Rules Of Origin

RULES OF ORIGIN IN THE FOREIGN TRADE WITH THE EU and within CEFTA by Helmuth Berndt 03/2008

/ Pauza /

Reasons for rules of Origin 1.International division of labour = - “ global outsourcing” by - - global sourcing of materials and - - global manufacturing of components 2. Worldwide trade facilitations - Customs preferences for free-trade partners in addition to the “ Most favoured nations rule” of the WTO-community 3. Multi-purpose apply for - Management of quotas, - National statistics - Anti-dumping measures

Positive Fallout of Rules of Origin

Financial advantage :

Preferential tariffs in the EU/donor state (reduced rates or dismantled rates down to zero)

Economic impact:

National image, sustainable trade

relations

Who should know about Rules of origin?

The exporter

- origin is part of any foreign trade

operation

- to benefit from Customs

preferences on international markets

The importer

- to benefit from bilateral preferences

for foreign goods ( i.e. EU, EFTA, US)

- for sale of the goods to a domestic

- manufacturer or dealer

The manufacturer

- for producing semi- finished or

finished goods

- for local sale

The dealer

- for sale of the goods to a local

manufacturer or another dealer

This means: Every businessman

“ Seal of quality” for originating goods

- Upgrading of the Serbian

competitiveness on the EU Market -

Intensity of EU-Preferences Complete integration: European Union Customs Union: With Turkey EU-EFTA Agreements: Norway, Iceland, Liechtenstein, Switzerland “ Europe Agreements”: No more countries (Bulgaria, Romania were the last) ACP - Convention: 74 states Mediterranean Agreements, :North Cyprus (Turkish part), Israel, PNA, 3 Maghreb states: Morocco, Tunisia, Algeria Mashrek group: Egypt, Jordan, Syria, Lebanon, PNA Stabilisation and Association Agreements with Croatia, Macedonia and Albania (as Interim Agreement) Abroad: South Africa, Mexico, Chile Autonomous and unilateral: 179 developing countries and West Balkan beneficiaries: BiH, S, CG, Kosovo/UNMIK

System of Origin Preferential definition Non-preferential definition Commercial definition EU-system System of Other countries EU- definition Worldwide definition General system of Preferences (UNCTAD) Regional definition (“intra-trade”) (CEFTA 2006) Rules for specified Products (textiles) or Rules for all the rest of products Actually in process Contains elements of the preferential Origin Made-in origin UK in 1887 Madrid-Agreement 1891 Madrid-Agreement 1958 National legislation Most import. aspect TRIPS WIPO-Geneva Border measures (confiscation) WTO mandate to WCO bilateral unilateral

2% 3% 10% 7% 7% 7% 7% Japan Free Trade Association Customs Union 4% Japan

Principles of Management

- Contractual accordance

- Documentation

- Exact bookkeeping

- Organizational impact

- Service providing

- Customs cooperation

What do you need for the definition of the origin ?

HS-heading of imported parts

HS-heading of finished goods

ex-works-price of the product

Customs value of imported materials per unit cost

5 . Your share for the whole manufacturing process

- Wholly obtainment

- Sufficient processing

- Non-sufficient processing

- Minor treatment

Agreement to be applied

- Possibility of accumulation?

- - Which kind?

What should be the criterion for the Origin of goods?

Wholly Obtainment or Sufficient Processing

What is “Wholly Obtained” ??

Tomatoes 0702 :Processing Heading 2103 Tomatoes1 :EXPORT “ WHOLLY OBTAINED” ORIGIN BECAUSE EXPORT: ORIGIN, BECAUSE RAW MATERIAL IS ALREADY WHOLLY OBTAINED (spices?)

Mineral products

Extracted from the

Soil

=

Originating

Products

=======!!!

4403 4407 9504 IS IT WHOLLY OBTAINED ? 4403 WHOLLY OBTAINMENT

Pencil Pos.: 9609 Wood in the rough Pos. 4403 Wood sliced, chopped lengthwise Width: 10 cm, Length: 150 cm Pos.: 4407 Wood lengthwise veneer sheets Width: 5 cm, Length: 150 cm Pos.: 4408 Live Tree Pos.: 0602 Wood Fuel Pos.: 4401 Wooden Box Pos.: 4415

Example for Obligatory Wholly Obtainment

Heading 1902, pasta

If the pasta contains 20 or less % of meat, all the cereals must be wholly obtained,

If it contains more than 20% of meat , all cereals and all meat or fish (chapters 2 and 3) must be wholly obtained.

What is A Sufficient Processing?

Basic principles :

Change of the HS-heading

Percentage of used materials

Processing procedure

List of Processing:

=

Annex to the

Origin Protocol

Column 3 and 4

Conditions only

refer to imported

materials

What is The HS???

The Structure of the HS 01 04 20 90 00 10 Chapter HS Heading HS Subheading HS Subheading National Statistic (Combined Nomenclature) National Internal National Internal

The HS is divided into 21 SECTIONS 97 CHAPTERS 1241 HEADINGS 5016 SUBHEADINGS SECTION/CHAPTER NOTES SUBHEADING NOTES General Rules I – V ----Changes of the system per 1.1.2007!---

Harmonized System

Legal Texts:

Section Notes

Chapter Notes

Subheading Notes

Text of the Headings

Text of the Subheadings

Not Legally Binding:

Title of sections

Title of chapters

Explanatory notes

But binding:

The “General Rules”

HS-production Principle (Example Textiles)

Raw materials

Fiber, not prepared

First semi-product

Yarn

Second semi-product

Fabric

Finished product

Textiles, clothes, apparel

What Means

“ Ex chapter 20

And

“ Ex 2008”

???

“ Ex chapter 48”?

And

“ Ex 4811”??

Example for change of headings: Tomatoes IMPORT FROM EGYPT NON ORGINATING PROCESSING :EXPORT Tomatoes 2 Heading 2103 Heading 0702 ORIGIN BECAUSE SUFFICIENTLY PROCESSED (CHANGE OF HEADING)

Example for restriction of used materials:

Heading 3822: "Diagnostics…..“

Foreign materials are allowed up to:

50 %, related to the ex works-price of the finished goods .

The percentage relates to the " Ex-works Price " of the finished goods.

The value of the used materials is their customs value.

So: Check the Customs value carefully!

Be aware of the exchange rate!

Example for change of heading and restriction for the used materials: Chapter 18 Cocoa and cocoa preparations Semi colon reads = and !

Combined criteria - Medicine

HS headings 3003, 3004:

1. Tariff change of all used materials

But: materials of headings 3003 and

3004 only up to 20% ex-works

and

2. Used materials must not exceed 50% of the ex works-price.

40 % rule for imported parts

Restriction of the value for special parts to the value of the originating materials

Obligatory origin for special parts

- extremely restrictive -

Example for technical criteria: Sewing Machines of HS- heading 8452

Example for

Exclusion of a heading,

exclusion specific imported materials

and

restriction of imported materials:

Heading 1904, I.E. Corn Flakes Question: Is it allowed to use imported mineral salts?

Example for minimum- input criteria:

Heading ex 2008 ..Nuts..

“ Manufacture, in which the value of originating nuts and oil seeds …used exceeds 60% of the ex-works price of the product”

Other example for minimum- input of Serbian originating materials:

HS-heading 2402,

… Cigarettes…:

At least 70% by weight of the used tobacco must be originating in the country

Heading 2309, preparations for animal feeding

All cereals, sugar, meat, milk must be originating products of

Chapter 3,

fish must be wholly obtained in Serbia

Example for necessary processing procedures:

Headings:

ex 4415

4816

7601

Example for Necessary Production Range: 1. Glass Mirrors of Heading 7009 : "Manufacture from materials of heading 7001” 7001 = waste and scrap of glass, glass in the mass

2. Clothes and garments of chapter 61 and 62:

"Manufacture from yarn "

" Manufacture from animals of chapter 1”

3. Preparations of meat

ex Chapter 16:

Notice: Chapter 1 = Live animals!

Rules for cotton products:

1.Natural cotton fibers, not prepared for spinning HS 5201

2. Cotton yarn, HS 5203

Manufacture from natural fibers, not prepared for spinning

3. Cotton Fabric HS 5208 Manufactured from natural fibers, can be prepared for spinning

Jeans HS 6203 Manufactured from YARN

Alternative 1/fabrics:

Printing of the raw fabric in Serbia

(Plus at least two finishing steps)

But: Value of the unprinted fabric only up to 47,5 % of the ex-works price of the goods

Alternative 2/clothing:

Embroidered clothing:

Manufacture from un embroidered fabric with a value of not more than 40 % of the ex-works price of the finished good

Sufficient working without a change of heading

Example:

Export of worked precious stones, heading ex 7103

Criterion : manufacture from unworked precious stones heading ex 7103

Reason for the Rule:

The working of a raw precious stones needs a high complex of processing input, esp. labor input, which is “sufficient” without a change of heading

Why is a minor processing not accepted as origin???

Is "Mixing” always a simple operation ??

When will the "Mixing”be sufficient ??

Origin Rules for Sets :

All components must be originating, but

up to 15%

there may be non-originating material in the set

Example for Sets

Set of foodstuff for the preparation of spaghetti, containing:

Spaghetti

Cheese

Tomato paste

All this put up in a carton goes to HS Heading 1902 as Spaghetti because this is the material which gives the essential character (HS-rule 3b) - see also HS 9605 (traveller sets) -

When should you use the alternative criterion??

Fertilizers Ex - 3105

Standard rule col. 3:

Manufacture, in which all materials used are classified within a Heading other than that of the product.

However, materials classified within the same heading may be used, provided their value does not exceed 20% of the ex-works price of the product

And the value of all materials used does not exceed 50% of the ex-works price of the product

- COMPLICATE -

Alternative Rule Col.4:

Manufacture, in which the value of all the materials used does not exceed 40% of the ex-works price of the product

- Simple but restrictive -

Example Color Lakes

HS - heading 3205 Standard rules col.3

Manufacture from materials of any Heading, except

Headings Nos. 3203, 3204 and 3205.

However, materials from heading No. 3205 may be used, provided their value does not exceed 20% of the ex-Works Price of the product

- Very complicate, large classification works -

Alternative Rule Col. 4:

Manufacture in which the value of all the materials used does not exceed 40% of the ex-works price of the product

Simple and allows products of heading 3205 up to 40%

Loudspeakers

HS heading ex 8518

Standard rule col. 3:

Manufacture:

In which the value of all materials used does not exceed 40% of the ex-works price of the product;

Where the value of all the non - originating materials used does not exceed the value of the originating materials used

Complicate and restrictive

Alternative Rule Col. 4:

Manufacture in which value of all the materials used does not exceed 25% of the ex-works price of the product

Simple but restrictive -

Classification of Parts

1. The heading of the principle good contains parts (94.01)

2. There are own headings for groups of goods (8708 for 8803, 8701 – 8705) 9305…….

3. The notes rule the classification of parts (note 3 chapter 95 / note 2 chapter 90)

4. If there is no solution by rule 1 – 3, then parts have to be classified after their own composition / nature (mast of a sailing boat / aluminum goes out of 89 Chapter 76)

The Use of Part s

If parts have the same HS-heading as the finished product, then there is no change of heading!

Example:

Dolls ex chapter 9502

Origin criteria : change of heading of the used materials.

But parts have the same heading 9502!

Result:

The assembling of only the parts is not sufficient , the production line must start on a lower base which means production of the parts here

Levels of co-production

1. Bilateral accumulation

- needs originating products

2. Diagonal accumulation

- needs originating products

3. Pan-European accumulation

- needs originating products but with chances for

minor treatment

4. Pan-Euromed accumulation

- needs originating products of the partner states

5. Full accumulation

(so far only with the Maghreb states, the ACP –states and within EEA (EU + EFTA without CH )

- includes all accumulations and minor treatment

Bilcum Bilateral Accumulation PREFERENCE AREA A CONTRACTING PARTY B

Conditions for bilateral accumulation

1. Origin of the materials to be documented

2. Treatment more than minor processing

- but may be less than sufficient processing

3. If only minor processing:

Origin will be retained

4. Non-originating materials have to be processed sufficiently

---actually: against EU only “donor content”,

within CEFTA 2006 possible---

MULTI - LATERAL ACCUMULATION MULTILATACCUM PREFERENCE A AREA CONTRACTING B PARTY C CONTRACTING PARTY

Conditions for diagonal accumulation with EU

1. Agreement with the EU for diagonal accumulation

2. Agreements with the partner states with identic rules of origin

3. Origin of the materials

4. More than minor processing

- but less than sufficient processing will be allowed

5. Non-originating materials have to be processed sufficiently

---CEFTA 2006: Fully applicable---

Example for Diagonal Accumulation (Theoretically!)

Export product: woven fabric of wool, HS 5112, woven in Serbia for export to the EU

Input: yarn of wool of HS 5107, originating in Croatia and BiH

The weaving in Serbia is more than minor processing

Result: The fabric Is originating in Serbia

Condition: Croatia and BiH are contracting parties to the EU and to Serbia with the same rules of origin.

In case of minor processing in Serbia, the origin falls back to the country with the highest input.

--- Example applicable after SAP-Agreements

of Serbia and BiH

--- Example already applies within the

CEFTA-2006 - zone ---

Pan- European accumulation

Origin in the EU Origin in partner state

1. Processing of originating products:

(from the accumulation zone)

- Processing more than minor treatment:

= Origin in this country

(Compliance to list-criteria is not

necessary!)

- Processing only as minor treatment

= Origin in the country with the highest

value share

2. Processing of non-originating materials:

= Origin only by sufficient working or

processing ( according to “list criteria”)

3. Unchanged sale of the materials:

Goods retain their origin

Pan-European accumulation

- Agreements between all partner states providing the Pan-european accumulation / does not exist with the West Balkan states (but between CEFTA members)

- Originating materials

- No more separated bilateral or diagonal accumulation

- Minor treatment with originating materials possible

- - Origin according to the highest input

- Non-originating materials need sufficient processing

Pan-European accumulation Case 1- Use of originating materials - more than minor processing-

Yarn ( HS 5204) origin: EU

Serbia for weaving into

raw fabric ( HS 5208)

origin: Serbia

EU for dyeing

origin: EU

Sold from the EU to Switzerland

Weaving and dyeing not sufficient ( see list criteria for HS 5208!),

but:

Both processings are more than minor treatments within the pan-european accumulation

Applied for:

Bilateral trade with the EU and

diagonal export of the raw fabric to Switzerland

- - example is actually theoretically- -

Pan- European Accumulation Case 2 – Minor processing

Jeans / Origin Serbia ( HS 6203)

with EUR.1 to Bosnia for packing and export to the EU:

Values : Jeans 20.- Euro

Packing costs 2.- Euro

Plastic bag (Croatia) 0.5 Euro

Other costs 2.5 Euro

Prices ex works 25.- Euro

Added value in Bosnia: 5.-- Euro

Highest value input = Serbia

Origin = Serbia

Preference in the EU for Serbia export to CEFTA??

- the example export to the EU is actually theoretically - -

Pan-european accumulation Case 3 – actually not applied against EU

Assembling of a ball point pen of HS 9608

- All used parts are of HS 9608:

- Cartridge, origin EU, value 2.— €

- Plastic parts, origin Macedonia, value 1,-- €

- Clip, origin Bosnia value 1.-- €

Ex-works price in Serbia value 5.-- €

Export -> Croatia, Origin is EU ( highest share)

The “ List” does not apply!

If: Cartridge is of origin Serbia: Origin of the pen will be Serbia

If: Cartridge is of origin Bosnia: Origin of the pen will be Bosnia

If: Clip is of origin China: No preferential origin for the pen

No Certificate EUR.1

- 10%-tolerance rule does not apply:

- - Minor treatment is given and

- - 10%-tolerance is exceeded

Actually: „Donor content“ of the EU:

- Materials originating in the EU

count as originating in Serbia

- But : Materials originating in

Serbia do not count as originating in the EU

= „ unilateral concession“

No Draw Back rule

General background

Which goods are concerned?

Example: TV tube

Origin : South Korea

Value not exceeding 25% of the ex - works price of the TV (HS 8528)

Clearing of the tube as

1. Inward processing without levying of duties or

2. Levy of duties for free circulation

Export of the finished TV to EU with EUR.1 Consequences:

1. Duty free access of the Korean TV tube to the EU - market,

2. Disadvantage for European producers against Serbian producers because of customs duties to be paid by the European producer to the EU market.

Result :

No draw back for the paid duties or levy of duties for the tube in case of inward processing in the moment of exportation of the finished TV

- - - The no-draw back rule is not

applied actually!

But standard in all new Agreements

of the EU ( and in CEFTA 2006 !)

Example The Bagatelle Rule

Principle: Up to 10% of prohibited materials are allowed.

Product: Zippers of heading 9607, ex-works price 60 CSD.

Used materials:

Cotton ribbon of heading 5806

Artificial yarn of heading 5404

Mechanical parts of heading 9607 from Taiwan, value

5 CSD

List condition:

Change of heading for all used materials

But mechanical parts have the same heading!

Solution:

5 CSD do not exceed 10% of the ex-works price. The Zipper is originating.

---This 10%-tolerance does not apply for goods of Chapters 50 - 63 and for “minor treatments”

Impact of the rules of origin on the internal structure of your company :

C A L C U L A T I O N Calculation 1 Purchase Supplier Preference Section Planning Developing Production Storage of Materials and Finished Products Export /Dispatch Shipment

Calculation 2 Purchase Production Calculation Case Worker Preferences Sales Marketing