Rules of Origin
The purpose of rules of origin is to identify the origin of goods. The position is straight-forward when they are produced in a single state. Where they are comprised of raw materials and processes undertaken in various states, complex issues arise regarding origin. Multinational entities may manufacture goods comprised of components from and subject to processes undertaken in different countries as part of a chain.
Rules of origin play a number of functions. In some cases, there may be preferential customs treatment or duties for goods from a particular country. There are commonly lower or zero duties on imports from less developed countries. There may be tariff quotas and limits on the amount that can be imported from a particular country. Another case is there may be measures against goods from a particular country by way of sanctions or countervailing measures were lawful under World Trade Organisation rules (or not).
The rules of origin are contained in the relevant agreements to which they relate. Attempts have been made to provide common procedural and administrative rule. However, the specific rules applicable in any given case will depend on the international agreement that applies.
The World Trade Organisation has promoted common rules of origin in order to facilitate international trade. The common rules are an integral part of international agreements on customs tariffs and classifications. They are applicable largely in relation to non-preferential trade issues.
Rules of origin may also be relevant in relation to export quotas in some limited contexts.
Tests of Origin
In case of simple goods which are processed and comprise raw materials from one country, the origin is easily defined. Where goods involve material or processing involving more than one country, one or more tests are used to designate the origin
Under the value-added percentage test, there may be a minimum or maximum percentage of value required for the goods to be treated as having the origin of the particular country. Where the added value of the most recent processing exceeds a defined percentage, it may be deemed to have the origin of the country on which that processing took place.
Origin may be designated on the basis of the substantial transformation of the goods. The country in which the most recent substantial processing has occurred may be deemed the country of origin.
In some cases, certain specific significant processes may be defined as conferring a new origin.
The rules interact with those on tariff classification. Sometimes where the processing is such as to change the tariff classification at a particular level (four digits or six digits) that may be deemed to be a change sufficient to attract origin in that place.
The European Union usually treats goods in the case of non-preferential origin, by reference to the country on which they undertook their last substantially economically justifiable processing or working. In the case of preferential treatment, the origin is determined by the particular international agreement under which the preference arises.
Product Specific Criteria
Product specific rules of origin based on tariff change are used in many European origin agreements. They are often combined with additional criteria such as requirements that certain non-originating material inputs do not exceed a certain value threshold or that certain input materials used must be wholly obtained or that they must be already originating.
There are specific rules on origin in certain sectors, including in particular textiles More detailed rules are provided for meeting the criteria of origin. The working or processing is to constitute a complete process. This is the working or process as a result of which, the products obtain receive classification under different customs heading. The provisions specify the processes concerned. They provide for certain processes which are always deemed insufficient of themselves.
Preferential rules of origin found in trade agreements are usually more restrictive than the rule of origins for other purposes. This is in order to prevent the deflection of trade by transiting goods through a preference country in order to obtain preferential treatment.
Preferential rules of origin are defined in the relevant trade agreement. The origin criteria typically involve “wholly obtained” goods and “substantial sufficient transformation” criteria. Some exceptions to substantial transformation criteria may be provided.
Generally, the rules require the direct consignment of goods from the place of production to the place where it is preferred. This is to ensure that the bulk cargo, which may be difficult to identify is identical of the goods leaving the export country and to reduce the risk of intermixing with non-eligible goods which may be transitting to other countries.
Revised Kyoto Convention Approach
The Kyoto Convention annex provides that the “wholly produced” basis applies mainly to natural products and goods made entirely from them. Goods containing imported products are of undetermined origin and not dealt with under this principle.
The second principle applies where more than one country is involved in the production of goods. The fundamental test is substantial transformation.
Goods whose production involves more than one country, are deemed to originate in the country where they underwent their last substantial economically justified processing, working in an undertaking equipped for that purpose and resulting in the manufacturer of a new product or representing an important stage of manufacture. Whether or not the process is the last relevant process is a technical question which is defined with reference to the product itself, the operations resulting in its manufacture or its creation.
The recommended practice under the revised Kyoto Convention is that in applying the substantial transformation criteria, use should be made of the international convention on harmonised commodity design and coding.
EU Court Approach
The EU uses all three methods of applying substantial transformation set out in the Kyoto Convention. The Court of Justice has been cautious in relation to the use of tariff headings. It has referred to the need for criteria to be objective. The determination of the origin of goods should be based on real and objective distinctions between raw materials and processed products depending fundamentally on the specific material qualities of each of the products.
A product, process or operation is substantial if the product resulting from it has its own properties and a composition of its own, that it did not possess before that process or operation. It has held for example, that cleaning, grinding, sorting, packing a particular product was not sufficient. They did not affect the goods’ substantial properties.
In another case the court held the processing of meat by boning, trimming, drying its sinews, cutting into pieces and vacuum packing did not result in the acquisition of origin where the processing was carried out. In a case involving assembly, the court noted that simple assembly operations did not result in goods changing their origin to where they are carried out.
The court indicated that an assembly operation may be regarded as conferring origin where it represents from a technical point of view and helping regard to the definition of goods in question, the decisive production stage during which the use to which the component parts are to be put becomes definite and the goods in question are given their specific qualities.
In considering the value added by the assembly, it is necessary to consider the amount of value-added in that state of assembly and other states. Where only two countries were concerned in and the assembly in the last state was appreciably less than that in the other state, the goods did not obtain the origin of the place of assembly country of assembly. Often if it is less than 10 per cent it cannot confer origin under the relevant criteria.
The European Court of Justice seeks to prevent origin shopping, whereby one last simple operation changes identity in the context of seeking to ensure that the goods obtain the most favourable origin, with as little economic import as possible. If it is discerned that the object is the circumvention of EU provisions on origin, processing does not result in the goods obtaining the origin where it is carried out. The application of community legislation cannot be extended to cover abusive practices by economic operators, that is to say, transactions carried out not in the context of normal commercial operations but solely for the purpose of wrongfully obtaining advantages provided for by EU law.