Rules of Origin: Wholly Obtained, Processing and Cumulation

Rules of origin explained: wholly obtained goods, sufficient processing (tariff shift, value added), tolerance, cumulation and proofs such as the EUR.1.

Two containers of electric water heaters leave the same factory on the same day. One enters the EU duty free, the other pays the full rate. The difference is not the product, the price or the port. It is whether the exporter can prove the heaters originate in the exporting country under the rules of the agreement that applies.

Rules of origin are the most technical part of customs, and the most profitable to master. They decide whether a trade agreement actually works for you, whether anti-dumping duties hit your goods, and what "Made in" you may print. In this lesson you will learn the two families of origin, the three ways a product acquires origin, the rules on tolerance and cumulation, the proofs of origin you will meet, and how to run an origin calculation on a real product.

Preferential and non-preferential origin

There are two separate kinds of origin, with separate rules:

A product can be Algerian for non-preferential purposes and still fail the preferential rule of an agreement, because preferential rules are usually stricter. The documents themselves are covered in certificates of origin.

How does a product acquire origin?

Preferential agreements recognise two routes: goods are either wholly obtained in one country, or they have undergone sufficient working or processing there.

Wholly obtained products

Wholly obtained goods contain no foreign input at any stage. Typical categories:

• Mineral products extracted from the country's soil or seabed
• Plants and vegetable products grown and harvested there
• Live animals born and raised there, and products from them (milk, eggs, honey)
• Products of hunting and fishing conducted there, and sea fish taken by its own vessels (agreements define the vessel conditions: flag, registration, ownership)
• Waste and scrap from manufacturing there, and used articles collected there fit only for recovery of raw materials
• Goods produced there exclusively from the above

Deglet Nour dates grown in Biskra, olive oil pressed from Algerian olives, phosphate mined in Tébessa: all wholly obtained.

Sufficient working or processing

Most manufactured goods contain imported materials. They acquire origin if the processing in the exporting country meets the list rule of the agreement for the finished product's HS heading. List rules use three techniques, sometimes combined or offered as alternatives:

1. Change of tariff classification: the non-originating materials must be classified in a different heading (CTH, four digits), chapter (CC, two digits) or subheading (CTSH, six digits) from the finished product. Example: wooden furniture (heading 9403) made from imported sawn timber (heading 4407).
2. Value rule: the value of non-originating materials may not exceed a percentage of the ex-works price (typical in the PEM rules: 40% or 50%), or, in other agreements, a minimum regional value content must be reached (GAFTA has long used a 40% local value added threshold).
3. Specific processing operation: a named operation must take place, for example manufacture from yarn for textiles, or a chemical reaction for chemical products.

This is why the HS code of both the finished product and its inputs matters as much for origin as for duty.

Operations that never confer origin

Every agreement lists insufficient operations that do not confer origin, even if the list rule seems met: preserving goods during transport and storage, breaking up or assembling packages, washing, cleaning, painting and polishing, simple cutting, sorting and grading, putting in bottles or boxes, affixing marks and labels, simple mixing, simple assembly of parts, and the slaughter of animals, as well as combinations of these.

Tolerance: the de minimis rule

Tolerance lets non-originating materials that do not satisfy the list rule be used anyway, up to a share of the ex-works price. Under the 2012 PEM Convention rules it is 10%; the revised PEM rules raised it to 15% for most products, with special rules for textiles. Tolerance can never rescue an insufficient operation, and it cannot push a value rule beyond its percentage.

Cumulation: counting partners' materials as your own

Cumulation treats materials from partner countries as originating in the country of manufacture:

• Bilateral cumulation: materials originating in the other party to the agreement count as originating. EU materials used in Algeria count as originating for EU–Algeria trade, and vice versa.
• Diagonal cumulation: materials from third countries in a group count as originating, if all the countries involved have agreements with identical origin rules in force. This is the purpose of the Pan-Euro-Mediterranean (PEM) zone.
• Full cumulation: even processing that did not itself confer origin in a partner country can be added up. The revised PEM rules allow it for most products.

Other conditions: territoriality, transport and drawback

• Territoriality: the conditions for origin must be met without interruption in the exporting country.
• Direct transport or non-alteration: the goods must not be processed or altered on the way. The 2012 PEM rules require direct transport, with transit through third countries allowed under customs control; the revised rules replace it with a non-alteration rule.
• No-drawback: under the 2012 PEM rules, non-originating materials used in a product exported with preferential origin may not benefit from a refund or exemption of duty (for example under inward processing). The revised rules lift this prohibition for most products.

Proofs of origin

An approved exporter is authorised by its customs administration to make origin declarations whatever the value, after showing it understands and controls origin. Under the 2012 PEM rules, a EUR.1 is valid for four months from issue, and the exporter must keep supporting documents for at least three years. The practical steps in Algeria are covered in certificates of origin in Algeria.

Worked example: water heaters to Spain

Common mistakes

• Confusing the country of shipment or of the exporter with the country of origin
• Using a non-preferential certificate to claim a preference
• Computing the value rule on the FOB price instead of the ex-works price, or forgetting packing materials
• Assuming diagonal cumulation works with every partner country
• Not obtaining supplier's declarations for inputs counted as originating
• Keeping no file: during a verification, customs of the exporting country will ask for the cost sheet, purchase invoices and supplier declarations behind each proof

How to turn a qualifying origin into duty savings, agreement by agreement, is the subject of free trade agreements and preferential duties. The glossary entry on preferential origin gives a short definition to share with colleagues.