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
4

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
5

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)
Stabilisation and Association Agreements with Croatia, Macedonia and Albania (as Interim Agreement)

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

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 Made-in origin

EU-system

System of Other countries General system of Preferences (UNCTAD)

EUdefinition

Worldwide definition
WTO mandate to WCO Actually in process Contains elements of the preferential Origin

UK in 1887 Madrid-Agreement 1891 Madrid-Agreement 1958 National legislation Most import. aspect TRIPS

bilateral

unilateral

Regional definition (intra-trade) (CEFTA 2006)

Rules for specified Products (textiles) or Rules for all the rest of products

WIPO-Geneva
9 Border measures (confiscation)

Free Trade Association

2% 3%

Customs Union
7% 7% 7%

4%

10%

7%

Japan
10
Japan

Principles of Management
Contractual accordance Documentation Exact bookkeeping Organizational impact Service providing Customs cooperation
11

What do you need for the definition of the origin ?

1. 2. 3. 4.
5.

HS-heading of imported parts HS-heading of finished goods ex-works-price of the product

Customs value of imported materials per unit cost

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?

6.

12

What should be the criterion for

the Origin of goods?

13

Wholly

Obtainment or
Sufficient Processing
14

What is Wholly Obtained ??

15

Tomatoes
0702
:Processing

ORIGIN BECAUSE WHOLLY OBTAINED

:EXPORT

Heading 2103

EXPORT: ORIGIN, BECAUSE RAW MATERIAL IS ALREADY WHOLLY OBTAINED (spices?)

Tomatoes1

16

Mineral products Extracted from the Soil

=
Originating Products =======!!!
17

WHOLLY OBTAINMENT

4403

4403

4407

IS IT WHOLLY OBTAINED?

9504

18

Live Tree

Wood in the rough

Pos.: 0602

Pos. 4403 Wood sliced, chopped lengthwise

Width: 10 cm, Length: 150 cm Pos.: 4407

Wood Fuel
Pos.: 4401 Wood lengthwise veneer sheets Width: 5 cm, Length: 150 cm

Pos.: 4408
Wooden Box

Pos.: 4415

Pencil Pos.: 9609

19

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.

20

What is A Sufficient Processing?

21

Basic principles :

Change of the HS-heading Percentage of used materials Processing procedure

22

List of Processing: = Annex to the Origin Protocol Column 3 and 4 Conditions only refer to imported materials
23

What is The HS???

24

The Structure of the HS

01
Chapter HS

04

20

90

00
National Internal

10
National Internal

Heading HS

Subheading HS
Subheading National Statistic (Combined Nomenclature)

25

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!--26

Harmonized System

Legal Texts: Section Notes Chapter Notes Subheading Notes Text of the Headings Text of the Subheadings
27

Not Legally Binding:

Title of sections Title of chapters Explanatory notes

But binding: The General Rules

28

HS-production Principle (Example Textiles)

Raw materials

Fiber, not prepared Yarn Fabric

First semi-product

Second semi-product

Finished product

Textiles, clothes, apparel

29

What Means
Ex chapter 20 And Ex 2008 ??? Ex chapter 48? And Ex 4811??
30

Example for change of headings: Tomatoes

IMPORT FROM EGYPT Heading 0702 NON ORGINATING

PROCESSING
Heading 2103

:EXPORT
ORIGIN BECAUSE SUFFICIENTLY PROCESSED (CHANGE OF HEADING)
31
Tomatoes 2

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.

32

The percentage relates to the "Exworks Price" of the finished goods.

33

The value of the used materials is their customs value.

So: Check the Customs value carefully! Be aware of the exchange rate!
34

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

35

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.
36

Example for technical criteria: Sewing Machines of HSheading 8452

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 37

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?

38

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

39

Other example for minimuminput of Serbian originating materials:

HS-heading 2402, Cigarettes: At least 70% by weight of the used tobacco must be originating in the country
40

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

41

Example for necessary processing procedures:

Headings:

ex 4415

4816
7601
42

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
43

2. Clothes and garments of chapter 61 and 62:

"Manufacture from yarn"

44

3. Preparations of meat ex Chapter 16:

" Manufacture from animals of chapter 1

Notice: Chapter 1 = Live animals!

45

Rules for cotton products:

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

46

2. Cotton yarn, HS 5203

Manufacture from natural fibers, not prepared for spinning

47

3. Cotton Fabric HS 5208

Manufactured from natural fibers, can be prepared for spinning

48

Jeans HS 6203

Manufactured from YARN

49

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
50

Alternative 2/clothing:
Embroidered clothing: Manufacture from unembroidered fabric with a value of not more than 40 % of the ex-works price of the finished good

51

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

52

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

53

Why is a minor processing

not accepted as origin???
54

Is "Mixing
always a simple operation ??
When will the "Mixingbe sufficient ??
55

Origin Rules for Sets:

All components must be originating, but
up to 15%

there may be non-originating material in the set

56

Example for Sets

Set of foodstuff for the preparation of spaghetti, containing:

Spaghetti Cheese Tomato paste

57

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) -

58

When should you use the

alternative
criterion??

59

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
60

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

COMPLICATE -

61

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 62

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 -

63

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%
64

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
65

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 -

66

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.

67

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)

68

The Use of Parts

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

69

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
70

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
71

Bilateral Accumulation

PREFERENCE AREA

CONTRACTING

PARTY

Bilcum

72

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---

73

MULTI - LATERAL ACCUMULATION

PREFERENCE AREA
CONTRACTING

PARTY

CONTRACTING

PARTY C
74
MULTILATACCUM

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---

75

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

76

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 --77

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)
Unchanged sale of the materials: Goods retain their origin

3.

78

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
79

Pan-European accumulation Case 1- Use of originating materials - more than minor processingYarn ( 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 paneuropean accumulation Applied for: Bilateral trade with the EU and diagonal export of the raw fabric to Switzerland

- - example is actually theoretically- -

80

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 Packing costs Plastic bag (Croatia) Other costs Prices ex works 20.2.0.5 2.5 25.Euro Euro Euro Euro Euro

Added value in Bosnia: Highest value input = Serbia Origin = Serbia Preference in the EU for Serbia

5.-- Euro

export to CEFTA??
81

- 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
82

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
83

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)
84

Clearing of the tube as

1. Inward processing without levying of duties or
2. Levy of duties for free circulation

85

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.
86

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!)
87

Example The Bagatelle Rule

Principle: Up to 10% of prohibited materials are allowed. Product: Zippers of heading 9607, exworks 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

88

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
89

Impact of the rules of origin

on the internal structure

of your company :

90

C A L C U L A T I O N

Purchase

Supplier

Planning Developing Production

Preference Section

Storage of Materials and Finished Products

Export /Dispatch Shipment

91
Calculation 1

Purchase

Production

Calculation

Case Worker

Preferences

Sales Marketing
92
Calculation 2

Formal simplification: - Invoice declaration for

all shipments up to 6.000.- or - as Approved Exporter --- in future: Approved Economic Operator--93

Details for the approved exporter:

- Legal base in the Agreement - Irrespective of the value - Origin declaration by typing, stamping or printing on the invoice or any commercial doc. - Wording must be according to the legal text - The declaration must be signed ( principle) - Non-originating goods indicated only on the invoice - Written application and basic audit - Frequent shipments, knowledge of rules of origin - Proper records and stock accounts - Full responsibility by the exporter - Regular audits by the Customs 94 - Withdrawal of the authorization in case of non-

Suppliers declaration: - Simplification for the - - proof of origin of goods - - status of non-originating goods - For single shipments and as long term declaration - Responsibility and auditing ---Actually applied within the EEA and between EU, Turkey and the Maghreb states--95

Selected Customs duties for textile products in the EU (as per 2007/8):

Silk yarn Wool yarn Cotton yarn

Silk fabric Wool fabric Cotton fabric Apparel and Clothing: Knitted and crocheted: Not knitted or crocheted:

2,9 5% 3,2 4% 4%
5,3 6,9% 7,2 8% 8%

12% 12%

96

Thank you for the attention!

Helmuth Berndt Senior Customs Advisor Tel: + 49 30 8240 7657 Mobile: + 49 177 203 7508 E-mail: berndt_consult@gmx.de
LV-roo-serbia-2008
97