Preferential rules of origin are applied by countries that offer certain trade partners zero-duty or reduced-duty access for their imports as a means of determining the eligibility of products to receive such preferential access. In a globalized world with complex supply chains, it may be difficult to determine where a product originates. In order to take advantage from Canadian international trade agreements, it is essential that a product’s originating status be clearly defined. The process of globalization have led to the splitting up of production chains and the distribution to different locations and has complicated the identification of origin. With the proliferation of preferential rules of origin there is an increasing risk of mismanagement of preferential trade agreements and rules of origin. In the diagram below it can be seen that for making a cotton pyjamas, inputs from five different countries are collected but certificate from one single country will be required for getting preferential treatment
WHAT CAN WE DO FOR YOU ?
Transmanna trade compliance experts can help by:
- Identifying of specific set of rules of origin applicable in the partner countries for the products to be imported.
- Identifying and analysing all the parts, materials, components, and processes of the products to be imported.
- Determining ‘Substantial Transformation’ of the goods manufactured or assembled abroad or used materials originating in more than one country.
- Identifying tariff classification of final goods and the components using the Harmonised System (HS).
- Identifying specific manufacturing or other processes necessary to produce the product.
- Identifying the criteria that is required to be applied in establishing the origin of the product
- Apply all the tests and analyze all the results to determine if the product satisfy all the requirements of the rules of origin.
- Apply other next level of tests and formulas if the initial product does not qualify in the initial level tests,
What are Rules of Origin ?
The rules of origin concern the criteria used to define the place where a product has been manufactured. These rules specify the proportion of the value and production that must occur collectively in Canada and in the partner country of the free trade agreement in order for the countries to benefit from it. The application of these rules allows avoiding a situation where goods are simply brought into a partner country with an aim to benefit from the preferential advantages of these agreements. Rules of origin are divided into two categories: preferential and non-preferential rules of origin. Preferential rules of origin are applied by countries that offer certain trade partners zero-duty or reduced-duty access for their imports as a means of determining the eligibility of products to receive such preferential access. These rules of origin are required to prevent trade deflection or simple trans-shipment, whereby products from non-preferred countries are redirected through a free trade partner to avoid the payment of customs duties. They are meant to ensure that only goods originating in participating countries enjoy duty preferences.
Non-preferential rules of origin are used for all other purposes, including enforcement of product and country specific trade restrictions that increase the cost of entry (i.e., antidumping duties) or restrict or prevent market entry (i.e., quotas). When a product is produced in a single stage or is wholly obtained in one country, such that there are no imported components, the country origin of the product is relatively easy to establish. This applies mainly to “natural products” and to goods made entirely from them. Proof that the product was produced or obtained in the preferential trade partner is normally sufficient. For all other cases in which two or more countries have taken part in the production of the good, the rules of origin define the methods for ascertaining in which country the particular product has undergone sufficient working or processing. The process of globalization have led to the splitting up of production chains and the distribution to different locations of the various elements in the production of a good and has complicated the identification of origin more difficult.
Because rules of origin determine eligibility for receiving preferential tariff treatment, they have a significant impact on the strategic planning of profit-maximizing firms. These firms should analyze the different rules of origin, quantify their cost, and treat them as a factor of production in determining where to source their investments, purchase their raw materials, produce or purchase intermediate materials, and assemble their final products.
Methods for Determining Substantial Transformation
At least four different methods or criteria exist for determining the origin of goods that are manufactured in, assembled in, or use materials originating in more than one country:
- Substantial Transformation Method
- Value Added Method
- Specific Manufacturing Process Method
- Specified Change in Tariff Classification Method
1. Substantial Transformation Method
The substantial transformation of a good requires an article be transformed into a “new and different article” “having a distinctive name, character or use. To prevent a product from having multiple countries of origin, the good is a product of the country where it last underwent substantial transformation. However, the ambiguity of the standard and its flexible decision-making can lead to unpredictable, seemingly arbitrary results, especially when substantial transformation rule is applied differently for different purposes. The substantial transformation standard has many advantages, including its flexibility, evolution over time, and development through application to specific facts in an adversarial situation where interested parties are represented. However, these advantages are also the root of its disadvantages: its inconsistent applications, its discretionary nature, and the costs of making an origin determination under it
2. Value Added Method.
When the value added to a product in a particular country exceeds a specified percentage(say 50% or 60%), the goods are defined as originating in that country. This criterion can be defined in two ways: as the minimum percentage of the value of the product that must be added in the country of origin, or as the maximum percentage of imported inputs in total inputs or in the value of the product. As in the case of change of tariff classification, the value added rule has the advantage of being clear, simple, and unambiguous as stated. In application, however, it can become complex and uncertain. First, there is the issue of the valuation of materials, which may be based on several prices: ex works (from factory); free on board (FOB); cost, insurance, and freight (CIF); or into factory. Each method yields a different (in this instance, ascending) value of non-originating materials. Second, the application of this method can be costly for firms that will require sophisticated accounting systems and the ability to resolve often complex accounting questions. Finally, under the value added method, origin is sensitive to changes in the factors that determine production cost differentials across countries, such as exchange rates, wages, and commodity prices. For example, operations that confer origin in one location may not do so in another because of differences in wage costs, and an operation that confers origin today may not do so tomorrow if exchange rates change.
3. Specific Manufacturing Process Method.
The specified process method of origin, also referred to as technical tests, prescribe certain production or sourcing processes that may (positive test) or may not (negative test) confer originating status. The rules may require the use of certain originating inputs or prohibit the use of certain non-originating inputs. For example, EU rules of origin for clothing products stipulate manufacture from yarn, while the rule for sodium perborate requires manufacture from disodium tetraborate pentahydrate. The main advantage of specific manufacturing process rules is that, once defined, they are clear and unambiguous so that, from the outset, producers are able to clearly ascertain whether their product is originating or not. There are, however, a number of drawbacks to this system, including obsolescence (as a consequence of changes in technology) and documentary requirements, such as an up-to-date inventory of production processes, which may be burdensome and difficult to comply with.. No one rule dominates others as a mechanism for formally identifying the nationality of all products, and each has its advantages and disadvantages. It is clear, however, that different rules of origin can lead to different determinations of origin. Producers who are eligible for preferential access to different markets under different schemes with different rules of origin may find that their product qualifies under some schemes but not others. For example, a company in a developing country may find that the product it produces qualifies for preferential access to the EU market under the EU’s GSP scheme but that the same product does not satisfy the rules of origin of the U.S. GSP scheme.
4. Specified Change in Tariff Classification Method.
Origin is granted if the exported product falls into a different part of the tariff classification from any imported inputs that are used in its production. Application of this “tariff-shift” method has been facilitated by the widespread adoption of the Harmonized System (HS), under which most of the world’s more than 190 countries are now classifying goods according to the same harmonized categories. The level of classification of the HS at which change is required remains an issue, however. Typically, it is specified that the change should take place at the heading level (that is, at the four-digit level of the HS).The HS, however, was not designed specifically as a vehicle for determining country of origin; its purpose is to provide a unified commodity classification for definition of tariff schedules and for statistical purposes. Thus, in some cases it can be argued that a change of tariff heading will not identify substantial transformation, whereas in other cases, substantial transformation may occur without change of tariff heading. For example, the North American Free Trade Agreement (NAFTA) rule of origin for tomato ketchup states that a change to ketchup (HS 210320) from imported inputs of any chapter except subheading 200290 (tomato paste) will confer origin. In other words, any ketchup made from imported fresh tomatoes will confer origin, but ketchup made from tomato paste imported from outside the area will not qualify for preferential treatment, even though the basic change of tariff classification requirement has been satisfied.
General Rules for “Rules of Origin”
- Pursuant to section 35.1 of the Customs Act(the Act) proof of origin must be furnished for all imported goods.
- Proof of origin may be in the form of a commercial invoice, a Canada Customs Invoice, a Form A, Certificate of Origin, an Exporter’s Statement of Origin, a Certificate of Origin or any other documentation that indicates the country of origin of the goods.
- With the exception of the General Tariff, each tariff treatment requires specific proof of origin as set out in regulations. A summary of the proof of origin requirements by tariff treatment is given below:
- The proof of origin under the North American Free Trade Agreement (NAFTA) is theNorth American Free Trade Agreement Certificate of Origin
- Proof of origin for theMost-Favoured Nation tariff treatment must be in the form of a commercial invoice or a Canada Customs Invoice prepared by the vendor indicating the country of origin of the goods, or any other documentation indicating the country of origin of the goods
- For all originating goods from GPT beneficiary countries, a Form A – Certificate of Origin (Appendix B) or the Exporter’s Statement of Origin (Appendix C) must be submitted as proof of origin to the CBSA upon request. Such proof of origin must be completed and signed by the exporter of the goods located in the GPT country in which the goods were finished prior to importation into Canada.
- For all originating goods from LDC beneficiary countries, with the exception of textile and apparel goods of Harmonized System (HS) Chapters 50 to 63, a Form A – Certificate of Origin (Appendix B) or the Exporter’s Statement of Origin (Appendix C) must be submitted as proof of origin to the CBSA upon request. Such proof of origin must be completed and signed by the exporter of the goods located in the LDCT country in which the goods were finished prior to importation into Canada.
- For textile and apparel goods of HS Chapters 50 to 63, which means goods of any of the tariff item numbers set out in the schedule to the General Preferential Tariff and Least Developed Country Tariff Rules of Origin Regulations, the Certificate of Origin – Textile and Apparel Goods Originating in a Least Developed Country must be submitted as proof of origin to the CBSA upon request. Such proof of origin must be completed and signed by the exporter of the goods located in the LDCT country in which the goods were finished prior to importation into Canada.
- For all originating goods from CCCT beneficiary countries, Form A – Certificate of Origin (Appendix B) or the Exporter’s Statement of Origin (Appendix C) must be submitted as proof of origin to the CBSA upon request. Such proof of origin must be completed and signed by the exporter of the goods located in the CCCT country in which the goods were finished prior to importation into Canada.
- Proof of origin for theAUT and NZT treatment must be presented in the form of a commercial invoice or a, Canada Customs Invoice prepared by the vendor, or any other documentation indicating the country of origin of the goods as Australia or New Zealand as the case may be.
- Under a free trade agreement, the proof of origin is a “Certificate of Origin”. A “Certificate of Origin” is completed and signed by the exporter attesting that the goods covered by that certificate meet the rules of origin for that free trade agreement.
- No Certificate of origin is required for commercial importations of goods valued at less than CAN $2,500 for NAFTA and less than CAN $1,600 for CCFTA, CCRFTA, CPFTA, CCOFTA, CIFTA, CEFTA and CJFTA. In lieu of a certificate of origin, the importer must have in his possession, at the time of accounting, a Statement of Origin, completed by the exporter. This Statement must be provided to the CBSA upon request. The Statement of Origin under NAFTA is contained in “Appendix E” and the “Statement of Origin” under CCRFTA is contained in Appendix F. For CCFTA, CIFTA, CPFTA, CCOFTA, CEFTA and CJFTA, the “Statement of Origin” must be completed by the exporter and indicate that the good is an originating good.
- This “Certificate of Origin” must be provided to theCBSAupon request. If the importer does not have the “Certificate of Origin” in his possession at the time of accounting, another appropriate tariff, usually the Most-Favoured-Nation Tariff is to be claimed. If a “Certificate of Origin” has been completed in a language other than English or French, the importer may be requested to have it translated into either of those languages.
- A certificate of origin completed and signed by an exporter will be accepted as proof of origin for four years after the date on which it is signed.
- Where an importer has reason to believe that a declaration of origin is incorrect, he has to make a correction to the declaration and pay any duties owing as a result of such a correction.