The Importance of Origin from A Customs Perspective
The label says Made in China, so determining the origin for customs purposes is easy, right? Wrong! Determining the origin of your goods is much more complicated than you might think. It is also essential, as the origin of your goods can affect the duty amount you have to pay or even whether you are allowed to export or import your goods.
What is Origin?
Essentially there are two types of origin. There’s the origin determined by where the goods were in free circulation and the origin where the goods were manufactured. For example, a car manufactured in Japan has been imported to Germany and sold by a German car dealer to a customer in the Netherlands. While the Dutch customer could say he bought a German car, the car was still manufactured in Japan. From a customs point of view, the country where it was manufactured can change if the product is processed (changed) before it is sold. Let’s say the German company that imported the car takes out the gas engine and installs an electrical drive train, making it an electric vehicle. The country of origin is now German.
There is also a difference between preferential and non-preferential origin—more on that below.
The Proof is in the Pudding
The preferential country of origin is used to determine whether or not you need to import duties on it. The EU has many trade agreements, and if the product meets the rules of origin as laid down in a trade agreement, you may not have to pay any duties or may apply for a lower duty rate.
Simply stating the origin is not enough. Companies need to prove what their country of origin is. Stating the preferential origin can be done by an invoice declaration or, for example, a EUR.1 certificate, depending on the Trade Agreement, but the background of your origin determination must be covered by a long-term supplier’s declaration for all the raw materials, manufacturing flows or calculations of used materials.
There are some cases where non-preferential Origin is critical. An excellent example comes from one of our customers who export products to Pakistan. They sell products manufactured in the EU but also processed in India. Pakistan does not allow any imports with the origin of India, so it is crucial to have proof that the origin is not India.
The Difference Between Preferential and Non-Preferential Origin
Non-Preferential Origin basically is about what country the product is wholly obtained from or had the last substantial transformation or processing, according to the rules set out for determining the origin. In the example above, proving that the non-preferential origin is the EU instead of India is essential. Non-Preferential Origin has basically no influence on the number of duties you have to pay.
Preferential Origin has everything to do with import duties. Countries all over the world strike trade deals with each other. In these trade deals, they may agree on preferential rates for certain goods. These preferential rates mean paying a lower amount of import duties or even exemption of import duties. In some cases, preferential duties mean paying higher than the standard duties.
To make things even more interesting: preferential origin and non-preferential origin can be different.
The Biggest Challenge When Determining Origin
Determining preferential origin can be very complicated. You need a complete overview of your supply chain and product to prove origin. Where do the raw materials and various parts come from? What raw materials are processed where? Where is everything assembled?
Regarding preferential origin, the conditions for determining origin are outlined in the relevant trade deal. Trade deals have different protocols that state the requirements for different HS-Codes. In some cases, the origin is determined based on the added value, and in other cases, it could be based on the added weight. It varies per product.
Correct classification of your product is fundamental. The HS-Code, combined with the relevant Trade Deal and protocols, determines the preferential origin.
Sometimes it is possible to meet the conditions for preferential within the same protocol in more than one way. This means that in some cases, you can choose. In these cases, the tolerance rule applies.
Determining non-preferential origin can also be complicated. For a large part, these are the same dynamics as with preferential origin. Where do the raw materials or components come from, were they processed sufficiently for the origin to change, and was the processing significant enough? For example. If you export Dutch milk to Australia and you add some powder there to give it a different taste, is the end product then Dutch or Australian?
The Importance of Origin from a Customs Perspective
The origin of your goods is essential for determining the import duties that need to be paid, potential anti-dumping levies that need to be paid, or even whether your products are allowed to be imported or exported. Is there a contingent? Do you need a permit to import or export it?
The other factors that determine this are the HS-Code and the Customs Value of the goods. Import duties are calculated as a percentage of the Customs Value of the goods.
In many companies determining origin is treated as a poor relation, while it can be one of the most important members of the family! You could be missing out because you are unaware of specific trade deals or tolerance rules that would allow you to change the origin of your goods. This can have a significant financial impact. Another critical factor is that rules and regulations are subject to change. The rules for your product could change, but also the rules for one of the raw materials, ingredients, or parts of your product. This can mean a change in the preferential status of the product. If a product now complies with the condition for preferential rates, you can save on import duties.
Make sure you have all the knowledge and experience you need to determine the origin and the consequences of that origin. When in doubt, contact one of our specialists.