Seminar on Rules of Origin in theCEFTA 2006 – Agreement

Shkodra/Albania, Nov. 2010

Helmuth Berndt© 2010

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Period ofre-orientation and transition

CEFTA 1992:

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CEFTA 1992 - Member states: Entry: Leave (EU):

Poland 1992 2004

Hungary 1992 2004

Czechoslovakia (then) 1992 2004--------------------Visegrad

Goup-----------------------Slovenia 1996 2004Romania 1997 2007Bulgaria 1999 2007

------------- ------- ------Croatia 2003 ------Macedonia 2005 ------

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Stabilisation- and Association Pact

1999 Cologne40 participants: All participants of CEFTA 2006,

EU, Canada, Switzerland, Russia, Japan, USA,

IMF, World Bank, OECD; NATO, UN, Turkey et alt.

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Targets of the Stability Pact:

3 „working tables“

- Democracy

- Economy

- Security

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„Working table economy“: To assist economic development by trade liberalisation

– in the region and– in the trade with partners of

the European Economic Area (EEA)

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2001 Memorandum of Understanding

on Trade Liberalisation and Facilitation

Key targets:

- Bilateral Free Trade Agreements- Enhance the WTO accession - Stimulation of the EU accession process

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2003 – 2005:

Network of 32 bilateral Free Trade Agreements („Matrix“)

„Virtual Free Trade Zone“

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Elements of the Free Trade Agreements:

Liberalisation of at least 90% of the trade within 6 years

- Application of preferential rules of origin

- Harmonisation of legal regulations with the EU legislation (Customs nomenclature, phyto- and sanitarian protection, tax system etc.)

- Protection of intellectual property rights

- Approximation of laws with WTO-rules

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Joint Declaration of June 2006:

Creation of a single modernised and improved CEFTA (1996) Agreement in

- full conformity with the WTO rules

- and establishing a zone of diagonal accumulation

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Agreement on Amendment of the CEFTA (1996) Agreement

19.12.2006:

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Conditions for the accession:

WTO-membership (in case of non-membership a committment to application of WTO-rules mutatis mutandis is imposed, actually relevant for Serbia, BiH and UNMIK/Kosovo)

Free Trade Agreement with the EU Free Trade Agreements with all

member states of CEFTA

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Structural elements of the Agreement:

Preamble -with reference to EU-accession and WTO compliance-

Objectives Industrial products Agricultural products Technical barriers General provisions New trade issues - with reference to „TRIPS“ Joint declaration – containing WTO-Annexes 1

A, B, and C

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Main targets of CEFTA 2006 (trade related): Free trade in the area Trade facilitation by - Customs preferences - - In general duty free trade - - Support for technical co-

production - Modern and harmonised Customs Law - Lesser technical barriers - Harmonisation of standards

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Customs preferences in detail: - Abolition of quantitative restrictions - No export duties - No new import duties - Industrial goods: - - Duties abolished at entry into force

(exceptions in Annex 2/dismantling) - Agricultural goods: - - Duties abolished, reduced or

retention of MFN-tariff (Annex 3)

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- Goods are eligible or preferences

- Goods are originating in the country of exportation

- Technical conditions are met

Conditions for Customs preferences:

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The cornerstone: Rules of Origin

Different trade within a

Free Trade Zone

and a

Customs Union

2% 3%

10%

Japan

Free TradeAssociation

4%

Japan

2% 3%

10%

7% 7%

7%

7%

Japan

Free TradeAssociation

Customs Union

4%

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Intensity of EU-Preferences per 1.8..2010

Complete integration: European Union

Customs Union: With Turkey (except steel products)

EU-EFTA Agreements:Norway, Iceland, Liechtenstein, Switzerland

“Europe Agreements”: No more countries

Economic Partnership Agreements ( EPAs, see “Abroad”)

Mediterranean Agreements :North Cyprus (Turkish part), Maghreb states: Morocco, Tunisia, Algeria.

Mashrek group: Egypt, Jordan, Syria, Lebanon. Plus Israel and PNA

Stabilisation and Association Agreements with Croatia, BiH, Macedonia, Albania, Montenegro, Serbia (Interim)

Abroad: South Africa, Mexico, Chile, EPAs: Cariforum, Pacific Terr.

Unilaterally: 178 (176) developing countries in the GSP,

Balkan beneficiaries: UNMIK/ Kosovo and Moldova

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System of Origin

Preferential definition

Non-preferentialdefinition

Commercial definition

EU-system System ofother

countries

EU-definition

Worldwidedefinition

General system of Preferences

(UNCTAD)

PAFTA

ASEAN

CEFTA

AGADIR

Rules forspecifiedproducts

(i.e.textiles)and

Rules forall the restof products

Actually inprocess

Containselements of

the preferentialorigin

“Made-in” origin

UK in 1887

Madrid-Agreement 1891

Madrid-Agreement 1958

National legislation

Most important: TRIPS, (WTO-accession!)

WIPO-Geneva

WTO mandate to WCO

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Criteria for the origin of goods

Wholly obtainment

or

sufficient processing

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What is

“Wholly obtained” ??

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Mineral products: Extracted from the soil

Vegetables: Harvested there

Live animals: Born and raised up…..

See Article 5 of the Origin Protocol:

25Tomatoes1

Tomatoes, 0702,

harvested

Processing:

Heading 2103

“WHOLLY OBTAINED”

ORIGIN BECAUSE

EXPORT:ORIGIN, BECAUSE RAWMATERIAL IS ALREADYWHOLLY OBTAINED

But bottle, spices?

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4403

4407

9504

4403

IS IT WHOLLY OBTAINED?

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Chapter 07 Edible vegetables: Fresh, chilled, provisionally preserved

Chapter 08 Edible fruits: Fresh, dried

Chapter 20 Preparations of vegetables: In general all vegetables and fruits used must be wholly obtained (with little exemptions).

Chapter 21 Miscellaneous edible preparations:With one exception no wholly obtainment

„Chapter“ means Chapter of the „Harmonised System“ – see below).

Wholly obtainment frequently used for agricultural goods:

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The alternative for the processing industry:

Sufficient processing

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Most frequent basic principles :

– Change of the HS-heading (4-digits!)– Limited percentage of the used materials

- Manufacturing procedure -- AND COMBINATIONS THEREOF—

Recommendation: To start with the

production on the lowest level possible

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The tolerance rule cannot be applied for textiles (Chapter 50 – 63) and in case of insufficient working or processing.

General tolerance:

10% of materials which should not be used, are allowed.

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Where to find these criteria?

See „List of working and

processing“ = Annex to the Origin Protocol Column 3 an 4 only refer to

imported materials

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Importance of the HS for the rules of origin:

- For preferential origin: 4 digits(for used materials: See Customs

declaration)- for export goods: See export declaration- For help: Binding tariff information by

Customs!- For non-preferential origin: 4 digits, 1 KN-

code-line with 8 digits- Tariff reduction schemes: 6 – 8 digits

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The Structure of the HS

01 04 20 90 00 10Chapter HS

Heading HS

Subheading HS

Subheading National Statistic(Combined Nomenclature, TARIC)

NationalInternal

NationalInternal

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The HS / version 2007 is divided into

21 SECTIONS

97 CHAPTERS

1221 HEADINGS

5052 SUBHEADINGS

General Rules I – V, also binding

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- HS-heading of the finished product

- HS-heading of the used materials

- Exact calculation of the ex works- price per unit (= exact

bookkeeping!)

Determination of the origin in case of „sufficient processing“:

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The value of the used materials is their Customs value.

So: Important is to check the Customs value carefully!

Be aware of the exchange rate!

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Some examples for sufficient processing:

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Combined criteria - Medicine

HS headings 3003, 3004:

1. Tariff change of all used materials

But: materials of headings 3003 and

3004 only up to 20% ex-works

and

2. Used materials must not exceed 50% of the ex works-price.

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Example for Exclusion of a heading, exclusion specific imported materialsand restriction of imported materials:

Heading 1904, I.E. Corn Flakes

Question: Is it allowed to use imported mineral salts?

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Example for minimum- input of originating materials:

HS-heading 2402,

… Cigarettes…:

At least 70% by weight of the used

tobacco must be originating in the country

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" Manufacture from animals of chapter 1”

Preparations of meat of Chapter 16:

Notice: Chapter 1 = Live animals!(sanitarian conditions of slaughter houses!)

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Clothes and garments of Chapter 61 and 62:

„Manufacture from yarn“

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Rules for cotton products:

1.Natural cotton fibers, not prepared for spinning HS 5201

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2. Cotton yarn, HS 5203

Manufacture from natural fibers, not prepared for spinning

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3. Cotton Fabric HS 5208

Manufactured from natural fibers, can be prepared for spinning

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Manufactured from YARN

3. Jeans HS 6203

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Alternative 1/ for fabrics:

Alternative for the fabric:

Printing of the raw fabric(Plus at least two finishing steps)

But: Value of the unprinted fabric allowed only up to 47,5 % of the ex-works price of the goods

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Alternative for clothing:

Embroidered clothing: Manufacture from unembroidered fabric

with a value of not more than 40 % of the ex-works price of the finished good

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Insufficient treatment (“simple operation”)in general not accepted asto confer origin.For details see Art. 7 of the Origin Protocol, but see cumulation rules (below).

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Column 3 of the “List”:

Alternative criteria:

Why do you need and when should you use the

alternative criterion??

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Fertilizers Ex - 3105

Standard rule col. 3: Manufacture, in which all materials used are

classified within a Heading other than that of the product.

However, materials classified within the same heading may be used, provided their value does not exceed 20% of the ex-works price of the product

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And the value of all materials used does not exceed 50% of the ex-works price of the product

- COMPLICATE -

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Alternative Rule Col. 4:

Manufacture in which the value of all the materials used does not exceed 40% of the ex-works price of the product

Simple and allows products of heading 3205 up to 40%

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If the conditions of the „List“ cannot be met, a co-production with a partner state can help in order to get the origin for the finished product.

How?

By processing materials originating in this or in more partner states.

Which possibilities are actually offered by the Free Trade Agreements?

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Actual models of co-production:

1. Bilateral accumulation

2. Diagonal accumulation

3. Full accumulation, actually only by EU applied in the trade with the Maghreb states, some former ACP states and in the EEA (EU + NO, IS, FO, CH is connected). Principle: Non originating material as first processing step allowed, but all accumulations must lead finally to “List compliance” -.

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PREFERENCEAREA

A

CONTRACTING

PARTY

B

Bilateral accumulation

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Conditions for bilateral accumulation

1. Agreement between the partners

2. Processing of originating

materials more than insufficient

- but less than sufficient

processing is allowed -

3. If only insufficient processing:

Origin will be retained

4. Non-originating materials have to be

processed sufficiently (“List”)

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The bilateral accumulation today is integrated as standard rule in all modern European Free Trade Agreements.

The „pan-european accumulation“,

which covers the bilateral and the diagonal accumulation with more than two involved trade partners, nowadays constitutes the most favourable and most modern system of trade facilitation by Customs technique.

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MULTILATERAL/DIAGONAL ACCUMULATION

PREFERENCE

AAREA

CONTRACTING

BPARTY

C

CONTRACTINGPARTY

MULTILATACCUM

D

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Advantages of the Pan-European accumulation

- No more differentiation between bilateral and multilateral accumulation

- Insufficient operation can lead to the origin- Facilitation and enhancement of regional

cooperation

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The diagonal accumulation is used - in the trade within EEA (European

Economic Area) = EU plus EFTA- states Norway and Iceland, while Switzerland incl. Liechtenstein are associated to the EEA,

- in the trade of the EEA with Turkey,

- in the trade of the EU and Turkey with the SAP-partners,

- within the CEFTA-region

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Accumulation in the CEFTA-Origin Protocol:

Origin in CEFTA-states, 2 options: Art. 3 of the Origin Protocol:

- - Using originating materials only from CEFTA-member states (Art. 3, Item 1),

- - Using originating materials from CEFTA-member states, the EU, Iceland, Norway, Switzerland and Turkey (Art. 3, Item 2).

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Origin in CEFTA-states

a n d in the EU:

Art. 4 of the Origin-Protocol:- Using originating materials from any

other CEFTA-party or from the EU (Art. 4 (1) of the Origin Protocol)

Question: How to be applied?

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Conditions for CEFTA-accumulation:

Agreements with all other involved partner states with identical rules of origin

2. Origin of the materials and processing of more than “insufficient operation”

3.) Publication in the Official Journal/Gazette

----- same conditions as in pan-european model ----

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Principles of CEFTA-accumulation

1. Processing more than insufficient operation: = Origin in this country, Compliance to list-criteria is not necessary!

2. Processing only as insuficient operation: = Origin in the last country only if the added value there is

higher than the highest value share of originating materialsof the other involved countries

3. Processing of non-originating materials:= Origin only by sufficient working or

processing (according to “list criteria”)

4. Unchanged sale of the materials:Goods retain their origin

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Example for CEFTA-accumulation

Export product: Woven fabric of wool, HS 5112, woven in Albania, export to Montenegro

Input: yarn of wool of HS 5107, originating in BiH and Serbia

The weaving in Albania is more than insufficient processing. The criterion of fabric is: Manufacture from natural fibre.

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Result: The fabric gets Albanian originReason: BiH, Serbia, Montenegro and Albania are contracting parties to the CEFTA-2006 Free Trade Agreement.

Preference in Montenegro.

In case of only insufficient operation in Albania, i,e, only packing of the yarn, the origin goes to the country with the highest input of originating materials.

Applied: Art. 3, Item 1 of the Origin Protocol

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Same example,but export to the EU: Same result:

The woven fabric has Albanian origin and is eligible for preference in the EU, because all involved parties have Free Trade Agreements (actually as Interim Agreements) with the EU and between themselves. Preference in the EU.

Applied: SAP-Agreement

Question: Yarn from Croatia ??

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Example with export to Turkey:

Yarn ( HS 5204) - origin: EU goes to Albania for weaving intoraw fabric ( HS 5208) - origin: Albania

fabric goes to Serbia for dyeing - origin: Serbia

fabric sold from Serbia to Turkey

Both processings are more than unsufficient operation within the CEFTA accumulation.

But: There is no Agreement between Turkey and Albania (but between Turkey and EU and Turkey with Serbia) . No preference in Turkey, non-

preferential origin only!

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Example with 10%-tolerance and “insufficient operation”

Assembling of a ball point pen of HS 9608 for export to the EU- All used parts are of HS 9608:- Cartridge, origin EU, value 2.—€- Plastic parts, origin BiH value 1,-- €- Clip, origin Montenegro value 1.-- € Ex-works price in Albania 5.-- € Export → Serbia: Origin is EU ( highest share) Applied: Art. 3, Item 2 of the Origin ProtocolThe “ List” does not apply because of “insufficient operation”!

If: Cartridge is of origin BiH: Origin of the pen will be BiHIf: Cartridge is of origin Albania: Origin of the pen will be AlbaniaIf: Clip is of origin China: No preferential origin for the pen at all - 10%-tolerance rule does not apply:- - - “Insufficient operation” is given and - - - 10%- tolerance is exceeded

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Example with “insufficient operation” only

Jeans / Origin BiH ( HS 6203) with EUR.1 go to Albania for packing and export to the EU:

Values: Jeans 20.- Euro Packing costs 2.- Euro Plastic bag (Albania) 0.5 Euro Other costs/profit 2.5 Euro Price ex works 25.- Euro

Added value in Albania: 5.-- Euro Highest value input = BiH, Origin = BiH Applied: SAP-Agreement

Question: If the plastic bag is of origin Ukraine?

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No Draw Back rule

Art. 15 of the Origin Protocol

General background

Concerned goods

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Example: TV tube Origin : South Korea Processing in Albania for TV-set Value not exceeding 25% of the ex -

works price of the TV (HS 8528)

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Export of the finished TV to other CEFTA-partner state with EUR.1

1. Duty free access of the Korean TV tube to the CEFTA - market,

2. disadvantage for CEFTA producers against Albanian producers because

of customs duties to be paid by the CEFTA producer for his importations of tubes.

Question: Exportation to EU-market ?

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Additional special rules:

Accessories, spare parts Neutral elements Principle of territoriality Direct transport Free zone processing Sanctions

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Impact of the rules of origin on the internal structure of your company:

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Purchase

Production Calculation

Case WorkerPreferences

SalesMarketing

Calculation 2

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Formal simplification: - Invoice declaration for

- all shipments up to 6.000.- € or - as „Approved Exporter“

--- in future: „Approved Economic

Operator“/AEO:

Approved for Security aspects,

Customs procedures or both---

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- Legal base in the Agreement- Irrespective of the value- Origin declaration by typing, stamping or printing on the

invoice or any commercial doc.- Wording must be according to the legal text - The declaration must be signed ( principle)- Non-originating goods indicated only on the invoice - Written application and basic audit- Frequent shipments, knowledge of rules of origin - Proper records and stock accounts- Full responsibility by the exporter - Regular audits by the Customs- Withdrawal of the authorization in case of non-

compliance

Details for the „approved exporter“:

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Internal proof of origin of materials: „Supplier‘s declaration“ as part of the contract:Certification for the - - status of non-originating materials- - status of already originating materials- Issued for single shipments and

as long term declaration.

Responsibility by the manufacturer, auditing by the Customs.

Actually formally applied and based in the Agreements within the EEA and between EU, Turkey and the Maghreb states, but informal use is highly recommended.

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Thank you for your attention!

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Thank you for your attenion

Helmuth BerndtSenior Customs AdvisorE-mail: berndt_consult@gmx.de

Tel.: + 49 30 824 07 657 fax : + 49 30 824 07 658 Mob.: + 49 177 203 7508

LV-CEFTA-Maced-2010