade agreement of the WTOIncreasing number of countries have turned towards outward oriented policies since 1990sMore countries have experienced strong economic growth since 1990s

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THE SPAGHETTI BOWL OF COMPLEX AND OVERLAPPING RULES OF ORIGIN LEGISLATIONSCopyright 2015 World Customs Organization15Several examples on regional level as wellHow can RoO distort trade?16Sourcing from third countries is fundamental in a fragmented world economy

RoO are seen by exporters as a costProduction-related costsAdministrative costs

These costs have to be balanced against the benefit from fulfilling the RoO which is tariff preference

Strict RoO often lead to lower utilization of trade preferences

The purpose of rules of origin to prevent trade deflection has to be balanced against this fact

Copyright 2015 World Customs OrganizationFragmented world economy - companies use inputs from all over the world, production taking place all over the world and companies operate all over the worldGlobal value chains makes sourcing inputs from different parties necessaryProduction costs: for example choosing a more expensive production input in order to comply with RoOAdministrative costs: an exporter trying to comply with different sets of RoO in order to export to different countries16Costs and advantages for business17Costs:Issuance fee for certificates in some countriesInternal costs (administration, staff, internal and external audits)Longer processing times at the border in some countries

Advantages:Preferential treatment (lower duty rates)Copyright 2015 World Customs Organization17Conditions for preferential treatment18Definition of originating products

Territorial requirements

Proof of originCopyright 2015 World Customs Organization18Definition of originating product19Origin criteriaInsufficient working and processing / Minimal operationsCumulationTolerance rule (de minimis)Unit of qualificationAccessories, spare parts and toolsSetsNeutral elementsNotes in the list of product specific rulesCopyright 2015 World Customs Organization19Definition of originating product20Wholly obtained goods

Substantial/sufficient transformation of goods:

Change of Tariff Heading (CTH)Added valueTechnical requirements

Copyright 2015 World Customs Organization20Definition of originating product21Wholly obtained goods

Goods naturally occurringLive animals born and raised in a given countryPlants harvested in a given countryMinerals extracted or taken in a single countryEtc. List contained in the rules of origin-part of an agreement

Copyright 2015 World Customs OrganizationWholly obtained goods are: goods naturally occurring; or 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. The definition of wholly obtained also covers goods produced from wholly obtained goods alone or scrap and waste derived from manufacturing or processing operations or from consumption.

These goods belong to the country

21Wholly obtained221006, Rice: Manufacture in which all the materials of Chapter 10 used are wholly obtained

Source: Fotoakuten.se Copyright 2015 World Customs Organization22Definition of originating product23A criterion of a change in tariff classification

A good is considered substantially transformed when the good is classified in a heading or subheading (depending on the exact rule) different from all non-originating materials used

chapter level (2-digit)heading level (4-digit) most commonly appliedsub-heading level (6-digit)item level (8 or 10-digit)

Copyright 2015 World Customs OrganizationMerits: Simplicity and predictability. The Harmonized System (HS) is designed to be a multi-purpose nomenclature and has been established as a common Customs language. Traders and customs officers are familiar with the HS.

Demerits: In some HS chapters extensive knowledge is needed. Although being a multi-purpose nomenclature, the HS is not always suitable for origin determination purposes.

These rules can differ in terms of strictness as well. A CTH that requires a change on a 2-digit level is harder to comply with than a 4-digit level change

23Change in tariff classification24The manufacture of a straw basket, classified in heading 4602 of the HS.

The rule for the whole of Chapter 46 is "manufacture in which all the materials used are classified within a heading other than that of the product". As the basket is classified in HS4602, while the straw material was imported in HS1401, the origin criterion is clearly satisfied.

Heading 4602Heading 1401Copyright 2015 World Customs Organization24Definition of originating product25A criterion of value added (ad valorem percentages)

Regardless a change in its classification, a good is considered substantially transformed when the value added of a good increases up to a specified level expressed by ad valorem percentage

The value added criterion can be expressed in two ways,a maximum allowance for non-originating materials or a minimum requirement of domestic contentCopyright 2015 World Customs OrganizationMerits: Suitable for addressing certain goods which have been further refined or value-added, despite the unchanged classification. The value provides a simpler threshold than manufacturing or processing operations.

Demerits: Lack of predictability and consistency due to currency fluctuation and possible exposure to transfer pricing. Difficulty to calculate the real value of the good.

Ex-works price is the method the EU uses in their agreementsPerhaps the easisest to apply in practise out of the three origin methodsNegatives: incurs a high administrative burden due to necessity of calculating the various cost componentsNegatives: fluctuating exchange rates can alter the scene completely, a product that has origin one year can due to volatile exchange rates not have it the next year

25Definition of originating product26A criterion of specific manufacturing or processing operations (technical requirement)

Regardless a change in its classification, a good is considered substantially transformed when the good has undergone specified manufacturing or processing operations

So-called Ottawa-type rule

Ex: manufacture from yarnCopyright 2015 World Customs OrganizationPrescribes for each product or product group, certain manufacturing or processing operations that have to be carried out on any non-originating materials/inputs in order for the final product to be originating

Merits: A more technical, objective criterion.

Demerits: Need for frequent modifications to catch up with technological developments. To be precise, longer and more detailed texts are needed.

26Definition of originating product27HS Code No.Description of GoodsOrigin Criteria03.04Fish fillets and other fish meat (whether or not minced), fresh, chilled or frozen.ex03.04 (a)- Fish surimiex03.04 (b)- Fish fillets, fresh, chilled or frozen[The country of origin of the goods of this split heading shall be the country in which the live fish have been captured - Ottawa type rule][CTH - Change of tariff classification rule ][The country of origin shall be the country in which the CIF value of non-originating materials imported and used in the production does not exceed 75% of the ex-factory price of the goods. - Value added rule ]ex 03.04 (c)- OtherCopyright 2015 World Customs Organization27Originating or not?28An electric hair curling iron (subheading 8516.32) made in EU from Japanese parts (8516.90)

Net cost: 3,65Non-originating inputs: 1,20Manufacturing costs: 2,45Profit: 0,50Ex-works price: 4,15Transport: 0,25FOB price: 4,40

Copyright 2015 World Customs Organization28Originating or not?29List rule for hair curling iron (8516.32) in a given FTA:

Copyright 2015 World Customs Organization29Originating or not?30(3) Not originating!(4) Originating!

Input materials cannot be1.2 / 4.15 = 28.9%from the same headingValue/ex-works =as the product

Copyright 2015 World Customs Organization30Definition of originating product31Insufficient working and processing / minimal operations

A reverse form of the specific manufacturing operations

Specifically identified manufacturing operations that are insufficient to confer origin (e.g. labeling, packaging or assembly)

Copyright 2015 World Customs OrganizationIncluded as a list in the origin provisions of a FTA

Also included in non-preferential rules of origin31Definition of originating product32Cumulation

Definition of origin cumulation

Exception to the principle of originating (list rules versus cumulation)

Cumulation provisions only in preferential rules of originCopyright 2015 World Customs Organizationrules of origin are as we have seen what needs to be done to a given product for it to be originating and thereby have access to a preferential treatment

Definition of origin cumulation contracting parties may source non originating raw materials and components form specified countries and count them as originating when incorporating them into a final good

cumulation is the term used to describe a system that allows originating products of country A to be further processed or added to products originating in country B, just as if they has originated in country B. The resulting product would have the origin of country B. In some cases there is a possibility for cumulation of processes instead of cumulation of originating inputs

list rules CTH: import non originating materials, fulfill the CTH rule, then the final good is originating

cumulation: import materials from a partner country, incorporate it in final good, then the final good is originating

cumulation is an exception to the originating principle, just like the tolerance rule

cumulation only exists in preferential rules of origin the goods must originate in a specific country to have a preferential treatment. In non preferential rules of origin, we just need to find out, where the good originates.

32Definition of originating product33Cumulation

Why is cumulation important?

What are the requirements for using cumulation provisions?Same rules of origin in FTAsAgreement on mutual administrative assistanceCopyright 2015 World Customs OrganizationWhy is cumulation important? because of cross-border production and sourcing, cumulation rules are a very important component. They are important for regional production networks as they allow the more advanced countries to outsource labor-intensive production stages to low-wage partners. wider possibilities for cumulation would help foster deeper regional integration and the spread of regional production networks based on freedom of sourcing of inputs. This is important to create an environment where the regionally based networks are able to source from the most efficient sources in the world at world prices. in other words, coupled with simple RoO, cumulation provisions will make it easier for regionally based companies to exploit economies of scale.

Requirements for using cumulation provisions same rules of origin in FTA between the involved countries cumulation can only be applied between countries operating with identical rules of origin this is already the case, when a sourcing country is specifically mentioned in an agreement between the exporting and the importing country

agreement on mutual administrative assistance between all involved countries in order to be able to verify the origin of the final good this is already the case, when a sourcing country is specifically mentioned in an agreement between the exporting and the importing country

33Definition of originating product34Different kinds of cumulation

Bilateral cumulation

Diagonal / regional cumulation

Full cumulation

Extended cumulation

Copyright 2015 World Customs OrganizationThese are the kinds of origin cumulation that exist in different origin systems.

We will have a closer look at the definition of these different kinds of cumulation and then a closer look at the different origin systems in the world and see what kinds of cumulation they include.

34Definition of originating products35Bilateral cumulation

Operates between contracting parties to a FTA

Allows the use of originating products from the partner country as if they were already originating cumulation of originating inputs

Example: Shirts (HS 6205) - If the rule requires Manufacture from yarn, originating fabrics can be imported from Country A and used in the production of shirts in Country B which then qualify for preferential access to Country A. Country ACountry BFabricsShirtCopyright 2015 World Customs OrganizationStrengths and weaknesses

Bilateral cumulation: most restrictive and unfortunately the most common in EU and US FTAs. Creates the strongest incentives to add value within the free trade zone.

35Definition of originating products36Diagonal/Regional cumulation

Sourcing possible from parties to a FTA or between countries with interlinked trading agreements

Countries tied by the same set of preferential origin rules can use products that originate in any part of the area as if they are originating in the Exporting/manufacturing country

Cumulation of originating inputs

Country ACountry BFabricsShirtCountry CCopyright 2015 World Customs OrganizationStrengths and weaknesses

Diagonal cumulation: less restrictive, but can still be very costly for traders since inputs used have to be already originating

36Definition of originating product37Full cumulationSourcing possible from all countries which have the same rules of origin in their free trade agreement with the importing country

and/or

Cumulation of operations possibility to incorporate inputs whether originating or notCopyright 2015 World Customs OrganizationStrengths and weaknesses

Full cumulation: is the most liberal of the cumulation alternatives because it allows for a more fragmented production processes. This in turn fits well with the global economic climate today and could stimulate increased economic linkages. It is also the least costly alternative if inputs can be sourced within the FTA.

Full cumulation puts a strain on the administrative systems, a sophisticated system is needed to track back on the different production processes. Administrative cooperation needed between the countries in the FTA.

37Definition of originating product38Full cumulation cumulation of operations

All operations carried out in the participating countries are taken into account. Inputs do not need to be originating before being exported from one party to another for further working or processing

PSR made from yarn:A shirt made in Country B from fabricmade in Country C (which in turnwas made from non-originatingyarn from Country D) would qualify for preferential treatment

Country ACountry BNon-originating fabricsShirtCountry CCopyright 2015 World Customs OrganizationThe most liberal alternative

With other kinds of cumulation, this would not be possible, as the fabric is not originating in country C due to the double transformation criterion. In this case, due to the possibility to cumulate operations, the double transformation takes place on countries B and C jointly, and the shirt becomes originating in country B38Definition of originating product39Extended cumulation

(At the request of the exporting country), materials originating in another (neighboring) country may be considered as originating when incorporated in a product obtained in the exporting countryCopyright 2015 World Customs OrganizationCovers in some cases the same as full cumulation cumulation with all countries with identical FTAs

this is a rather new kind of cumulation it is used in EUs agreements with ACP countries that are being negotiated (EPA Economic Partnership Agreement) used to help developing countries without harming the importing (developed) country

Canadian approach is to allow cumulation with all countries with whom Canada has a free trade agreement. If you accept to import the goods directly from a partner country under a preferential treatment, why would you not accept the goods if they are used in another partner country first?

39Definition of originating product40Tolerance rule (de minimis)

Permits manufacturers to use non-originating materials up to a specific percentage without fulfilling the PSR

Relaxation of the rules of origin

Different threshold in different agreements

Possibility to exclude certain products from the tolerance rule or to have different thresholds

Copyright 2015 World Customs OrganizationStrengths and weaknesses

The tolerance rule can lessen the burden of RoO for products with non-originating inputs,

Can be used as hidden protection for example, among textiles and clothing, the sector specific tolerance rules are often different and less favorable than the general tolerance rules.

40Definition of originating product41Unit of qualificationAccording to the Harmonized System

SetsAccording to the Harmonized System

Packing and packaging materials and containersThe origin of packing and packaging materials and containers presented with the goods shall be disregarded, provided such packing and packaging materials and containers are classified with the goodsCopyright 2015 World Customs Organization41

Containers classified with the goodsDisregarded !4242

Containers - Separate goods4343Definition of originating product44Accessories, Spare Parts and Tools

Accessories, spare parts, tools and instructional or other informational materials classified and presented with a good shall be disregarded, provided they are normally sold therewith and correspond, in kind and number, to the normal equipment thereof

Copyright 2015 World Customs Organization44

Spare parts and toolsInstructional materialsDisregarded !4545Definition of originating product46Neutral elements

The origin of the power and fuel, plant and equipment, including safety equipment, or machines and tools used to obtain a good or the materials used in its manufacture which do not remain in the good or form part of the good shall not be taken into accountCopyright 2015 World Customs OrganizationSome elements are excluded from the determination of the origin as we only look at the materials going into the product and not whatever is used to make them (electricity, tools etc.).

When using value added rules one will though in principle take a bit of these natural elements into account.

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Disregarded !4747Territorial requirements48Principle of territorialityExported goods that are re-imported are considered an non originating, unless proof thatThe goods are the sameThey have not undergone any operation except for their preservation

Direct transportation between exporting and importing countryUnless proof of non manipulation / non alteration / under customs control

ExhibitionsCopyright 2015 World Customs Organization48Proof of origin49Preferential originNeed for a proof to claim preferential treatmentPaper form, origin declaration, e-certificate, importer declaration.Specific rules relating to proofs are included in the agreement

Non preferential originNo need for a proof in most casesProof needed if quotas or other restrictions applyCopyright 2015 World Customs Organization49Types of preferential origin certification systems50Type of systemKey features1. Authority issued certification, incl. e-certificatesGovernment authorities or delegated bodies issue the certificate of origin in a prescribed form2. Approved Exporter systemExporters with prior approval may make origin declaration on commercial documents3. Fully exporter-based certificationAny exporters can sign and issue a certificate of origin of a prescribed form 4. Importer-based certification

Importers certify the origin of goodsSelf-certification = issuing authorities not involved in every single issuance of proof of originCopyright 2015 World Customs OrganizationAuthority issued certification, incl. e-certificates

EU = customs, Others = Customs, Ministries of Trade, delegated to Chambers of Commerce etc.

2. Approved Exporter system

Can be used in combination with authority issued certification

Can sometimes be diluted : registered exporterNew EU GSP system. Exporter will issue a statement on the origin of the goods (error from exporting authorities vs good will)

3. Fully exporter-based certification

US and others

4. Importer-based certification

US and othersIn some agreements the importer sign a declarationUS/AU: must know the origin and be able to prove it

50Proportion of certification systems around the world51Copyright 2015 World Customs OrganizationKey findings are :More than half of the FTAs studied introduce a kind of self-certification of origin, i.e. approved exporter, fully exporter-based certification, or importer-based system.The authorized exporter system is mainly used in the FTAs involving one or more European countries, while the fully exporter-based certification system is typically utilized in the FTAs by countries in the Americas.Intra-African and intra-Asian agreements appear to prefer the certification of origin by competent authorities.

51Definitions : concepts at a glance52a. certification of originb. self-certification of originTypes of origin proceduresc. proof of origin(i) certificate of originTypes of evidence on origin(iii) declaration of origin(ii) self-issued certificate of origind. indication of originOtherCopyright 2015 World Customs OrganizationAn indication of origin should be sufficient for non preferential purposes.52When is a proof of origin needed for preferential purpose?53ELIGIBLE FOR PREFERENTIAL TREATMENTGoods producedCopyright 2015 World Customs OrganizationGoods produced: either wholly obtained or sufficiently transformed

In general, a claim for preferential tariff treatment under a certain FTA or GSP is required to be supported by a proof of origin, which must by presented to the Customs authority of the importing country upon request.

However, in many FTAs, the requirement to present a proof of origin is exempted under a certain threshold. In addition, some agreements provide exemptions for travelers' luggage and small packages.

53Where to find the rules of origin54WTO Agreement on Rules of Origin

Revised Kyoto Convention (RKC), Specific Annex K

Domestic legislation

Free trade agreements

Copyright 2015 World Customs Organization54Role of WCO in origin matters55Organize the Technical Committee on Rules of Origin (TCRO)

Support the work of the WTO Committee on Rules of Origin (CRO)

Support Members for the correct understanding, management and application of rules of origin

Provide technical assistance seminars to Members and private sector

Copyright 2015 World Customs OrganizationWCO initiatives on preferential rules of origin56Action Plan to improve the understanding and application of preferential rules of origin (2007)

Revenue Package Action Plan (2010)

Copyright 2015 World Customs Organization56WCO ACTION PLAN ON PREFERENTIAL RULES OF ORIGIN 57WCO Action Plan to Improve the Understanding and Application of Preferential Rules of Origin approved by WCO Council in June 2007 (doc. SP0237Ela).

5 key initiatives: establishment of a preferential origin database, comparative study of existing agreements, training and seminars, etc.

17 practical measures outlined aiming at improving the management and application of preferential rules of origin, which includes: Improved international cooperationImproved cooperation with the business communityIdentification and publication of standardsGreater use of risk analysis and increased enforcement

Copyright 2015 World Customs OrganizationORIGIN DATABASEhttp://origindb.wcoomdpublications.org/Login.aspx

58Copyright 2015 World Customs Organization58Comparative study on RoO

3 major origin models: European, ASEAN and NAFTA models59Copyright 2015 World Customs OrganizationMEGA regionals (TTIP, TPP, EU-JP, African Union etc.) might lead to new models and rules

Euro-Med = one set of rules for 40 PEM countries = identical

This is not the case for the 2 other models (ASEAN and NAFTA) = similar, but not identical

ASEAN = a hub in the region. There is an agreement between the ASEAN countries themselves and a number of agreements between ASEAN and other countries59Additional modules60Under the umbrella of the Comparative Study, the following studies are currently available :

Comparative Study on Certification of OriginOrigin Irregularity Typology StudyWorld Trends in Preferential Origin Certification and VerificationCategorization and analysis on Preferential Rules of OriginStudy on the use of Change in Tariff Classification-based rules in Preferential Rules of OriginCopyright 2015 World Customs Organization60New tools developed under the Revenue Package Phases I and II61Origin verificationStudy on trends in preferential origin verificationGuidelines on origin verification

Origin certificationStudy on trends in origin certificationGuidelines on origin certification

Origin irregularitiesOrigin irregularity typology studyGuide to counter origin irregularities (June 2015)

Guidelines on advance rulings for classification, origin and valuation (June 2015)

Diagnostic tool for control of classification, valuation and origin (June 2015)Common infrastructureDiagnostic tables

Copyright 2015 World Customs Organization61