Rules of Origin

Brexit consulting solutions for Rules of Origin – fixing the problems that Brexit has created

We can help you deal with Rules of Origin

  • ‘Rules of Origin’ can pose a significant threat to exporters
  • The concept may be simple, but the application is complex
  • Failure to understand and comply will…
    • lead to many businesses needlessly paying tariffs
    • compromise the validity of customs documentation
  • We will help you to understand how Rules of Origin works
  • We will help you to implement Rules of Origin
  • We will help you identify where you may need to find new suppliers, or new customers

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Newcomers to Rules of Origin (RoO) are often bemused by the complexity and apparent arbitrariness, of the regulations. Given that, it is helpful first to answer the following questions:

  • What are Rules of Origin (RoO)?

  • Why do Rules of Origin (RoO) exist?

  • Why do we care?

What are Rules of Origin (RoO)?

Sadly, there is no harmonised system of Rules of Origin globally:

The detailed regulations vary widely for different countries. Therefore, we focus here entirely on the RoO governing trade between the UK and EU, following the TCA.

Conceptually, the Rules of Origin idea is simple:

Did Product X originate in, say, the UK, prior to being exported to the EU (or vice versa)?

However, suppose that Product X, like many commercial products, is made from inputs, which themselves have been imported and then further processed. So, did Product X originate in the UK or not?

Therein lies the root of much of the complexity evident in the enabling detail of RoO regulations: how to prove where a product actually originated.

Why do Rules of Origin (RoO) exist?

The TCA allows for tariff/duty-free trade between the UK and the EU. However, goods can only benefit from these PREFERENTIAL tariffs/duties if they are genuinely produced (i.e. they ORIGINATE) in the UK or the EU.

For example, if a UK company imported US goods, simply changed the labels and re-exported them to the EU, the goods could not be granted preferential tariffs/duties.

In practice, deciding on whether any given Product X originates in the UK or EU is not a trivial matter. The need to cover every real-world eventuality has led to a complex set of rules by which to address the question: Rules of Origin.

Why do we care?

Put simply, the financial costs of not complying with Rules of Origin can be ruinous for a business.

  • NON-ORIGINATING products exported from the UK to the EU would attract tariffs based on the EU’s Common External Tariff
  • NON-ORIGINATING products exported from the EU to the UK would attract tariffs based on the UK Global Tariff

The absolute levels of tariff vary greatly between products, with some at levels which could make the trade economically unviable.

However, assuming that origination can be proven, the goods can be exported to the EU with zero tariff/duty.

In the vast majority of cases, the administrative cost (set-up and ongoing) of complying with RoO will be far less than the recurring cost of tariffs/duties.

You may choose to use a customs agent to help you with Rules of Origin. The crucial next step is to understand the costs vs benefits of this step: what are the margin implications of the decision to outsource or not?

Will we be able to claim ORIGINATION for our product?

The need to encompass every commercial possibility, in the real world means, that the TCA allows for both GENERAL PROVISIONS and PRODUCT-SPECIFIC RULES.

These are not ‘either/or’ sets of regulations: a successful claim for ORIGINATING status requires both to be satisfied for the goods in question.

General Provisions

These set out the general rules for determining the origin of products traded under the agreement. They must be read alongside the product-specific rule for a given product. The general provisions cover the basic concepts of origin and how origin should be determined in specific instances, such as when a product has accessories or is part of a set, or how packaging and materials used in production should be treated.

These include:

  • Cumulation of Origin
  • Wholly Obtained Products
  • Insufficient Production
  • Tolerance
  • Accounting Segregation.

While we provide brief summaries here, it is vital that you work through the detail of the provisions, as they relate to your specific goods. The links above will take you to the relevant documentation.

Cumulation of Origin

Cumulation features in many modern free trade agreements, allowing originating products from one country to be treated as if they are originating in another when determining whether a good is able to meet a product-specific rule.

This means, e.g. that products or materials originating in the EU can be considered as originating in the UK if those products are further processed in the UK or incorporated into another product prior to re-export to the EU. Under the TCA arrangements, exporters can

  • cumulate originating materials or products
    AND
  • processing or production carried out on non-originating materials

That is ”FULL BILATERAL CUMULATION”.

This means that all operations carried out in the UK or EU are taken into account when determining whether a good is able to meet a product-specific rule.

Full bilateral cumulation applies to both specific production processes (for example ‘combing’ or ‘making up’ in the manufacture of textiles products) and the value associated with such processing (for example in product-specific rules with value-add requirements).

Wholly obtained

Wholly obtained products are those obtained entirely in the territory of a party without the addition of any non-originating materials.

Within the TCA, wholly obtained products automatically qualify for preferential treatment. These products are specified under the wholly obtained article, and you should refer to the list to understand which products are eligible for wholly obtained status.

Insufficient production

A trade agreement includes a list of processes that, if carried out on non-originating materials, are considered such minor processing that they do not on their own confer originating status. Even if a product meets its product specific rule, if the only processing carried out on non-originating materials is listed as ‘insufficient’, that product will not obtain originating status.

Note: cumulation does not apply for these purposes, i.e. if the only processing carried out on a product in the UK is insufficient, it will not meet the rules of origin even if the processing was carried out on EU-originating materials or if further processing (beyond insufficient) had previously been carried out in the EU.

Tolerance

Tolerance is a relaxation of the rules of origin under certain conditions. It provides that, even if a product does not meet its product-specific rules, it can nevertheless be originating if only a limited amount of non-originating materials are used in the production of that product.

Note: Tolerance can only be applied to certain types of product-specific rules.

Accounting segregation

Originating and non-originating fungible materials may be used in the production of a product without being physically separated during storage, if an accounting segregation method is used.

In this context, fungible materials are materials that are of the same kind and commercial quality, with the same technical and physical characteristics, and which cannot be distinguished from one another for origin purposes.

Product-specific rules

For every product traded under a free trade agreement there is a corresponding product-specific rule (PSR) that must be met to demonstrate the product originates in the free trade area and qualifies for preferential tariff treatment. Each rule describes the nature or value of processing that must be carried out on any non-originating materials so that the final product meets the origin requirements. The rules agreed by the UK and the EU are set out in ANNEX ORIG-2 (Product-specific rules of Origin) of the TCA.

There are four types of rule that a product may be required to meet (on their own or in combination) in order to confer origin.

The types of rule are as follows:

  • Wholly obtained
  • Change of tariff code
  • Value added/percentage rule
  • Specified processes.

Businesses should determine the correct tariff code for the exported product to find the relevant rule in the TCA product-specific rules list.

The codes are detailed in the Harmonized System (HS), which is an internationally standardised system of description and numbers and forms the first part of the 10-digit classification code when importing goods into the UK (8-digits when exporting from the UK).

It is used by customs authorities around the world to identify products when working out tariffs and taxes and for gathering statistics. The HS is administered by the World Customs Organization (WCO) and is updated every five years. It serves as the foundation for the import and export classification systems used in every country. The main categorisations for products are chapters (2-digit level or first two digits, of the HS), headings (4-digit level of the HS) and subheadings (6-digit level of the HS).

Wholly obtained requirement

If a product-specific rule of origin requires that a product is wholly obtained, the product must be made only from UK (or EU materials that are further processed).

Change in tariff classification (HS Code)

If a product-specific rule of origin requires a change from any other chapter (2-digit level of the Harmonized System), heading (4-digit level of the Harmonized System) or subheading (6-digit level of the Harmonized System), any non-non-originating material used in the production of the product must be classified in a chapter, heading or subheading other than that of the final product. There are no limits on the amount of originating material businesses can use, regardless of their HS code.

To demonstrate that the rule has been met, businesses will need to know the HS code of their exported product, all of its inputs, and the origin of the inputs.

Value added/percentage rule

Under a value limitation rule, the value non-UK or non-EU originating materials may not exceed a given percentage of the ex-works price of the product. Sometimes, the limit might apply only to the value of specific types of inputs to a product. If the use of an ingredient, material or component is limited by value, the rule concerning tolerance cannot be relied upon in addition to the threshold.

Note 4 of Annex ORIG-1 (Introductory Notes to Product Specific Rules of Origin) sets out the definition of ‘ex-works price’.

Average pricing rules. The value of the non-originating materials used in production may be calculated on the basis of the weighted-average value formula, or other inventory valuation method under generally accepted accounting principles in the UK. The accounting method utilised for determining the average value of input non-originating materials may be different to the accounting principles adopted by the business for its general accounting purposes.

Weight/value limitations. For some agricultural products, limitations on non-originating materials can apply by weight, by value or there can be choice of meeting either criteria in certain instances.

Specified operations

Specified operations are particular to certain specialised industries or products. Rules may include the re-treading of tyres to take place in the UK for a tyre to be originating, or a chemical reaction to take place for chemical products. As well as the chemicals sector, such rules are common in textiles and clothing and may specify that the weaving and cutting of fabric to make garments must take place in the free trade area for the product to be originating.

Combinations of several rules

Different product-specific rules can be combined to make a rule whereby all the listed conditions must be fulfilled.

Note: Once a product has gained originating status, it is considered 100% originating. This means that if that product is further used in the production of a further product, its full value is considered originating and no account is taken of non-originating materials within it.

How do we prove ORIGINATION?

HMRC provides highly detailed guidance on origin procedures, which must be followed, to avoid mistakes in this procedurally complex process. For PROOF OF ORIGIN, the TCA allows a choice of two different ways to declare proof of origin. Either:

  • A STATEMENT ON ORIGIN can be made by the EXPORTER on a suitable commercial document (e.g. the invoice)
    OR
  • Origin can be claimed on the basis of IMPORTER’S KNOWLEDGE

Supporting documents and records will be required if you are claiming preference using your ‘importers knowledge’, and records must be kept for at least four years. If using importer knowledge, you must obtain sufficient evidence that the goods qualify as originating. This may involve the exporter providing a range of supporting documentation. If you cannot obtain that evidence, then the exporter may be able to provide a Statement on origin.

What do we do with our proof of ORIGINATION?

Firstly, it is vital to understand that the right to preferential tariffs/duties MUST BE CLAIMED. There is no automatic system in the background, flicking a switch to assign preferential tariffs/duties to your goods.

Exporters (from UK)

When exporting to the EU you must include your EORI number in any statement you issue to your EU customer, regardless of the value.

The statement on origin must be provided on an invoice, or any other commercial document (excluding a bill of lading), describing the originating product in sufficient detail to enable its identification.

It will be valid for 12 months, from the date it was made out, for exports to the EU.

Importers (to UK)

If you’re importing goods into the UK, there are different way to claim the preferential rate of duty depending on which system you’re using to make your import declaration.

If you’re using the Customs Handling of Import and Export Freight (CHIEF) system

Box
number
  What you must include
Box 36 must include a preference code in the 300 series.
Box 47c
Field 1
Must be coded ‘A’.
Box 44 Must include one of the following codes, as appropriate:
• U110 – if the claim is based on a ‘statement on origin’ for a single shipment
• U111 – if the claim is based on a ‘statement on origin’ for multiple shipments of identical products to cover a 12-month
• U112 – if the claim is based on importers knowledge (this must be declared with status code JP)U110 and U111 must be declared with one of these status codes AE, AF, AG, AP, AS, AT, GE, GP, HP, JE, JP, LE, LP, UA, UE, UP, US, XA, XB and the commercial document reference number.

If you’re using the Customs Declaration Service (CDS)

Data
Element
(DE)
  What you must include
DE 4/17 Must include a preference code in the 300 series.
DE 2/3 Must include one of the following codes, as appropriate:
• U110 – if the claim is based on a ‘statement on origin’ for a single shipment
• U111 – if the claim is based on a ‘statement on origin’ for multiple shipments of identical products to cover a 12-month
• U112 – if the claim is based on importers knowledge (this must be declared with status code JP)U110 and U111 must be declared with one of these status codes AE, AF, AG, AP, AS, AT, GE, GP, HP, JE, JP, LE, LP, UA, UE, UP, US, XA, XB and the commercial document reference number.

The statement on origin must be provided on an invoice, or any other commercial document (excluding a bill of lading), describing the originating product in sufficient detail to enable its identification.

It will be valid for 2 years, from the date it was made out, on imports into the UK.

Suppliers’ declarations

Until 31 December 2021, if you’re claiming preference on the basis of the importer’s knowledge or making out a statement on origin, you do not need to hold a supplier’s declaration at the time you’re claiming preference for goods imported from or to the EU.

But, the importer must be confident that the goods meet the rules of origin. You must make every effort to obtain suppliers declarations retrospectively.

Statement on Origin

As mentioned above, this is not a free-standing document: it is simply a statement, to be made on a commercial document (provided that the document describes the originating product in sufficient detail to enable its identification). The invoice for the relevant transaction is typically a convenient choice. This is known as an invoice or origin declaration.

The required text of the Statement on Origin is:

————

The text of the statement on origin (Annex ORIG 4 of the TCA)

“(Period: from ………………… to ………………… [footnote 1])

The exporter of the products covered by this document (Exporter Reference No … [footnote 2] declares that, except where otherwise clearly indicated, these products are of … [footnote 3] preferential origin.

…………………………………………………………… [footnote 4]

(Place and date)

……………………………………………………………

(Name of the exporter)”

Footnotes

  1. If the Statement on origin is completed for multiple shipments of identical originating products within the meaning of point (b) of Article ORIG.19(4) [Statement on Origin] of this Agreement, indicate the period for which the Statement on origin is to apply. That period shall not exceed 12 months. All importations of the product must occur within the period indicated. If a period is not applicable, the field may be left blank.
  2. Indicate the reference number by which the exporter is identified. For the Union exporter, this will be the number assigned in accordance with the laws and regulations of the Union. For the United Kingdom exporter, this will be the number assigned in accordance with the laws and regulations applicable within the United Kingdom. Where the exporter has not been assigned a number, this field may be left blank.
  3. Indicate the origin of the product: the United Kingdom or the Union.
  4. Place and date may be omitted if the information is contained on the document itself.

————

An exporter making out a Statement on Origin must hold information demonstrating that the product is originating, including information on the originating status of materials used in the production of the product. This may include declarations obtained from their suppliers (supplier’s declarations).

A Statement on Origin may apply to either:

  • A single consignment
    OR
  • Multiple shipments of identical products within any period specified in the Statement on origin but not exceeding 12 months from the date of the first import

If an exporter that has completed a Statement on Origin becomes aware or has reason to believe that it contains incorrect information, they must immediately notify their customer in writing.

A statement may be made out in English, or any of the other official languages used in the EU. However, it is best to use the same language as being used for the commercial document itself.

We can help you with Rules of Origin