introduction
Overview of rules of origin
What does this mean in practice?
How do I claim preferential rate treatment?
introduction
After leaving the European Union, a key aspect of UK trade policy is creating free trade agreements (FTAs) with other countries and trade blocs (for more details see “Back to basics: free trade agreements“).
To that end, Britain has negotiated a ‘roll over’ FTA to replace the EU FTA.(1) These include the UK’s most significant FTA, the Trade and Cooperation Agreement (TCA), which was concluded with the European Union on 24 December 2020.
An obvious benefit of an FTA is the ability of businesses to use ‘preferential tariff treatment’ (ie, reduced or zero rates and quotas) when shipping their products between parties to the FTA.
While FTAs offer significant benefits, they also pose new challenges for businesses that are not accustomed to navigating the complex rules of origin set out in these agreements. Failure to take advantage of FTAs and adhere to these rules of origin could result in businesses paying unnecessary large amounts of import duties as well as serious disruptions to global supply chains.
In addition, many UK businesses are, for the first time, faced with the added administrative burden of obtaining relevant supporting information about their products and supply chains to support their claims of preferential treatment.
This article provides an overview of common rules of origin and the main considerations for businesses to comply with these rules.
Overview of rules of origin
In order to attract preferential tariff treatment, goods must originate or be produced in the territory of one of the FTA signatories. This can be proven if the product:
- has been acquired entirely within the territory of one of the parties;
- contains a number of regional values;
- experiencing a rate shift during the manufacturing process; or
- requires a certain type of processing within a party’s territory.
Although this rule has a number of general principles, its application varies depending on the type of goods and the relevant FTA requirements.
Fully acquired product
Products will be ‘fully acquired’ if they occur naturally and are extracted from within the territory of a party to the relevant FTA. For example, crops or plant products grown and collected in the United Kingdom will be acquired entirely in Great Britain.
Alternatively, a product manufactured within a party’s territory that exclusively uses products originating from that party’s territory will be deemed entirely acquired within that party’s territory.
Regional value content
Under this rule, the finished product must contain the original material in the maximum amount or minimum percentage of the original material. For example, under the TCA, components from outside the United Kingdom or the European Union used in vehicles cannot be more than 45% of the total cost of the finished product work.
Shifting rates
If a product is produced within the territory of a party to the FTA using non-originating materials, that product will benefit from preferential tariff treatment if there is a change in its tariff classification as a result of the manufacturing process.
This means that non-originating materials used in the production of products must have different chapters, headings or subheadings from the Harmonized System.
Special processing
Finally, certain product origin rules under an FTA may require that certain types of processing be carried out within the territory of either party. This is especially prevalent for clothing and apparel items that may require “weaving combined with make-up including cutting of fabrics”.(2)
Tolerance
Even if a product does not meet specific product origin rules, it may benefit from preferential tariff treatment under the FTA’s general tolerance rules. This rule allows manufacturers to use non-originating materials to a certain weight or value. However, these rules are specific to each FTA and will vary depending on the commodity code of the product.
Stacking
Finally, importers can benefit from the accumulation provisions in the FTA.
The TCA allows for ‘bilateral accumulation’ (for example, a product originating from the UK will be deemed to be of EU origin if it is used as an ingredient in the production of a separate product within the EU or through further processing within the EU).(3)
Certain UK FTAs go a step further by allowing ‘diagonal accumulation’, which allows products to include ingredients that do not come from a specific third country. For example, in a UK-Morocco FTA, products obtained in the United Kingdom and using materials originating from Switzerland, Liechtenstein, Iceland, Norway, Turkey or the European Union will be deemed to have originated in the United Kingdom.(4) Although the UK initially attempted to find a similar approach within the TCA, this was rejected by the European Union.
What does this mean in practice?
Rules of origin are complex and claiming preferential tariff treatment requires consideration of a number of different factors, including product commodity code and composition and applicable FTA provisions.
However, once a business has determined that their product is highly eligible, further procedural steps are required to claim preferential tariff treatment.
How do I claim preferential rate treatment?
Claims for preferential tariff treatment must be lodged with the customs authorities at the point of import by the exporter or importer of the product. This can be done in several ways, depending on the applicable FTA provisions. This includes:
- statement of origin made by the exporter;
- importer’s knowledge; and
- movement certificates (for example, EUR1 or EUR-MED).
Declaration of origin
Under the EU and UK FTAs, exporters can provide a statement indicating that their product originates from a region that is a party to the FTA. These should be included on invoices or other commercial documents and should describe the product in sufficient detail so that it can be identified by the relevant customs authorities.
Importer’s knowledge
Both the Anglo-Japanese FTA and the TCA introduce the concept of ‘importer knowledge’ of the relevant product origin status as a way of claiming preferential tariff treatment.
Although the importer’s knowledge must be based on information indicating that the product originated, it is not necessary for the exporter to provide any information to the relevant customs authorities, including a statement on origin.
However, to take advantage of the importer’s knowledge option, the exporter must provide the importer with sufficient information about the product, such as commodity codes and details of the production or manufacturing process.
Movement certificate
Certain UK FTAs, such as the UK-Egypt association agreement, require submission to the customs authorities of the importing country a EUR1 or EUR-MED movement certificate, issued by the customs authority of the exporting party, unless the exporter is an approved exporter or the value of the shipment does not exceed € 6,000.
The UK continues to use the EUR1 and EUR-MED formats for this certificate, even though the transition period has ended, although the place of origin is now marked as ‘Great Britain’.
For more information on this topic, please contact Bernardine Adkins or James Stunt at Gowling WLG by phone (+44 207 379 0000) or email ([email protected] or [email protected]). The Gowling WLG site can be accessed at www.gowlingwlg.com.
Final Notes
(1) Details of the UK FTA are available here.
(2) See TCA, Annex ORIG-2.
(3) See TCA, Articles ORIG. 4 (1) – (2).
(4) Article 3 (1).
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