Following its exit from the European Union, a key aspect of the United Kingdom's trade policy has been to conclude free trade agreements (FTAs) with other countries and trading blocs (for further details please see "Back to basics: free trade agreements").
To that end, the United Kingdom has been negotiating 'roll over' FTAs to replace the European Union ones.(1) This includes the most significant of the United Kingdom's FTAs, the Trade and Cooperation Agreement (TCA), which was concluded with the European Union on 24 December 2020.
A clear benefit of an FTA is the ability for businesses to make use of 'preferential tariff treatment' (ie, reduced or zero tariffs and quotas) when shipping their products between parties to the FTA.
While FTAs offer significant benefits, they also raise new challenges for businesses which are not accustomed to navigating the complex rules of origin set out in these agreements. Failure to utilise FTAs and comply with these rules of origin could result in businesses unnecessarily paying substantial sums in import duties as well as serious disruption to global supply chains.
Additionally, many UK businesses will, for the first time, be faced with additional administrative burdens in obtaining the relevant supporting information about their products and supply chains to substantiate their claim for preferential treatment.
This article provides an overview of the common rules of origin and the key considerations for businesses in complying with these rules.
In order for goods to attract preferential tariff treatment, they must have originated or been manufactured in the territory of one of the signatories to the FTA. This can be demonstrated if the product:
- has been wholly obtained within the territory of one of the parties;
- contains a certain amount of regional value content;
- undergoes a tariff shift in the course of the manufacturing process; or
- requires a specific type of processing within a territory of one of the parties.
Although these rules have a number of common principles, their application varies depending on the type of goods and the terms of the relevant FTA.
Wholly obtained products Products will be 'wholly obtained' if they occur naturally and are extracted from within the territory of a party to the relevant FTA. For example, a plant or plant product which is grown and gathered within the United Kingdom would be wholly obtained within the United Kingdom.
Alternatively, a product which is produced within the territory of a party exclusively using products which originate within the territory of that party will be considered to be wholly obtained within the territory of that party.
Regional value content Under this rule, a finished product must contain either a maximum amount of non-originating materials or a minimum percentage of originating materials. For example, under the TCA, the components which originate from outside the United Kingdom or the European Union used in vehicles must be no more than 45% of the total ex-works price of the finished product.
Tariff shift If a product is manufactured within the territory of one of the parties to the FTA using non-originating materials, it will benefit from preferential tariff treatment if it undergoes a change in its tariff classification as a result of the manufacturing process.
This means that any non-originating materials used in the product's production must have a different chapter, heading or subheading of the Harmonised System.
Specific processing Finally, the product specific rules of origin under an FTA may require that a specific type of processing takes place within the territory of one of the parties. These are particularly prevalent for items of clothing and apparel which may require "weaving combined with making-up including cutting of fabric".(2)
Tolerances Even if a product does not satisfy the product specific rules of origin, it may nevertheless benefit from preferential tariff treatment under an FTA's general tolerance rules. These rules allow manufacturers to use non-originating materials up to a specific weight or value. However, these rules are specific to each FTA and will vary depending upon the commodity code of the product.
Cumulation Finally, importers may be able to benefit from cumulation provisions within an FTA.
The TCA allows for 'bilateral cumulation' (eg, a product which originates in the United Kingdom will be considered as originating in the European Union if it is used as a material in the production of a separate product within the European Union or undergoes further processing within the European Union).(3)
Certain UK FTAs go further by allowing for 'diagonal cumulation', which allows products to incorporate non-originating materials from certain third countries. For example, in the United Kingdom's FTA with Morocco, products which are obtained within the United Kingdom and incorporate materials originating in Switzerland, Liechtenstein, Iceland, Norway, Turkey or the European Union will be considered as originating in the United Kingdom.(4) Although the United Kingdom initially sought to obtain a similar approach within the TCA, this was rejected by the European Union.
What does this mean in practice?
Rules of origin are complex and claiming preferential tariff treatment requires consideration of a number of different factors, including the product's commodity code and composition and the terms of the applicable FTA.
However, once businesses have determined that their products are so eligible, further procedural steps are required in order to claim preferential tariff treatment.
How do I claim preferential tariff treatment?
A claim for preferential tariff treatment should be made to the customs authorities at the point of import by either the exporter or importer of the products. This can be made in several ways, depending on the terms of the applicable FTA. These include:
- an origin declaration made out by the exporter;
- importer's knowledge; and
- a movement certificate (eg, an EUR1 or EUR-MED).
Origin declarations Under the EU and the UK FTAs, exporters may provide a statement which demonstrates that their product originates within the territory of one of the signatories to the FTA. This must be included on an invoice or other commercial document and must describe the product in sufficient detail so as to enable it to be identified by the relevant customs authorities.
Importer's knowledge Both the UK-Japan FTA and the TCA introduce the concept of 'importer's knowledge' about the originating status of the relevant products as a means of claiming preferential tariff treatment.
While the importer's knowledge must be based on information which demonstrates that the product is originating, the exporter need not provide any information to the relevant customs authority, including a statement on origin.
However, in order to make use of the importer's knowledge option, the exporter should provide the importer with sufficient information about the products, such as the commodity code and details of the production or manufacturing process.
Movement certificate Certain UK FTAs, such as the UK-Egypt association agreement, require the submission to the customs authority of the country of import of an EUR1 or EUR-MED movement certificate, issued by the customs authorities of the exporting party, unless the exporter is an approved exporter or the value of the consignment does not exceed €6,000.
The United Kingdom continues to use the EUR1 and EUR-MED formats for these certificates, notwithstanding the expiry of the transition period, although the place of origin is now marked as the 'United Kingdom'.
For further information on this topic please contact Bernardine Adkins or James Stunt at Gowling WLG by telephone (+44 207 379 0000) or email ([email protected] or [email protected]). The Gowling WLG website can be accessed at www.gowlingwlg.com.
