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HOME > Publications > Professional Articles > Wholly and Non-wholly Obtained Standards in Rules of Origin

Wholly and Non-wholly Obtained Standards in Rules of Origin

Author: Sean Jia & Jing Ning 2021-04-013549

The confirmation of origin has always been a matter of high risk and high return. For taxpayers, if they can arrange and organize the global business in advance according to the rules of origin, so as to choose the country where they can enjoy the policy preference to the greatest extent as the origin, this is the best choice to reduce operating costs legally and reasonably and win in the commercial war. However, the cost of wrongly declaring the origin is also huge. If it is found to be illegal or smuggled by the Customs, it will be subject to administrative punishment at least and criminal responsibility will be borne in serious cases. It is very important to understand and master the rules of origin in order to enjoy the advantages from the rules of origin and avoid making mistakes. Wholly obtained standard and non-wholly obtained standard are the main rules used to judge the origin of goods in the world at present. This paper will give a brief introduction about these standards.


I. What is the wholly obtained standard?


As the name suggests, the wholly obtained standard is the rule to determine whether the goods are wholly obtained or produced in a country or region. Regulations of the People’s Republic of China on Place of Origin of Imports and Exports (collectively referred to as the “Regulations on Place of Origin”) states that the standard of entirely obtained is as follows: “Where all the goods are sourced from one country or region, the country or region shall be the place of origin of the goods.” With regard to “all the goods are sourced from one country or region”, both rules on preferential and non-preferential origin are specified by way of classification.


“Products sourced from one country or region”[1] referred to in rules on non-preferential origin include:


(1) live animals born and bred in the country (region);

(2) wild animals caught, fished and collected in the country (region);

(3) unprocessed items from live animals sourced in the country (region);

(4) plants and plant products harvested in the country (region);

(5) minerals excavated in the country (region);

(6) raw items sourced in the country (region) other than those mentioned in items (1) to (5) of this Article;

(7) waste and scrap materials produced in the manufacturing process that can only be discarded or recycled in the country (region);

(8) items collected in the country (region) that cannot be restored or repaired, or such parts or materials recycled from the items;

(9) aquatic animals and other items sourced legally in sea area outside the territorial waters by ships hoisting the flag of the country;

(10) products of items listed in item 9 of this Article processed on a ship hoisting the flag of the country;

(11) items sourced from the sea bed or sea bed subsoil outside the territorial waters where the country has special excavation rights; and

(12) products of items listed in items (1) to (11) of this Article manufactured in the country (region).


“Products sourced from one country or region”[2] referred to in rules on preferential origin include:


(1) plant products harvested, picked or collected in the said member country or region;

(2) live animals born and bred in the said member country or region;

(3) minerals mined or extracted in the territory or territorial sea of the said member country or region; and

(4) any other goods which comply with the standards of “wholly obtained” stipulated in the corresponding preferential trade agreements.


Lawyers advice


1. Whether rules on preferential origin or non-preferential origin, the categories of goods generally include plants (agricultural products) and their products, animals and their products, minerals, aquatic products or marine products, and other natural products.


2. Although the categories of goods stipulated in the two types of rules of origin are roughly the same, there are differences in the specific expressions of each category. The differences seem to be subtle, however when implemented in practice, it involves in not only huge economic interests, but also the undertaking of legal responsibilities. Therefore, it is necessary to carefully study every single word or phrase and clarify the exact meaning.


3. Under the premise of the current global scarcity of resources and the balancing of interests of all parties, rules on preferential origin are actually the result of the game among countries. Therefore, it is not difficult to understand that in general, rules on preferential origin have more stringent requirements than those on non-preferential origin when determining the “wholly obtained standard” of similar goods.


II. What is the non-wholly obtained standard?


Today, with the development of international trade globalization, the manufacturing and processing of products are often not completed in a single country or region. Products with “multinational elements” can be seen everywhere. In this case, to determine the origin of the products, we need to use the non-wholly obtained standard.


Non-wholly obtained standard: It refers to the rules of how to determine the final origin of goods when more than two countries (regions) are involved in manufacturing and processing.


“Non-wholly obtained standard” in rules on non-preferential origin: it mainly refers to substantive changes, i.e. “where the goods are produced in two or more countries or regions, the country or region where the goods undergo final substantial change and completion shall be the place of origin.”[3]


“Non-wholly obtained standard” in rules on preferential origin: It shall be determined according to the corresponding preferential trade agreements, which includes the tariff classification change standard, regional value-added content standard, manufacturing and processing procedure standard or specific origin of goods standard[4].


Lawyers advice


1. Non-wholly obtained standard is mainly applicable to the goods that have completed partial or major processing and manufacturing procedure or completed the main value-added part in the exporting country.


2. “Non-wholly obtained standard” in rules on non-preferential origin is different from those in rules on preferential origin. Enterprises need to apply corresponding rules of origin according to the actual situation of international trade.


III. What are the differences of Non-wholly obtained standard in rules on non-preferential origin and preferential origin?


1. “Non-wholly obtained standard ” in rules on non-preferential origin mainly refers to substantive changes.


2. Three specific standards to determine whether “substantive changes” are made:

There are three main standards to determine whether the processed goods constitute “substantive changes”:

(1) “Tariff classification change standard” refers to, after the raw materials not originated from a country (region) is manufactured or processed in the country (region), the change of four-digit tariff classification of the goods derived takes place in Imports and Exports Tariff of People’s Republic of China.

(2) “Manufacturing and processing operations standard” refers to the principal operations carried out in a country (region) which confer essential characteristics to the goods derived after the manufacturing or processing operations.

(3) “Ad valorem percentage standard” refers to, after the raw materials not originated from a country (region) is manufactured or processed in the country (region), the added value exceeds 30% of the value of the goods derived, and the formula is as follows:


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 “Ex work price” refers to the price of finished products paid to the manufacturer.


“Value of non-originating raw materials” refers to the value of import raw materials and spare parts for manufacturing or assembling the finished products directly (including raw materials or spare parts whose place of origin is unknown), which is calculated by “import cost, insurance plus freight” (CIF).


Lawyers advice


(1) The three standards mentioned above are in a primary and secondary order when they are applied. According to the provisions of the Regulations on Place of Origin, “Tariff classification change standard shall be regarded as the primary standard. Where Tariff classification change standard is unable to reflect substantive changes, the ad valorem percentage standard, or manufacturing and processing operations standard shall be adopted as supplementary standards.”


(2) In practice, if the above-mentioned articles are taken as the standard to determine whether a substantive change is made, the processed goods must be specified in Detailed List of Goods Applicable to the Standards of Manufacturing and Processing Operations and Ad Valorem Percentage, and whether or not substantive changes take place shall be determined according to the specified standard. If the substantive change of goods not specified in the Detailed List of Goods Applicable to the Standards of Manufacturing and Processing Operations and Ad Valorem Percentage, it shall apply to tariff classification change standard.[5]


(3) There are no special requirements for transportation under the rules on non-preferential origin.


(4) It should also be noted that if any processing or handling of the goods is to circumvent the relevant provisions of the People’s Republic of China on anti-dumping, countervailing and safeguard measures, the Customs may not consider such processing and handling when determining the origin of the goods.


(II) “Non-wholly obtained standard” in rules on preferential origin


“Non-wholly obtained standard” in rules on preferential origin should be determined in accordance with the provisions of corresponding preferential trade agreements. To sum up, the “non-wholly obtained standard” that may be applied to goods that are not entirely obtained or manufactured in the member countries or regions of preferential trade agreements mainly include the following categories:


1. Tariff classification change standard, refers to that there is a change of tariff classification for the derived goods in the Harmonised Commodity Description And Coding System after manufacturing and processing of materials not originated from the member country or region in the exporting member country or region.


2. Regional value-added content standard, refers to the percentage of the remaining price in the free-on-board price (FOB) of the exports after deducting the price of materials not originated from the said member country or region in the manufacturing process of goods from the free-on-board price (FOB) of the exports, and the formula is as follows:


image.png


3  Manufacturing and processing procedure standard, refers to the main procedure which gives rise to the basic characteristics of the goods derived from processing.


4. Other standards, refers to the standards other than the aforesaid standards agreed unanimously by the member countries or regions for determination of the place of origin of the goods.


Lawyers advice


(1) What kind of “non-wholly obtained standard” is applied under rules on preferential origin shall be determined according to the provisions of corresponding preferential trade agreements.


E.g. A mixture is directly imported from Malaysia (a member of the China-ASEAN preferential trade agreement) to China. The raw materials of the mixture are not wholly obtained or produced in Malaysia, but the mixture belongs to the scope of Attachment I Special Origin Rules of Goods (hereinafter referred to as “PSR”) of Revised Administrative Measures of the Customs of the People’s Republic of China for the Origins of Imported and Exported Goods under the Framework Agreement on Comprehensive Economic Co-operation between the People’s Republic of China and the Association of Southeast Asian Nations (ASEAN) (hereinafter referred to as Measures for the Origins of China-ASEAN), and conforms to the regional value-added content provisions of the corresponding goods. Therefore, the mixture is applied to the above-mentioned Article 2 “regional value-added content standard” to determine the “non-wholly obtained standard” of the origin of the goods.


(2) “Non-wholly obtained standard” under the rules on preferential origin needs to meet “direct transportation” condition at the same time.


The term “direct transportation” here includes two meanings: first, direct transportation in literal sense shall mean that imports under a preferential trade agreement are transported directly from a member country or region are transported directly to China without passing through any country or region other than the member countries or regions under the agreement; second, although the route passes through other countries or regions other than the member countries or regions under the agreement, it is regarded as “direct transportation” because it meets the specified conditions.


E.g. According to the Measures for the Origins of China-ASEAN, goods originating in member states of ASEAN and transported to China by passing through other countries or regions, shall be deemed as “directly transported” if all of the following conditions are met: 1. passing through such countries or regions is only for geographical reasons or transportation; 2. not entering such countries or regions for trade or consumption; and 3. when passing such countries or regions, none handling other than loading and unloading or handling necessary for keeping goods in good status is made.[6]


(3) Regional value-added content standard is a relatively variable standard in rules on preferential origin. Different free trade agreements have different requirements on regional value-added content, and specific requirements are usually issued in the form of attachments in customs regulations.


E.g. According to the Measures for the Origins of China-ASEAN, the components of products originated from China-ASEAN Free Trade Zone is not lower than 40% of its total value (FOB).[7]


References


[1] Article 4 of Regulations of the People’s Republic of China on Place of Origin of Imports and Exports

[2] Article 4 of Administrative Provisions of the Customs of the People’s Republic of China on Preferential Origin of Imports and Exports

[3] Article 3 of Regulations of the People’s Republic of China on Place of Origin of Imports and Exports

[4] Article 5 of Administrative Provisions of the Customs of the People’s Republic of China on Preferential Origin of Imports and Exports

[5] Provisions on the Substantial Transformation of Criteria in Non-Preferential Rules of Origin

[6] Article 13 of Administrative Measures of the Customs of the People's Republic of China for the Origins of Imported and Exported Goods under the Framework Agreement on Comprehensive Economic Co-operation between the People's Republic of China and the Association of Southeast Asian Nations (ASEAN)

[7] Article 3 (3) 2. of Administrative Measures of the Customs of the People's Republic of China for the Origins of Imported and Exported Goods under the Framework Agreement on Comprehensive Economic Co-operation between the People's Republic of China and the Association of Southeast Asian Nations (ASEAN)