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Guide to Non-Preferential Rules of Origin: Deciding Duty Rates, Restrictions & Quotas

This blog discusses the essential fundamentals for determining the Rules of Origin required to implement a wide range of commercial measures (Non-Preferential)


When components and raw materials are sent all over the world to be utilised as inputs in scattered manufacturing facilities, it may be difficult to determine where a product was made.


Therefore, origin laws are required to identify a certain nation of origin for each commodity.

What is Origin exactly?


In international commerce, the provenance of the product is largely unrelated to the country of dispatch or, in certain cases, even the country of production. Since it attests to the product's origin and acts as the basis for determining whether to apply taxes and other trade restrictions, a certificate of origin is often required for international business transactions.


As a consequence, rather than identifying the geographic nationality of a particular item, the rules of origin serve primarily to establish its economic nationality.


The mere free circulation of a product, for instance, inside a Customs Union, does, however, not indicate "Origin". In practice, that means that the mere fact that Chinese goods were imported into Japan, subjected to tariffs there, and then exported once again does not mean that they are now of Japanese origin.


Who decides the origin laws?


The WTO has decided to undertake discussions on uniform non-preferential origin standards. The Rules of Origin Agreement mandates that WTO members make sure their rules of origin are transparent and don't obstruct, suppress, or disrupt global trade. This is not related to the rules of origin in Free Trade Agreements (FTA)


Example: Rules of Origin in the EU


The European Union (EU)'s 27 members have adopted non-preferential Rules of Origin on the origin requirements of the WCO Kyoto Convention (Annex K), which were ultimately included in the Union Customs Code (UCC), the EU's prime Customs Legislation.


Example: Rules of Origin in the UK


Following Brexit, the UK still abides by the Kyoto Convention's framework for origin standards but has set up its own non-preferential rules of origin. The Department for Business and Trade (DIT) is responsible for the rules. Please refer to the latest Reference Document for The Customs (Origin of Chargeable Goods) (EU Exit) Regulations 2020 with the UK Trade Tariff for details.


Distinguishing Two Distinct Origins


Note that there are two types of origin that must be carefully separated: preferential origin and non-preferential origin.


Preferential Origin


When commodities from a specific country comply with the origin requirements outlined under the applicable preferential arrangement, such items' preferred origin is granted. The products can benefit from decreased or no customs duties in this situation. However, it is essential to remember that not every product has a preferred origin.


Non-Preferential origin


All non-preferential commercial policy measures, such as most-favourable-nation treatment, anti-dumping and countervailing duties, trade embargoes, safeguard measures, origin marking requirements, quantitative restrictions or tariff quotas, government procurement, and trade statistics, are applied according to rules.


In this article, we focus mainly on non-preferential origin.


Rules of Non-Preferred Origin - Two Fundamental Principles


Two important factors should be considered when determining the nation of origin of products:


Where was the Product Wholly Obtained?


If a product is exclusively manufactured by one country, the fully realised concept will be utilised. Actually, this will largely apply to items purchased in their natural state and those created solely from items purchased.


  • Example: Fresh produce grown and harvested in the exporting country, such as fruits and vegetables, as well as any mined minerals, are considered to be "wholly obtained" commodities. For instance, Moroccan-grown and -harvested tomatoes have non-preferential origin in Morocco when they are permitted to circulate freely throughout the EU.

Goods produced in one country entirely from products wholly obtained in that country or territory are themselves wholly obtained products. Even the smallest number of materials or processing from another country will disqualify that product from being wholly produced.


Wholly Obtained Examples:


  1. Wine bottle corks manufactured in South Africa using natural cork or waste cork produced in South Africa. – Non-preferential origin, South Africa

  2. Basketwork and wickerwork manufactured in Argentina from willow, reeds, rushes etc., harvested in Argentina. – Non-preferential origin Argentina

  3. Articles of non-treated natural wood manufactured in Morocco using wood from trees felled in Morocco. – Non-preferential origin Morocco

  4. Fish are caught in UK territorial waters by Belgium fishing vessels and are landed in Belgium. – Non-preferential origin, United Kingdom


What, however, would be the origin in the last example if the fish were further prepared (gutted, descaled), processed and frozen on board the vessel flying the Belgium flag and landed in Belgium?


Substantial transformation: Where did the Last Significant Economically Viable Process take place?


Where products may be created from a number of materials and components that were bought from several countries and then put together in a third country, we must meet the rules for "substantial transformation" to determine the non-preferential origin of the products.


For this, we need to find the place where the "Last Significant Economically Viable Process" (EU rule of non-preference origin) took place.


For example, leather seats, rubber tyres, computer software, brakes, clutches, and bumpers are just a few of the components that make up a car.


These might be made in numerous countries and then transferred for final assembly as needed:


The UK manufactures a car using

  • An engine from Germany

  • Wheels from the USA,

  • Battery from Japan, and

  • Brakes from Canada.

Due to the many value-adding components that certain products include, it may be quite difficult to determine their place of origin.


In this case, the final result depends on the "last substantial transformation".


Broadly, to determine the Country of Origin for our car, we need to answer these four questions:

  1. Last - Name the precise country where an operation was most recently performed: _______________

  2. Substantial - Please confirm that the processing volume exceeds the minimum listing requirements as stipulated in law: YES / NO

  3. Economic - Did the processing raise the value of the finished product (anything above 50% may have a good chance of changing origin to where the finished product was produced)? ___%

  4. Process - Did the finished product go through a step of manufacturing when the combined elements are transformed into the finished item, often changing the tariff heading? If Yes, describe the process__________________________

With this information, we can now proceed to determine the Country of Origin for Non-Preferential purposes:


  1. Last - Name the precise country where an operation was most recently performed: United Kingdom

  2. Substantial - Please confirm that the processing volume exceeds the minimum listing requirements as stipulated in law: YES / NO

  3. Economic - Did the processing raise the value of the finished product (anything above 50% may have a good chance of changing origin to where the finished product was produced)? unclear, but significant, as cars have a high cost.

  4. Process - Did the finished product go through a step of manufacturing when the combined elements are transformed into the finished item, typically changing the tariff heading? Yes, describe the process: Assembly into a car

We conclude:

  • The inputs were significantly changed into a car in the United Kingdom.

  • A substantial transformation occurred in that all input underwent a fundamental shift, in that a new category of goods arose from processing: a Car

  • The UK would be the country of origin as a result of the "birth" of a new product - a car - the sum of all individual parts has created a new product with significant added value.

Rules of Origin in more detail: The three determining criteria


To be more granular, there is a combination of the three following key factors that determine if there has been a substantial change for the preferred origin. They provide more detail as regards when a product is "sufficiently transformed". They are:


Tariff Shift


When work completed domestically causes a change in classification, there has been a change in tariff classification. For instance, the number 8703 for an entire car is different from the specific code 8708 for its parts. If a country assembles automobile parts to produce a finished car, it is said to have altered its tariff classification.


Adding sufficient value


The country of origin must at least somewhat contribute to an item's value.

The value that each component will provide is calculated as a percentage of the ex-works price of the completed item (i.e., the total cost of the inputs minus shipping and insurance costs). Typically, to claim origin, usually, more than 50% of the value must be added when comparing the finished product to inputs.


Particular processing

Products that have undergone certain working or processing activities may be eligible after they are done. For instance, a law may specify that only yarn be used to produce clothing.

The precise rules are quite detailed and might change depending on the list of rules for each product.


Minimum processes

What operations would not be enough to change the origin of a product?

  • Simply assembling components

  • Applying labels

  • Preservation

  • Sorting and trimming are common procedures.

  • Modifications to packaging

  • Putting goods in sets

  • Use modification or disassembly

  • A combination of the above

Example

  • After being harvested across many nations, fresh vegetables are mixed and frozen before being delivered to another nation.

  • The veggies must be labelled with the place of occurrence of each component, as they were not substantially transformed into products of the place where mixing and freezing occurred.

Non-preferential origin documentation: Proof of Origin


The declarant is responsible for accurately identifying the place of origin of the commodities they release for free circulation in the EU, the UK or elsewhere. Depending on the situation, this might contain information on the fully finished product, the precise manufacturing procedure, the tariff classification, and the cost and country of origin of the raw ingredients. Any evidence offered to back up an original claim is referred to as proof of origin.


The most prominent and official are the "Certificates of Origin" - issued by the Chamber of Commerce (CoC). Such a certificate of origin may be required for goods that you wish to import into a country, although, usually, the UK and the EU do not request it.


In fact, today, it is more of a business need than a custom need.


A Certificate of Origin could be needed, for instance, in response to a buyer's request, to apply anti-dumping regulations, to show that items are not from countries subject to importation-country fines, or for regulatory or statistical reasons. So, Certificates of Origin (CO) may be necessary for importers, banks, private parties, and customs for a variety of reasons. For customs clearing procedures, especially when determining whether to levy a tax on the items or, in certain circumstances, whether they may even be legitimately imported, almost every country in the world requires CO.


Takeaway


Origin laws are required to identify a certain country of origin for each commodity, and the WTO has adopted a set of non-preferential rules of origin that both the EU and the UK (and other nations) have implemented in national law.


Non-preferential origin is the origin that determines duty rates, restrictions and quotas, they have nothing to do with customs duty reduction.


Non-preferential origin is determined by two fundamental principles: where the product was wholly obtained, or where the Last Significant Economically Viable Process took place. Products from one country can benefit from decreased or no customs duties, but not all products have a preferred origin.


To determine the non-preferential origin of products, the "Last Significant Economically Viable Process" (EU rule of non-preference origin) must be met and, upon request, proven.



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