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RULES OF ORIGININ THE FOREIGN TRADE

WITH THE EU and within CEFTA

by Helmuth Berndt

03/2008

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3

/ Pauza /

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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

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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

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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

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“Seal of quality” for originating goods

- Upgrading of the Serbian

competitiveness on the EU Market -

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Intensity of EU-PreferencesComplete integration: European Union

Customs Union: With Turkey

EU-EFTA Agreements:Norway, Iceland, Liechtenstein, Switzerland

“Europe Agreements”: No more countries(Bulgaria, Romania were the last)

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

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

Abroad: South Africa, Mexico, Chile

Autonomous and unilateral: 179 developing countries and West Balkan beneficiaries: BiH, S, CG,

Kosovo/UNMIK

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System of Origin

Preferential definition

Non-preferentialdefinition

Commercial definition

EU-system System ofOther

countries

EU-definition

Worldwidedefinition

General system of Preferences

(UNCTAD)

Regional definition(“intra-trade”)

(CEFTA 2006)

Rules forspecifiedProducts(textiles)

or

Rules forall the restof products

Actually inprocess

Containselements of

the preferentialOrigin

Made-in origin

UK in 1887

Madrid-Agreement 1891

Madrid-Agreement 1958

National legislation

Most import. aspect TRIPS

WIPO-Geneva

Border measures(confiscation)

WTO mandate to WCO

bilateral

unilateral

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2% 3%

10%

7% 7%

7%

7%

Japan

Free TradeAssociation

Customs Union

4%

Japan

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Principles of Management

- Contractual accordance

- Documentation

- Exact bookkeeping

- Organizational impact

- Service providing

- Customs cooperation

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What do you need for the definition of the origin ?

1. HS-heading of imported parts

2. HS-heading of finished goods

3. ex-works-price of the product

4. Customs value of imported materials per unit cost

5. Your share for the whole manufacturing process- Wholly obtainment- Sufficient processing - Non-sufficient processing- Minor treatment

6. Agreement to be applied - Possibility of accumulation?- - Which kind?

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What should

be the

criterion for the Origin of goods?

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Wholly

Obtainment

or

Sufficient

Processing

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What is

“Wholly Obtained” ??

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Tomatoes

0702

:Processing

Heading 2103

:EXPORT“WHOLLY OBTAINED”

ORIGIN BECAUSE

EXPORT:ORIGIN, BECAUSE RAWMATERIAL IS ALREADYWHOLLY OBTAINED (spices?)

Tomatoes1

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Mineral productsExtracted from the

Soil

=

Originating Products

=======!!!

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4403

4407

9504

4403WHOLLY OBTAINMENT

IS IT WHOLLY OBTAINED?

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Wood in the rough

Pos. 4403

Wood sliced, chopped lengthwise

Width: 10 cm, Length: 150 cm

Pos.: 4407

Wood lengthwise veneer sheets

Width: 5 cm, Length: 150 cm

Pos.: 4408

Pencil

Pos.: 9609

Live Tree

Pos.: 0602

Wood Fuel

Pos.: 4401

Wooden Box

Pos.: 4415

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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.

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What is A

Sufficient

Processing?

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Basic principles :

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

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List of Processing:

=

Annex to the

Origin Protocol

Column 3 and 4

Conditions only

refer to imported

materials

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What is

The HS???

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The Structure of the HS

01 04 20 90 00 10Chapter HS

Heading HS

Subheading HS

Subheading National Statistic(Combined Nomenclature)

NationalInternal

NationalInternal

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The HS is divided into

21 SECTIONS

97 CHAPTERS

1241 HEADINGS

5016 SUBHEADINGS

SECTION/CHAPTER NOTES

SUBHEADING NOTESGeneral Rules I – V

----Changes of the system per 1.1.2007!---

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Harmonized System

Legal Texts:Section NotesChapter NotesSubheading NotesText of the HeadingsText of the Subheadings

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Not Legally Binding:

Title of sections Title of chapters Explanatory notes

But binding:

The “General Rules”

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HS-production Principle (Example Textiles)

Raw materials Fiber, not prepared

First semi-product Yarn

Second semi-product Fabric

Finished product Textiles, clothes, apparel

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What Means

“Ex chapter 20And

“Ex 2008”???

“Ex chapter 48”?And

“Ex 4811”??

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Example for change of headings :Tomatoes

IMPORT FROM EGYPT

NON ORGINATING

PROCESSING

:EXPORT

ORIGIN BECAUSESUFFICIENTLY PROCESSED

(CHANGE OF HEADING)

Tomatoes 2

Heading 2103

Heading 0702

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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.

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The percentage relates to the "Ex-works Price" of the finished goods.

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The value of the used materials is their customs value.

So: Check the Customs value carefully!

Be aware of the exchange rate!

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Example

for change of heading and restriction for the used materials:

Chapter 18

Cocoa and cocoa preparationsSemi colon reads = and !

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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.

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• 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 -

Example for technical criteria:Sewing Machines of HS-

heading 8452

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Example for

Exclusion of a heading, exclusion specific imported

materialsand restriction of imported materials:

Heading 1904, I.E. Corn Flakes

Question: Is it allowed to use imported mineral salts?

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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”

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Other example for minimum- input of Serbian originating materials:

HS-heading 2402, … Cigarettes…:

At least 70% by weight of the used tobacco must be originating in the country

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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

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Example for necessary processing procedures:

Headings:

ex 4415

4816

7601

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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

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2. Clothes and garments of chapter 61 and 62:

"Manufacture from yarn"

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" Manufacture from animals of chapter 1”

3. Preparations of meatex Chapter 16:

Notice: Chapter 1 = Live animals!

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Rules for cotton products:

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

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2. Cotton yarn, HS 5203

Manufacture from natural fibers, not prepared for spinning

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3. Cotton Fabric HS 5208

Manufactured from natural fibers, can be prepared for spinning

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Manufactured from YARN

Jeans HS 6203

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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

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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

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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

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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

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Why is a

minor processing

not accepted as

origin???

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Is "Mixing”

always a simple

operation ??

When will the "Mixing”be sufficient ??

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Origin Rules for Sets:

All components must be originating, but

up to 15%

there may be non-originating material in the set

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Example for Sets

Set of foodstuff for the preparation of spaghetti, containing:

Spaghetti Cheese Tomato paste

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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) -

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When should

you use the

alternative

criterion??

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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

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

- COMPLICATE -

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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 -

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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 -

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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%

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Loudspeakers HS heading ex 8518Standard 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

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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 -

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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…….

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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)

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The Use of Parts

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

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Example:

Dolls ex chapter 9502Origin 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

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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 states5. 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

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PREFERENCEAREA

A

CONTRACTING

PARTY

B

Bilcum

Bilateral Accumulation

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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---

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MULTI - LATERALACCUMULATION

PREFERENCE

AAREA

CONTRACTING

BPARTY

C

CONTRACTINGPARTY

MULTILATACCUM

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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---

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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

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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-Agreementsof Serbia and BiH

--- Example already applies within theCEFTA-2006 - zone ---

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Pan- European accumulation

Origin in the EU Origin in partner state1. 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”)

3. Unchanged sale of the materials:Goods retain their origin

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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

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Pan-European accumulationCase 1- Use of originating materials

- more than minor processing- Yarn ( HS 5204) origin: EU

Serbia for weaving intoraw fabric ( HS 5208)

origin: SerbiaEU 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 pan-european accumulation Applied for: Bilateral trade with the EU and diagonal export of the raw fabric to Switzerland

- - example is actually theoretically- -

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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 20.- Euro Packing costs 2.- Euro Plastic bag (Croatia) 0.5 Euro Other costs 2.5 Euro Prices ex works 25.- Euro

Added value in Bosnia: 5.-- Euro

Highest value input = Serbia Origin = Serbia

Preference in the EU for Serbia export to CEFTA??

- the example export to the EU is actually theoretically - -

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Pan-european accumulationCase 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 SerbiaIf: Cartridge is of origin Bosnia: Origin of the pen will be BosniaIf: 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

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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“

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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)

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Clearing of the tube as

1. Inward processing without levying of duties or

2. Levy of duties for free circulation

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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.

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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!)

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Example The Bagatelle Rule

Principle: Up to 10% of prohibited materials are allowed.

Product: Zippers of heading 9607, ex-works 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

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List condition:

Change of heading for all used materialsBut 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”

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Impact of the rules of origin

on the internal structure

of your company :

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Purchase Supplier

PreferenceSection

PlanningDevelopingProduction

Storage ofMaterials

and FinishedProducts

Export/Dispatch

Shipment

CALCULATI

ON

Calculation 1

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Purchase

Production Calculation

Case WorkerPreferences

SalesMarketing

Calculation 2

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Formal simplification: - Invoice declaration for

- all shipments up to 6.000.- € or - as „Approved Exporter“

--- in future: „Approved Economic Operator“---

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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- Withdrawal of the authorization in case of non-

compliance

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Supplier‘s 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---

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

Silk yarn 2,9 – 5% Wool yarn 3,2 – 4% Cotton yarn 4%

Silk fabric 5,3 – 6,9% Wool fabric 7,2 – 8% Cotton fabric 8%

Apparel and Clothing: Knitted and crocheted: 12% Not knitted or crocheted: 12%

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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