What are “Rules of Origin” and why are they important to my supply chain?

Introduction

The turn of the year brought many changes across the UK and Ireland, but none more so than the end of the transition period and the implementation of the new NI-GB and UK-EU trading relationships as defined within the Protocol on Ireland/Northern Ireland and the UK-EU Trade & Cooperation Agreement.

With these new trading relationships, came new technical terms, jargon and systems that local businesses needed to become accustomed to in order to adapt to their new obligations. One of the more notable new systems was Rules of Origin.

This blog will seek to outline the general guidelines of Rules of Origin, how the new trading systems impact Rules of Origin on NI-GB and UK-EU trade and the key steps local businesses need to take.

What are Rules of Origin – an Overview

Rules of Origin is the term used to refer to the system that defines and classify the economic nationality of a product, such as where it was manufactured and processed. Often, a product’s economic Origin does not align or match with the country it has been imported from. A product’s Origin is often critical to deciding which customs procedures and tariff rates are applied to its movement between two states.

If a product is solely produced, manufactured or processed using materials from a single country, that is the country that it will be deemed to originate from or is ‘ Wholly Obtained’ from. However, due to the strength and complexity of global supply chains, many goods are produced, manufactured or processed using materials from a range of different countries. In such a case, determining a product’s origin is decided by the country where the last Substantial Transformation occurred.

A Substantial Transformation will have been occurred if one of the following happens:

·        Change in Commodity Code

·        Change in the product’s value

·        Manufactured from certain products or through specific processes

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With the UK and the EU reaching a free trade agreement in the form of the Trade & Cooperation Agreement, securing reduced and zero-rated tariffs on goods traded between the UK and the EU. However, for goods to qualify for the reduced or zero-rated tariffs, also referred to as Preferential Origin, they will need to demonstrate that they are of either UK or EU Origin through a qualifying level of processing. This will apply specifically to EU-Origin goods imported into the UK and UK-Origin goods exported to the EU.

Within the terms of the Trade & Cooperation Agreement, products need to be of at least 50% UK or EU origin to qualify for Preferential Origin under the Agreement. This would then entitle the trader to either the reduced or zero-rated tariff as specified within the Trade & Cooperation Agreement.

The primary measure for businesses to achieve this target is Cumulation , which allows for products that originate in one country to be treated as though they are originating from another when determining its Origin. Under the terms of the Trade and Cooperation Agreement, full Bilateral Cumulation is granted on goods traded between the UK and the EU.

This means that products and goods manufactured, produced or processed within the UK, that consists of EU parts and materials or has undergone some form of manufacturing or processing within the EU, can be considered as occurring within the UK and count towards a product qualifying as UK-Origin. Conversely, this also applies to EU products.

It is important to note however that when traders are cumulating the origin of a product, that they may only do so when the processing or product working is deemed sufficient. Not all processes conducted on non-originating products and materials are considered substantial enough to grant originating status. These processes, outlined in Article ORIG.7 in the Trade & Cooperation Agreement, include:

·        preserving operations such as drying, freezing, keeping in brine and other similar operations where their sole purpose is to ensure that the products remain in good condition during transport and storage;

·        breaking-up or assembly of packages;

·        washing, cleaning; removal of dust, oxide, oil, paint or other coverings;

·        ironing or pressing of textiles and textile articles;

·        simple painting and polishing operations;

·        sharpening, simple grinding or simple cutting;

·        sifting, screening, sorting, classifying, grading, matching including the making-up of sets of articles;

·        simple placing in bottles, cans, flasks, bags, cases, boxes, fixing on cards or boards and all other simple packaging operations;

·        affixing or printing marks, labels, logos and other like distinguishing signs on products or their packaging;

·        simple assembly of parts of articles to constitute a complete article or disassembly of products into parts;

If any goods fail to meet the necessary qualifying threshold or cannot be proven to have undergone the necessary level of processing, the movement of those products will be subjected to default World Trade Organisation (WTO) tariff rates.

Rules of Origin will also play a critical role in determining the applicable tariff rate for a product that is imported into Northern Ireland from GB. With the Protocol on Ireland/Northern Ireland creating a trade border within the Irish Sea, goods that are imported into Northern Ireland from the rest of the UK must prove that they are of UK Origin to receive Preferential Origin status and avoid the subsequent tariff that would be levied by being designated ‘At Risk’.

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The key step for businesses to take to is to begin engaging with their suppliers throughout their supply chain to ascertain the Origin of their materials and products and develop an understanding of the different form of processing undertaken in each part of the supply chain. By familarising themselves with the processing undergone within their supply chain, businesses will be able to gather key information that can support their ability to identify which of their goods will be vulnerable to tariffs.

Further to this, by gathering information on the processes that their products undergo throughout their lifespan, businesses will be able to generate a strong evidence base to provide customs authorities with the necessary information to qualify for Preferential Origin and the reduced and zero-rated tariffs.