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.
That a combination of different rules applies.
That a choice between different rules is given.
Note: Rules can differ for each tariff code or preference scheme
Cumulation
Cumulation is the process that describes the following :
A product that originates from country A is then further processed or is added to with products originating in country B also known as cumulation.
The resulting product would have the origin of country B as it was processed or added to by that county, this is a product that accumulates its origin as its further processed.
Cumulation can only be applied between countries operating with identical origin rules.
There are four types of Cumulation: Bilateral, Diagonal, Regional and Full.
Bilateral Cumulation
Bilateral cumulation operates between two countries where a Free Trade Agreement or autonomous arrangement contains a provision allowing them to cumulate origin.
This is the basic type of cumulation and is common to all origin arrangements.
Only originating products or materials can benefit from it.
Diagonal Cumulation
Diagonal cumulation operates between more than two countries provided they have Free Trade Agreements containing identical origin rules and provision for cumulation between them.
Only originating products ormaterials can benefit from diagonal cumulation.
More than two countries can be involved in the manufacture of a product it will have the origin of the country where the last working or processing operation took place, provided that it was more than a minimal operation.
Regional Cumulation
Regional cumulation is a form of diagonal cumulation, which only exists under the Generalised System of Preferences (GSP)
It operates between members of a regional group of beneficiary countries
GSP (EU)
GSP is a special non-reciprocal preference scheme, it allows originating products to be imported into the EU at a reduced or zero rate of duty
GSP+ (EU)
GSP+ is a extension of the GSP system it includes developing countries which have proved their commitment to sustainable developmentand good governance.
Most rates are zero under this part of the GSP+ scheme.
The UK GSP has 3 frameworks:
Least Developed Countries Framework
General Framework
Enhanced Framework
For more information on UK GSP, please visit https://www.gov.uk/government/publications/trading-with-developing-nations
Full Cumulation
Full cumulation allows the parties to an agreement to carry out working or processing on non-originating productsin the area formed by them.
Full cumulation means that all operations carried out in the participating countries are taken into account.
While other forms of cumulation require that the goods be originating before being exported from one party to another for further working or processing, this is not the case with full cumulation.
Full cumulation simply demands that all the working or processing must be carried out on non-originating materials in order for the final product to obtain origin.
Preferential Origin Documentation
Every product, at its source, is considered of non-preferential origin. This could be different to its preferential origin.
Unless the specific customer agreement you’re honoring states that you do not need a proof of origin, you’ll need to either prove to HMRC that you can claim preference for goods you are importing, or you’ll need to give the person receiving your goods evidence of their origin so they can claim preference.
EUR1 - movement certificate
The EUR.1 is used to certify the origin of a product and may benefit from favorable trade terms or tariffs under a preferential trade policy of the EU.
In order to benefit from the preferential rate during a customs clearance, a valid EUR.1 movement certificate must be handed over to the customs office, in which the manufacturer certifies the origin of the goods.
EUR-MED - movement certificate
A EUR-MED certificate is used to move goods between countries of the Pan-Euro-Mediterranean cumulation. When exporting goods to a Pan-Euro-Med country, you either don’t have to pay customs duty, or you pay a discounted rate when the goods are imported.
Countries of the Pan-Euro-Med zone can only cumulate originating status of the goods if the free trade agreements including a Pan-Euro-Med origin protocol are applicable between them.
In the context of the Pan-Euro-Med system, diagonal cumulation means that products which have obtained originating status in one of the countries may be added to products originating in any other one of the countries without losing their originating status within the Pan-Euro-Med zone.
Countries within the Pan-Euro-Med cumulation include:
The EU
The EFTA States (Switzerland, Norway, Iceland, and Liechtenstein)
The Faroe Islands
The participants in the Barcelona Process (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria, Tunisia, and Turkey)
The participants in the EU’s Stabilisation and Association Process (Albania, Bosnia and Herzegovina, the Republic of North Macedonia, Montenegro, Serbia, and Kosovo)
The Republic of Moldova.
Note: Some countries apply full cumulation between themselves (EEA) and diagonal cumulation with the other pan-Euro-Med countries
ATR – movement certificate
The Movement Certificate A.TR is, similar to the EUR.1, a form of preference certificate, this document is solely for goods which are in ‘free circulation’ within the EU, to receive preferential import duty treatment when shipped to Turkey.
The major difference between the A.TR Movement Certificate and the EUR.1, is that the A.TR is exclusively for the goods traffic between the EU and Turkey.
Generalized Scheme of Preferences - Form A - movement certificate
Form A is a key document used under the Generalized System of Preferences also known as a ‘GSP certificate of origin’. This is needed to benefit from reduced or zero rates under the GSP schemes.
Origin declaration (Supplier's declaration)
An Origin declaration is not a document, but a prescribed text which the exporter should add to the invoice, or any other commercial document, describing the originating goods in sufficient detail to enable its identification. An exporter making a Statement on origin must hold information demonstrating that the goods are originating, including information on the originating status of materials used in production. This may include declarations obtained from suppliers.
A Statement on origin may apply to a single consignment, or to multiple shipments of identical goods, for a period specified in the statement, but not exceeding 12 months from date of first import. For UK imports, the statement will be valid for two years from the date it was made out and for exports to the EU, it will be valid for 12 months. Statements must be retained for at least four years.
Importer’s knowledge
‘Importer’s knowledge’ is an option allowing the importer to claim preferential treatment, based on own knowledge about the originating status of imported goods. It can be used as an alternative to a Statement on origin. As this requires the importer to have knowledge that the goods meet relevant rules of origin, the exporter or producer may have to provide information about production, to the importer. This may be in addition to other information already in possession of the importer, such as the HS code of the goods and origin criteria used and a description of the production process.
Non-Manipulation Certificate
Non-manipulation conditions require that the product declared for release for free circulation in the EU must be the same products as were exported from the beneficiary country in which they are considered to originate.
They must not have been altered or transformed in any way and only subject to operations to preserve them in good condition prior to being declared for free circulation.
Products or consignments may be stored under the responsibility of the exporter or subsequent holder on the condition that products remain under customs supervision.
If the customs authority has reasonable doubts about compliance with the requirements the exporter will be required to produce evidence that the goods that left the country of dispatch are still the same goods as they have left.
Rules of Compliance for Traders
Importers Must:
Have proof of the originating status of the goods, before claiming preference and this may be:
Statement on origin provided by the exporter on a commercial invoice, or other commercial document that describes the goods. The text of the Statement would be included in the agreement. This is known as an invoice or origin declaration
Supporting documents and records, if claiming preference using ‘importer’s knowledge’. If using importer knowledge, sufficient evidence that the goods qualify as originating, must be obtained. This may involve the exporter providing various supporting documentation and if this cannot be obtained, the exporter may be able to provide a Statement on origin
Claim for preference by completion of and declaring proof of origin on the customs declaration
If requested, provide proof of origin to the customs authorities
Maintain records for at least 4 years
Exporters Must:
Hold evidence that the goods meet the relevant rules of origin before issuing a Statement on origin
Understand whether a declaration from the supplier needs to be obtained
Provide the customer (importer) with one of the following:
Statement on origin on a commercial invoice, or other commercial document that describes the goods. The text of the Statement would be included in the agreement. This is known as an invoice or origin declaration
Supporting documents and records, if your customer is claiming preference using ‘importer’s knowledge’
Maintain records for at least 4 years
A claim for preference and proof of origin, is normally included on the customs declaration to enter the goods. However, a claim can be made after import, using form C285, but must be made within three years of the date of import and accompanied with proof of origin. Any duties would be repaid to the importer.
Additional Information
Direct Transport Rule
The purpose of direct transport is to make sure the good leaving one country is the same as the one that enters.
Preferential arrangements have rules regarding the transport of preferential goods from one territory to another.
If the goods pass through or stop over in the territory of a third country the goods need to stay under customs supervision or a non-manipulation certificate issued.
Documents needed to demonstrate the fulfilment of the Direct transport are contained in the relevant set of rules of origin, and could be:
(a) a single transport document covering the passage from the exporting country through the country of transit;
or
(b) a certificate (non-manipulation certificate) issued by the customs authorities of the country of transit:
giving an exact description of the products,
stating the dates of unloading and reloading of the products and, where applicable, the names of the ships, or
the other means of transport used, and
certifying the conditions under which the products remained in the transit country,
or
(c) failing these, any other substantiating documents.
Low Value Invoice Declaration
For low value consignments, usually under €6,000 (£5,700), companies can make an invoice declaration —a specially worded and signed statement on the export invoice or other commercial document relating to the consignment which describes the products concerned in sufficient detail to enable them to be identified.
Approved Exporter Invoice Declaration – AE Status
Under the present EU system, EU firms can apply for Approved Exporter (AE) status from their national customs authorities, allowing them to make statements of preferential origin using an invoice declaration (with no upper limit on value) instead of using an EUR1 form. There is no fee for getting AE status, but the application involves submitting documents to HMRC which might be time-consuming.
Approved Exporter status in the EU pertains only to specified goods and is not a general authorization of the exporter.
Once a UK firm has EU-type Approved Exporter status it continues to have a responsibility to keep the documentation required to prove origin, as per the relevant EU rules.
If you have been authorized by the relevant authorities to be an approved exporter you will need:
All appropriate documents proving the originating status
Invoice declaration stamped/signed by supplier
Delivery note
Any other commercial documents
Claiming preferential duty using the CHIEF software
Source: https://www.sendcloud.co.uk/rules-of-origin/#intro
Claiming preferential duty using the CDS Software
Source: https://www.sendcloud.co.uk/rules-of-origin/#intro
Useful Links
https://www.consilium.europa.eu/en/documents-publications/treaties-agreements/agreement/?id=2010035
https://findrulesoforigin.org/
https://www.gov.uk/guidance/get-proof-of-origin-for-your-goods
https://www.trade-tariff.service.gov.uk/sections
https://www.gov.uk/guidance/check-your-goods-meet-the-rules-of-origin
https://www.londonchamber.co.uk/LCCI/media/media/EUR1-Frequently-Asked-Questions.pdf
https://ec.europa.eu/taxation_customs/generalised-system-preferences_en
https://www.revenue.ie/en/tax-professionals/tdm/customs/origin/preferential-origin.pdf
https://sgp.fas.org/crs/misc/RL33663.pdf