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Annex D.1, Concerning Rules of Origin, to the Kyoto Convention (International Convention on the Simplification and Harmonization of Customs Procedures)
This agreement entered into force in 1977.

 

 

 


ANNEX D.1.

ANNEX CONCERNING RULES OF ORIGIN

Introduction

The concept of the origin of goods enters into the implementation of many measures whose application is the responsibility of the Customs. The rules applied to determine origin employ two different basic criteria : the criterion of goods "wholly produced" in a given country, where only one country enters into consideration in attributing origin, and the criterion of "substantial transformation", where two or more countries have taken part in the production of the goods. The "wholly produced" criterion applies mainly to "natural" products and to goods made entirely from them, so that goods containing any parts or materials imported or of undetermined origin are generally excluded from its field of application. The "substantial transformation" criterion can be expressed by a number of different methods of application.


In practice the substantial transformation criterion can be expressed:


- by a rule requiring a change of tariff heading in a specified nomenclature, with lists of exceptions, and/or
- by a list of manufacturing or processing operations which confer, or do not confer, upon the goods the origin of the country in which those operations were carried out, and/or
- by the ad valorem percentage rule, where either the percentage value of the materials utilized or the percentage of the value added reaches a specified level.


The advantages and disadvantages of these various methods of expression, from the point of view of the Customs and of the user, may be summed up as follows:


A. CHANGE OF TARIFF HEADING


The usual method of application is to lay down a general rule whereby the product obtained is considered to have undergone sufficient manufacturing or processing if it falls in a heading of a systematic goods nomenclature different from the headings applicable to each of the materials utilized.


This general rule is usually accompanied by lists of exceptions based on the systematic goods nomenclature; these specify the cases in which a change of heading is not decisive or impose further conditions.


Advantages


This method permits the precise and objective formulation of the conditions determining origin. If required to produce evidence, the manufacturer will normally have no difficulty in furnishing data establishing that the goods do in fact meet the conditions laid down.


Disadvantages


The preparation of lists of exceptions is often difficult and moreover such lists must normally be constantly updated to keep them abreast of technical developments and economic conditions. Any descriptions of manufacturing or qualifying processes must not be unduly complicated, since otherwise they might lead manufacturers to commit errors in good faith.


In addition, a prerequisite for use of the structure of a systematic goods nomenclature for determining origin is that both the country of exportation and the country of importation have adopted the same nomenclature as a basis for their respective tariffs and apply it uniformly.


B. LISTS OF MANUFACTURING OR PROCESSING OPERATIONS


This method is generally expressed by using general lists describing for each product the technical manufacturing or processing operations regarded as sufficiently important ("qualifying processes").


Advantages


The advantages are the same as those described at A above.


Disadvantages


Apart from sharing the disadvantages referred to at A above, the general lists are longer and more detailed, so their preparation is even more difficult.


C. AD VALOREM PERCENTAGE RULE


In order to determine origin by this method, regard is had to the extent of the manufacturing or processing undergone in a country, by reference to the value thereby added to the goods. When this added value equals or exceeds a specified percentage, the goods acquire origin in the country where the manufacturing or processing was carried out.


The value added may also be calculated by reference to the materials or components of foreign or undetermined origin used in manufacturing or producing the goods. The goods retain origin in a specific country only if the materials or components do not exceed a specified percentage of the value of the finished product.


In practice, therefore, this method involves comparison of the value of the materials imported or of undetermined origin with the value of the finished product.


The value of constituents imported or of undetermined origin is generally established from the import value or the purchase price. The value of the goods as exported is normally calculated using the cost of manufacture, the ex-works price or the price at exportation.


This method may be applied:


- either in combination with the two other methods, by means of the lists of exceptions referred to at A above or the general lists referred to at B, or
- by a general rule prescribing a uniform percentage, without reference to a list of individual products.


Advantages


The main advantages of this method are its precision and simplicity.


The value of constituent materials imported or of undetermined origin can be established from available commercial records or documents.


Where the value of the exported goods is based on the ex-works price or the price at exportation, as a rule both prices are readily ascertained and can be supported by commercial invoices and the commercial records of the traders concerned.


Disadvantages


Difficulties are likely to arise especially in border-line cases in which a slight difference above or below the prescribed percentage causes a product to meet, or fail to meet, the origin requirements.


Similarly, the origin attributed depends largely on the fluctuating world market prices for raw materials and also on currency fluctuations. These fluctuations may at times be so marked that the application of rules of origin formulated on this basis is appreciably distorted.


Another major disadvantage is that such elements as cost of manufacture or total cost of products used, which may be taken as the basis for calculating value added, are often difficult to establish and may well have a different make-up and interpretation in the country of exportation and the country of importation. Disputes may arise as to whether certain factors, particularly overheads, are to be allocated to cost of manufacture or, for example, to selling, distribution, etc. costs.


While these various rules for determining origin all have, in one degree or another, advantages and disadvantages, it must be stressed that the absence of common rules of origin, at both importation and exportation, not only complicates the task of Customs administrations and of the bodies empowered to issue documentary evidence of origin but also causes difficulties for those involved in international trade. This points to the desirability of moving progressively towards harmonization in this field. Even where different methods have been introduced to reflect economic conditions or negotiating factors in preferential tariff arrangements, it seems very desirable that they should exist within a common or standard framework, for ease of understanding by traders and ease of application by the Customs.


Having regard to the foregoing considerations, the Annex proposes, following the definitions of certain technical terms, those rules for the determination of origin which it is felt can be most easily applied and controlled, with least risk of misunderstanding and fraud and the least interference with commercial activities.


The provisions concerning these rules are accompanied by other provisions generally agreed to be essential for the practical application of a system of origin determination.


The Annex deals solely with the Customs aspects of rules of origin. It does not, for example, extend to measures taken to protect industrial or commercial property or to ensure respect for origin indications or other trade descriptions in force.

Definitions

For the purposes of this Annex:


(a) the term "country of origin of goods" means the country in which the goods have been produced or manufactured, according to the criteria laid down for the purposes of application of the Customs tariff, of quantitative restrictions or of any other measure related to trade;


Note


In this definition the word "country" may include a group of countries, a region or a part of a country.


(b) the term "rules of origin" means the specific provisions, developed from principles established by national legislation or international agreements ("origin criteria"), applied by a country to determine the origin of goods;
(c) the term "substantial transformation criterion" means the criterion according to which origin is determined by regarding as the country of origin the country in which the last substantial manufacturing or processing, deemed sufficient to give the commodity its essential character, has been carried out;
(d) the term "Customs control" means the measures applied to ensure compliance with the laws and regulations which the Customs are responsible for enforcing.

Principle

1. Standard


The rules of origin necessary for the implementation of the measures which the Customs are responsible for applying both at importation and at exportation shall be laid down in accordance with the provisions of this Annex.

Rules of origin

2. Standard


Goods produced wholly in a given country shall be taken as originating in that country. The following only shall be taken to be produced wholly in a given country:


(a) mineral products extracted from its soil, from its territorial waters or from its sea-bed;
(b) vegetable products harvested or gathered in that country;
(c) live animals born and raised in that country;
(d) products obtained from live animals in that country;
(e) products obtained from hunting or fishing conducted in that country.
(f) products obtained by maritime fishing and other products taken from the sea by a vessel of that country;
(g) products obtained aboard a factory ship of that country solely from products of the kind covered by paragraph (f) above;
(h) products extracted from marine soil or subsoil outside that country's territorial waters, provided that the country has sole rights to work that soil or subsoil;
(ij) scrap and waste from manufacturing and processing operations, and used articles, collected in that country and fit only for the recovery of raw materials;
(k) goods produced in that country solely from the products referred to in paragraphs (a) to (ij) above.


3. Standard


Where two or more countries have taken part in the production of the goods, the origin of the goods shall be determined according to the substantial transformation criterion.


Notes


1. In practice the substantial transformation criterion can be expressed:


- by a rule requiring a change of tariff heading in a specified nomenclature with lists of exceptions, and/or
- by a list of manufacturing or processing operations which confer, or do not confer, upon the goods the origin of the country in which those operations were carried out, and/or
- by the ad valorem percentage rule, where either the percentage value of the materials utilized or the percentage of the value added reaches a specified level.


2. In order to determine whether the conditions relating to substantial transformation are met, use may be made of the structure of a tariff classification system such as the Brussels Nomenclature by laying down a general rule accompanied by lists of exceptions.


Under this general rule the product obtained is considered to have undergone sufficient manufacturing or processing if it falls in a heading of the tariff classification system different from the headings applicable to each of the materials utilized.


The lists of exceptions may cite:


(a) the manufacturing or processing operations which, although they entail a change in the tariff classification heading, are not regarded as substantial or are regarded as substantial only under certain conditions;
(b) the manufacturing or processing operations which, although they do not entail a change in the tariff classification heading, are regarded as substantial under certain conditions.


The conditions referred to in (a) and (b) may relate either to a type of treatment undergone by the goods or to an "ad valorem" percentage rule.


3. The "ad valorem" percentage requirement may be expressed in the form of a general rule laying down a uniform rate, without a list of individual products.


4. Recommended Practice


In applying the substantial transformation criterion, use should be made of the Brussels Nomenclature as provided for in Note 2 to Standard 3.


5. Recommended Practice


Where the substantial transformation criterion is expressed in terms of the ad valorem percentage rule, the values to be taken into consideration should be:


- for the materials imported, the dutiable value at importation or, in the case of materials of undetermined origin, the first ascertainable price paid for them in the territory of the country in which manufacture took place, and
- for the goods produced, either the ex-works price or the price at exportation, according to the provisions of national legislation.


6. Standard


Operations which do not contribute or which contribute to only a small extent to the essential characteristics or properties of the goods, and in particular operations confined to one or more of those listed below, shall not be regarded as constituting substantial manufacturing or processing:


(a) operations necessary for the preservation of goods during transportation or storage;
(b) operations to improve the packaging or the marketable quality of the goods or to prepare them for shipment, such as breaking bulk, grouping of packages, sorting and grading, repacking;
(c) simple assembly operations;
(d) mixing of goods of different origin, provided that the characteristics of the resulting product are not essentially different from the characteristics of the goods which have been mixed.

Special cases of qualification for origin

7. Standard


Accessories, spare parts and tools for use with a machine, appliance, apparatus or vehicle shall be deemed to have the same origin as the machine, appliance, apparatus or vehicle, provided that they are imported and normally sold therewith and correspond, in kind and number, to the normal equipment thereof.


8. Standard


An unassembled or disassembled article which is imported in more than one consignment because it is not feasible, for transport or production reasons, to import it in a single consignment shall, if the importer so requests, be treated as one article for the purpose of determining origin.


9. Standard


For the purpose of determining origin, packings shall be deemed to have the same origin as the goods they contain unless the national legislation of the country of importation requires them to be declared separately for tariff purposes, in which case their origin shall be determined separately from that of the goods.


10. Recommended Practice


For the purpose of determining the origin of goods, where packings are deemed to have the same origin as the goods account should be taken, in particular where a percentage method is applied, only of packings in which the goods are ordinarily sold by retail.


11. Standard


For the purpose of determining the origin of goods, no account shall be taken of the origin of the energy, plant, machinery and tools used in the manufacturing or processing of the goods.

Direct transport rule

12. Recommended Practice


Where provisions requiring the direct transport of goods from the country of origin are laid down, derogations therefrom should be allowed, in particular for geographical reasons (for example, in the case of landlocked countries) and in the case of goods which remain under Customs control in third countries (for example, in the case of goods displayed at fairs or exhibitions or placed in Customs warehouses).

Information concerning rules of origin

13. Standard


The competent authorities shall ensure that the rules of origin, including any changes and interpretative information, are readily available to any person interested.


14. Standard


Changes in the rules of origin or in the procedures for their application shall enter into force only after sufficient notice has been given to enable the interested persons, both in export markets and in supplying countries, to take account of the new provisions.