[Abstract] In international trade, if taxpayers can fully utilize the Rules of origin of the relevant countries in the supply chain and reasonably arrange the procurement of raw materials, production, processing processes, and logistics according to them, they could maximize the policy benefits arising from the Rules of origin, reduce operating costs and enhance comprehensive competitiveness legally and reasonably. Therefore, the certificates of origin have the metaphorical name of "paper gold". However, to make the "paper gold" work, we need to master the Rules of origin accurately, otherwise, we may encounter compliance risks due to incorrect declaration of origin. In minor cases, the Customs authorities may impose administrative penalties, or in more serious cases, it may be suspected of constituting a smuggling offence. In this issue, let's learn the basics of Customs rules of origin.
[Keywords] Customs, Rules of Origin, Basic points
Origin, commodity classification, and commodity valuation are considered to be the three main technical issues of Customs operations in International trade. The difference is that, in contrast to the "visible" impact of commodity classification and valuation on the interests of enterprises, the role of origin is more like "an invisible hand", although invisible, in fact directly influences the tax benefits available to the goods and the regulatory policies to be implemented. In recent years, with the increasing frequency and intensification of trade friction between countries, this invisible hand has become increasingly powerful, so that import and export enterprises have to pay attention to it. In this notes, the authors will take you through the basics of China's Rules of origin, hope it can be helpful to you.
I. Five questions help you understand the basic concepts of rules of origin
1. What is Origin?
Origin, commonly known as the economic "nationality" of goods, is the place of origin of the goods traded in international trade, i.e. the place where the products are produced, gathered, raised, extracted, processed, and manufactured.
2. Why is it important to determine the origin of the goods?
In international trade, the origin is a symbol of the "specific identity" of the goods and is the reference for their quality and brand, directly affecting their price, quality, reputation, and trade treatment. When it comes to trade treatment, the implementation of national trade control policies (anti-dumping, quota controls, quarantine restrictions, etc.) is often carried out through the medium of origin.
3. What are Certificates of Origin?
The certificates of origin is a necessary document for enterprises to enjoy the differential tariff treatment of importing countries for their export products. Through the certificates of origin, exporters can obtain the tariff reduction and exemption from the importing countries, reduce the trade costs and enhance the competitiveness of the goods in overseas market. Based on the importance of the certificates of origin, some people refer to certificates of origin "golden key" and "paper gold" to open the door to international trade.
4. What are the rules of origin?
As the name implies, the rules of origin are generally applicable laws, regulations, and administrative rulings applied by countries to determine the origin of goods. In short, they are the rules to be followed and applied when determining the origin of goods. China’s rules of origin are divided into rules on non-preferential origin and preferential origin.
5. What are the legal consequences of an incorrect declaration of origin?
The origin of import and export goods is an important basis for Customs to determine the implementation of trade measures such as national preferential tariff policies, most-favored-nation treatment, anti-dumping and anti-subsidy measures, safeguard measures, origin marking management, national quantitative restrictions, tariff quotas, as well as for government procurement, trade statistics, and other activities. In accordance with the relevant provisions of Customs laws, enterprises are obliged to declare the origin of goods truthfully and accurately. If the origin declaration is incorrect and is found to be a violation of Customs supervision regulations or other violations of the Customs Law by Customs investigation, the Customs will impose penalties in accordance with Customs Law of the People’s Republic of China and Implementation Regulations of the Customs of the People's Republic of China on Administrative Penalties. If it constitutes a crime, the enterprise and the relevant personnel will be held criminally liable according to law.
II. Classification and Legal Basis of Rules of Origin in China
(i) Classification of Rules of origin in China
China’s rules of origin are divided into Preferential Rules of Origin and Non-preferential Rules of Origin.
Non-preferential Rules of Origin refer to the rules of origin established by a country's legislation in accordance with the needs of its Customs tariff and other trade measures, and are therefore also known as "autonomous rules of origin". The implementation of Non-preferential Rules of Origin must comply with the MFN principle, i.e. they must be applied universally and without distinction to all imports of MFN origin.
Preferential Rules of Origin refer to the origin policy formulated by a country in order to implement a national preferential policy. The specific criteria for determining the origin of goods need to follow the corresponding preferential trade agreements. "Up to now, China has signed 19 FTAs with 26 countries and regions. The scope of preferential treatment is limited to the import and export products of the member countries of the preferential trade agreement signed by China or the import products of the beneficiary countries which China unilaterally grants preferential tariff policies.
(ii) Legal basis
The legal basis for the two types of rules of origin is different.
Non-preferential Rules of Origin
At present, the World Trade Organization's Rules on Non-Preferential Origin has not yet come out, and the Non-preferential Rules of Origin are still autonomously formulated by the domestic legislation of each country. In China, the legal basis is mainly the Regulations of the People’s Republic of China on Place of Origin of Imports and Exports (hereinafter referred to as the Regulations on Place of Origin) and the Provisions of the Customs of the PRC on Executing “Provisions on the Substantial Transformation of Criteria in Non-Preferential Rules of Origin”.
Preferential Rules of Origin
Since the rules of origin are formulated for the implementation of national preferential policies, they are naturally the gaming result of all parties, and the rules should not only take into account the maximum interests of the country, but also the interests of other member countries, it goes without saying that the main basis for rules on preferential origin is bilateral or multilateral international agreements, that is, preferential trade agreements. For China, the relevant preferential trade agreements are often transformed into domestic laws in the form of regulations of the General Administration of Customs, such as the Order of the General Administration of Customs on Promulgating and implementing the Administrative Measures of the Customs of the People’s Republic of China on Place of Origin of Imports and Exports under the Asia-Pacific Trade Agreement. In addition, the legal basis also includes the Administrative Provisions of the Customs of the People’s Republic of China on Preferential Origin of Imports and Exports.
III. Differences between Two types of Rules of Origin
Although both are rules of origin, there are significant differences between rules on preferential origin and non-preferential origin, which can be seen from the definition and legal basis in Part II of this notes. To facilitate understanding, authors make a general distinction between the two in the form of a table, and briefly describe each of them.
Table 1: Differences between Rules on Preferential and Non-preferential Origin
(i) Legal basis
See the notes II(ii).
(ii) Purpose of application
Non-preferential Rules of Origin apply to non-preferential trade measures such as MFN treatment, anti-dumping and anti-subsidy, safeguard measures, origin mark management, national quantity restriction, tariff quota, and other non-preferential trade measures, as well as government procurement, trade statistics, and other activities.
Preferential Rules of Origin are the rules of origin formulated to implement national preferential policies (tariffs), for example, the application of Free Trade Agreement members belongs to this category.
(iii) Specific Content of Origin Standards
Both rules on preferential origin and non-preferential origin can be divided into “entirely obtained standards” and “not entirely obtained standards” in terms of origin standards. However, there are great differences in the content and application of specific standards, and enterprises need to determine according to the specific standards of origin in the international trade. The details of the origin standards will be covered in the following articles.
(iv) Transport Requirements
The preferential rules of origin have no requirements on transportation, but the preferential rules of origin require “direct transport”, i.e., direct transport from exporting member states to importing member states.
There are two meanings of direct transport: 1. literally direct transport, i.e. transport that does not pass through a country or territory other than a member state; 2. deemed direct transport, i.e. transport that passes through a country or territory other than a member state, but is regulated as direct transport because it meets the specific circumstances set out in the law. Circumstances that can be considered as direct transport, e.g. for geographical reasons only or transport needs, without any value-added treatment, without entering the country of transit for consumption or trade. The exact rules and requirements depend on the specific preferential trade agreement that applies. The exact rules and requirements depend on the specific preferential trade agreement that applies. This is because there are still subtle differences in the circumstances and regulations of deemed direct transport under different preferential trade agreements. Although the differences are subtle, in practice, they may result in wide divergence, so they need to be applied accurately.
(V) Declaration Requirements
Preferential Rules of Origin: According to the Article 14 of Administrative Provisions of the Customs of the People’s Republic of China on Preferential Origin of Imports and Exports, “At the time of declaration of importation of goods, the consignee of imports or its agent shall fill in a “Customs Declaration Form of the Customs of the People’s Republic of China for Imports” pursuant to the declaration provisions of the Customs, state whether conventional tariff or ex-gratia tariff is applicable, and submit the following documents together with the declaration: (1) a valid original copy of the certificates of origin for the goods or a written declaration on place of origin stipulated by the relevant preferential trade agreement; and...”From "shall", it can be seen that it is a mandatory requirement for the consignee or consignor to submit the certificates of origin or declaration documents, i.e. the import and export goods must submit the certificates of origin or declaration documents issued by the designated agency and declare the application of the preferential tariff rate under the corresponding agreement, otherwise they cannot enjoy the corresponding tax preferences.
Non-preferential Rules of Origin: According to Article 14 of Regulations of the People’s Republic of China on Place of Origin of Imports and Exports, “When examining and determining the place of origin of the imports, the Customs may require the consignee of the imports to submit the certificates of origin of the imports for examination. Where necessary, the Customs may request that the relevant organization in the exporting country examine the place of origin of the goods.” The word “may” indicates the discretionary power, which shows that, when it comes to the rules on non-preferential origin, the consignee or consignor will only submit the certificates of origin if required by the Customs.
Under the current management measures, the main cases requiring the submission of certificates of origin under the non-preferential rules of origin are "two anti-countermeasures and one safeguard", i.e. the import and export goods subject to anti-dumping, anti-subsidy, and safeguard measures require the submission of certificates of origin.
According to current international trade and Customs laws, the origin of goods is an important basis for whether the goods can enjoy tax benefits under bilateral or multilateral free trade agreements, and whether they are subject to certain trade sanctions. As one of the tax-related elements, origin has been an area of high compliance risk and Customs supervision focus in recent years.
For enterprises, the compliance risk and cost of incorrect declaration of origin are huge. Once detected by Customs and found to constitute a violation or smuggling, the possible legal consequences usually include administrative penalties, downgrading of the enterprise's credit rating, joint inter-departmental disciplinary action, etc. If a crime is suspected, it will also be referred to the procuratorial authorities for public prosecution. Therefore, it is important for enterprises to accurately confirm and declare the origin. Based on this issue, the notes briefly introduce rule of origin in China for the reference of enterprises.