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Rules Of Origin - Preferential Origin

This article focuses on Preferential Origin

For non-preferential origin please click here

What is Preferential Origin?

Preferential origin offers benefits for trades between particular countries.

  • It applies to goods from particular countries where they fulfill the rules of origin for the relevant preferential arrangement to benefit from reduced or zero customs duty.

  • It qualifies the ‘right’ origin can bring significant reductions in the import Duty and VAT payable at import. It can also open the door to the use of the so called ‘Free Trade Agreements’ which not only bring the benefit of reduced import Duty and Tax but can open up markets that are not available to your competitors.

  • It is important for international traders to understand how to determine where their products fall within the rules of origin. Failing to do so means you may have to pay unnecessary duties and could result in delays at customs, additional costs, or fines.

Free Trade Agreements

The rules of preferential origin sit under the Trade and Cooperation Agreement (TCA)

Under a Free Trade Agreement (FTA), Rules of Origin (RoO) are used to establish whether a product can receive the preferential rate of duty, usually a reduced tariff as negotiated by the parties to an FTA.

Rules for determining preferential origin (origin that is eligible for preferential tariff rates) are made at the product level by FTA partner countries on the importing side.

In cases where there is no FTA in place, importing countries sometimes, but not always, require (non-preferential) origin to be proved for reasons of national trade policy, including anti-dumping and quota compliance on imports.

The UK Global Tariff (UKGT), published in May 2020, differs from the EU’s Commons External Tariff (CET) in a number of ways, and overall around 60% of all detailed tariff lines have been reduced in the UKGT compared to their current levels under the EU’s CET. Any trade agreement between the UK and the EU will, therefore, need to include rules of origin.


Main types of Agreements

From a UK perspective, there are four main types of agreements:

  • Imports from the EU- Import goods from the EU at zero tariffs.

  • Exports to the EU - Export goods to the EU at zero tariffs.

  • Reciprocal - Unilateral, Bilateral, and Multilateral preferential agreements.

  • Non-Reciprocal - Generalized System of Preferences (GSP) agreement.

Key criteria of preferential origin : Originating & Non-Originating Goods

Goods traded between countries which have agreed such agreements or where one side has granted it autonomously can have a reduced or zero rate of duty.

Goods must have fulfilled certain criteria agreed between those countries and usually means they are wholly obtained or have undergone substantial transformation:

Originating goods are wholly obtained good or ones that have undergone acceptable working or processing.

There are typically four types of conditions that are used to determine whether or not a good is deemed as ‘originating’:

  • Wholly obtained (WO) : Wholly obtained goods are those that do not use any materials from any other country and are entirely produced within the country. This often includes agricultural products or live animals.

  • Specific production process (SP) : Here the rule will grant originating status depending on whether a given production process has been used.

  • Change in tariff classification (CTC) : this rule considers whether a change of tariff classifications has occurred when looking at what is imported in order to produce the good that is then exported, i.e. inputs are imported as one good (e.g. aircraft engines) and exported as a different good (finished aircraft). Most rules of origin are defined using the Harmonised System trade classification.

  • Value-added (VA) : Specifies the minimum amount of domestic value-added in the value of the product being exported. For example, the rule may specify that there has to be a minimum of 40% domestic value-added embodied in the product. Consequently, the higher the required minimum domestic value-added content, the more difficult it is to use imported intermediates and the more constraining is the underlying rule of origin.

  • Minimal Operations (MO) : Minimal operations are such that when carried out have such a minor importance that they do not affect the origin status. The product must go under sufficient transformation to affect the origin and must exceed the minimum requirement or will be classed as minimal operations. All preferential origin rules contain a statement, which defines the working or processing which is to be regarded as insufficient to grant origin. Some examples are: Storage | Washing | Cleaning | Polishing | Peeling | Painting | Packaging | Labelling

For non-originating materials or components, there is a list of working or processing each product must undergo in order to obtain originating status. In order to know the working or processing requirements a product must undergo, it’s necessary to know the tariff classification. Once the tariff code is found you can see what countries can offer origin benefits of reduced import duty.

Key rules of preferential origin

There are several types of rules include in preferential origin agreements, but the most common ones are:

  • That only wholly obtained (originating) materials can be used.

  • That non-originating materials from certain countries or tariff codes can be used or are excluded from the working or processing.

  • That a specific working or processing operation must be carried out.

  • That a certain percentage of value is added or cannot be exceeded in the production process.