The New Era of Origin Rules and Their Impact to Importers

By: C.M. de Anda del Corte

2010/2011

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Table of Contents

I. Introduction

II. Basic Concepts and Legal Framework

• GATT/WTO

• The Concept of Origin

• Common Provisions

III. Classic Trade Agreements

• EU-Mexico FTA

o Structure of the FTA

o Relevant provisions of the FTA

• Generalised System of Preferences

o Relevant provisions of the GSP

IV. New Trade Agreements – Main Changes

• The EU-Korea Free Trade Agreement

• New GSP Origin Rules

• PanEuro-Med

V. Repercussions of Abolishing Documentary Proof of Origin in

Favour of Invoice Declarations

• Good Faith

VI. Conclusion

VII. Bibliography, Case Law References and Internet Sources

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I. Introduction

On March 6, 2005 the European Commission published a communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee on what they called ‘orientations for the future’ on the rules of origin in preferential trade agreements. This document is a result of the consultation process launched by the European Union through the Green paper on the same topic aiming at creating a more enhanced market access to beneficiaries of all trade arrangements, but particularly focused in development-oriented arrangements such as the Generalised System of Preferences (GSP). During the consultation period, it became evident that the preferential origin status is often not granted and/or claimed due to the complexity of the origin rules in the view of exporters. The Commission therefore chose to re-write the rules in a more accessible fashion. In practice, it is true that certificates of origin are with some frequency revoked during post-clearance examinations. This leaves the importer often with a customs debt (subsequent entry in the accounts1) with exception of particular cases (namely good faith). Considering that one of the already announced so-called ‘improvements’ would be the abolition of the certificates of origin as proof of origin, one cannot help but wonder whether this ‘improvement’ would injure the principle of good faith often pleaded by importers. The outcome of the consulting procedures from the European Commission resulted (amongst other) in the Commission Regulation 1063/2010 published in the Official Journey on November 23, 2010 by which the Commission Regulation 2454/93 (the Community Customs Code implementing regulation) is amended where it comes to the GSP origin provisions. Along with the GSP, the EU has committed itself to modernise the origin protocols in new and existing agreements (being the EU-Korea FTA the first FTA from this so-called new generation). Given the importance and the impact that this new approach could mean to importers, I have formulated the problem subject to this essay by means of the following question: Which are the effective changes resulting from the new approach of the EU towards preferential duty treatment and what are the preponderant actual consequences to importers in the EU?

1 Article 220-1 of the current Community Customs Code

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In this essay, I will first briefly touch ground on the legal framework. I will subsequently analyse the structure of the classic trade agreements taking the structure of a couple as example to consequently compare it to the new trade agreements/rules of origin. I will afterwards go over the possible impact of the main changes (with special interest on the to the future expected prevalent role of the registered exporter -REX-) to importers to finally come to a conclusion on whether these changes will indeed be a step forward to the market operators (in particular to importers).

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II. Basic Concepts and Legal Framework

Prior to refer to the classic structure of preferential trade agreements on which the EU takes part, it is pertinent by means of introduction, to refer briefly to the legal framework applicable to international trade and the concept of origin.

At the present time, in this era of globalisation, the international tendency is free-trade-supportive. The previous, based upon the concept that free trade is beneficial to everybody. At least from a theoretical point of view, free trade should result in higher economic and social welfare2 and in stimulation of domestic industries. However, there are significant economical and social differences within the international community that have to be dealt with before reaching free trade on a global level. To this extent, it is important to note that while some countries already enjoy of a high level of economic wealth and social stability, some other countries are still dealing -for example- with flagrant human right issues. Accordingly, although the international community seems to agree that an open border to goods in the long run pays off, on an individual level economies do not want to jump into an abysm without taking proper precautions. The precautions are set through the application of commercial policies. Trade agreements are an important instrument to set up the pace in which economies will ultimately embrace free trade. Trade agreements are generally based on the WTO rules. General background on this institution is presented below. Given the focus of this essay, I will confine the recount of the topics covered by the GATT/WTO rules and agreements, solely to those which may be of relevance to the subject of this paper.

GATT / WTO The General Agreement on Tariffs and Trade (hereinafter GATT) was born in 1948 out of the need to create a non discriminatory trading system to help the world’s economies to raise after the economic devastation suffered from World War II. The agreement had a temporary nature to it. It established a set of rules that are in essence still in force. The GATT as such evolved to become the World Trade Organisation (hereinafter WTO) in 1995 as a result of the Uruguay Round. To enforce a multilateral non discriminatory trading system, the WTO took over the rules and principles already in place during the GATT era and updated them where appropriate (on the grounds of negotiations between the Member countries via the so called ‘rounds’). One of the GATT/WTO’s most important principles is the ‘Most Favoured Nation’ principle (MFN). This

2 Principles of Political Economy and Taxation David Ricardo (1817), The Wealth of Nations by Adam Smith (1799).

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principle requires any agreement signed upon WTO rules, not to discriminate amongst the WTO Members (e.g. if a favourable duty treatment is granted to one Member, it has to be granted to all Members equally). There are however important exceptions to this rule, e.g.:

- Free trade agreements whereby parties may grant special duty treatment amongst the contracting parties and therefore discriminate the treatment to the non-party Members

- Special treatment to developing countries Moreover, the GATT includes clauses on principles ruling the trade agreements such as tariff schedules, restrictions to apply non-tariff barriers, subsidies, safeguards measures, dispute settlement and of course, origin. A specific agreement on rules of origin was created under the umbrella of the Uruguay Round in 1994 (same round which gave birth to the WTO). This agreement has as main objective the harmonisation and clarification of the rules of origin. The concept of origin as such will be described below.

The concept of Origin

From a customs and economic point of view, the origin of a good, relates to the country in which that product was:

1. wholly obtained or; 2. sufficiently processed.

These are thus, the basic two rules. There is an important distinction to be made when it comes to origin: preferential and non-preferential origin. The latter relates to the ‘economic’ origin of the goods by which non-tariff measures (such as anti-dumping duties, quantitative restrictions, tariff quotas and in some cases export refund in the framework of the Common Agricultural Policy) may be applicable depending on the last country in which the good was sufficiently processed. Preferential origin relates to a favourable duty rate applicable to goods originating from countries with whom the importing country or group of countries (such as the EU) has a trade agreement or to whom it grants duty preferences unilaterally. Hence the importance of determining the origin of goods. Given the problem formulation and the extension limit of this document, in this essay I will focus on preferential origin. On a rather simplistic example, one could think of preferential origin as the ‘nationality’ of a good. A good wholly obtained in a particular country can be

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regarded as a good that ‘was born’ in that country and has therefore such country’s nationality. In case that a good was not ‘born’ in a particular country, it can still be granted a ‘passport’ of that country if certain criteria is met. Such good is regarded to be sufficiently processed in that country. Each trade agreement has an own set of rules of origin (also referred as origin protocol) that stipulates the working or processing operations that confers the originating status to a given product in case such product is not wholly obtained (‘not born’) in the country in question. In general terms, the rules to confer preferential origin to a product applicable to most trade agreements of the EU can be, amongst other, the following:

- Change of tariff (sub) heading, - Change of tariff heading of all materials with a specific tolerance rule

other than the general tolerance rule, - Maximum percentage of non originating materials allowed in proportion

to the ex works price (also known as value added content rule), - Maximum percentage of non originating materials allowed in proportion

to the ex works price – applicable to the group of materials which predominates by weight in the product,

- A specific working of processing carried out on certain materials. - A combination of the above mentioned criteria.

It is to be noted that all origin protocols include an article referred to as ‘insufficient working or processing’. This article impedes goods from acquiring the origin status when very simple processes have been carried out even in case that the criteria applicable to a particular good has been met. This article includes a list of all the activities that will be considered as insufficient to confer the originating status. For example, let us take a product for which the rule of origin is ‘change of tariff heading’ and let us assume that the final product is made from parts classified under a different tariff heading than the final product. In principle, one might think that the product will be conferred the origin status of the country in question since the applicable origin rule has been met. However, taking into account that the only activity carried out was the simple assembly of the articles, the final product could never be granted the origin status since the simple assembly of parts is one of the activities listed as ‘insufficient working or processing’ to confer origin. As can be concluded from the previous, there are several items to take into account in order to be able to determine whether a certain good can benefit from duty preferential treatment. First of all it is imperative to observe whether the processing of the non originating materials goes beyond the activities listed in the corresponding agreement as insufficient working or processing. Further, depending on the tariff classification of the final product, a specific criterion is to be met. If the applicable criterion is met, a proof of origin can be

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issued. Such proof of origin will entitle the importer to benefit from the preferential duty treatment.

Other common provisions in trade agreements Aside from the rules of origin applicable to any given trade agreement, there are other common provisions relevant to preferential treatment. Below I will mention and describe briefly the most important. Cumulation Cumulation is a system allowing to use products originating in country A for a further process in country B, as if they were originating from country B. There are several types of cumulation: Bilateral. This is the basic type of cumulation and is common to all origin arrangements. It allows the use of materials originating from the trade partner as if they were originating in the producer’s country. Diagonal. This type of cumulation is applicable to the Pan-Euro-Mediterranean cumulation zone and allows cumulation between two or more countries of the zone as long as the involved countries have FTA’s containing identical origin rules. Regional. Similar to Diagonal but applicable to specific blocs of beneficiary countries within the GSP scheme. Full cumulation. Goes beyond the former types of cumulation as it allows the parties to an agreement to carry out working or processing on non-originating products in the area formed by them. In all the other types of cumulation, only the use of originating materials is allowed while full cumulation allows to carry out processes on non-originating materials. Drawback Drawback refers to refund of duties paid upon importation of a particular good when such good is exported. Direct transport rule This provision usually requires the goods to be transported directly from one trade partner to the other in order to ensure the goods exported are the same ones that the goods imported in the country in which the preferential treatment will be claimed. Exceptions to this rule are applicable when the goods in transport for some reason needed to stop in a third country, as long as they were not manipulated and remained under customs supervision. Proof of origin When the applicable origin criteria are met, a proof of origin is to be issued. The most common proof of origin are the certificate of origin issued by the exporting authorities and the invoice declaration. The latter can require the

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exporter to be an approved exporter in order to be able to make invoice declarations. In this chapter I have described briefly the legal framework applicable to trade agreements based upon WTO’s rules. I have subsequently described the concept of origin for preferential purposes. I have as well mentioned the most common criteria used in trade agreements in order to confer preferential origin to products. In the following chapter, I will proceed to analyse the common provisions in trade agreements that are relevant to preferential duty treatment.

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III. Classic trade agreements

Given the number of agreements, I will analyse for the purpose of illustration of the classic agreement structures, two agreements that are representative as to the structure they follow and/or the importance of them: the EU-Mexico FTA and the GSP. As it will be seen in the structures of these examples, there are common concepts recurrent in all trade arrangements. Of great importance is to notice whether a particular arrangement allows cumulation and to which extent, if there are chances for drawback, which are the possibilities for proof of origin, the validity of it, the responsibility of the issuing authorities and the trade operators and of course the rules of origin on itself. It is important to note that although there are different sorts of trade agreements, the origin rules, or at least the structure thereof, is quite similar. The differences rely mostly on the level or criterion by which the status of ‘sufficiently processed’ is deemed to be granted on an agreement by agreement basis. Based upon these concepts, I will analyse the current structures to test the problem formulation of this essay. Subsequently in Chapter IV ‘New trade agreements-main changes’ I will proceed to analyse the EU-Korea FTA, the evolvement of the Pan-Euromed Partnership and the amendments to GSP applicable as of January 1, 2011.

EU-Mexico FTA This FTA covers free trade, economic partnership and political coordination matters. However, for the purpose of this analysis I will only focus on aspects related to origin and the manner by which the preferences are granted.

Structure of the FTA Below the items included in Annex III of the EU-Mexico FTA, marking with (*) those which are key from an origin/preferential treatment point of view. It is worth mentioning that this structure is pretty much standard in all FTA’s signed by the EU.

1. Tariff elimination schedule 2. Definition of concept originating products*

a. Wholly obtained b. Sufficiently processed and % allowed of non originating

materials c. General tolerance rule

3. Bilateral cumulation*

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4. Insufficient working or processing* 5. Unit of qualification 6. Application of rule 5 of the General Rules of the Harmonised System 7. Accounting segregation 8. Accessories, spare parts and tools 9. Sets of goods and percentage of non originating materials 10. Neutral elements* 11. Principle of territoriality

a. Returned goods 12. Direct transport* 13. No drawback clause* 14. Proof of origin*

a. Certificate of Origin (EUR 1) b. Invoice declaration (can be issued retrospectively in accordance

to the domestic law of the importing country) i. Shipments >€6.000 ii. Authorised exporter

15. Validity of proof of origin (10 months)* 16. Retrospective issuance of EUR.1/invoice declaration 17. Import by instalments 18. Supporting documents* 19. Preservation of proof of origin and supporting documents (exporter and

competent authority of the exporting country three years)* 20. Mutual assistance 21. Verification of proofs of origin* 22. Dispute settlement

Relevant provisions of the EU-Mexico FTA Origin criteria The EU-Mexico FTA has pretty standard criteria to confer originating status to products not wholly obtained. The most common criteria are:

• change of tariff heading,

• maximum percentage of non originating materials allowed in proportion to the ex works price,

• specific working or processing;

• a combination of the above mentioned criteria. Cumulation The EU-Mexico FTA allows bilateral cumulation. Drawback As to drawback concerns, the EU-Mexico FTA does not allow drawback or suspension of duties on non originating materials that are used in the production of an originating product.

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Proof of origin The agreement provides for two major instruments as proof or origin: certificate of origin and invoice declaration.

Generalised System of Preferences The GSP was conceived originally in 1968 under the umbrella of the UNCTAD having as objectives the increase of exports, industrialisation and economic growth of developing countries. To observe this, the contracting parties of the GATT and later the WTO adopted in 1979 a clause creating a waiver to the most favoured nation clause and in doing so, allow the preference giving-countries to grant preferential tariff treatment to the GSP beneficiary countries. At present there are 11 national GSP schemes including the EU, the US, Turkey, Switzerland, Australia, Norway, Japan and Canada amongst other preferential tariff treatment-giving countries. The EU receives a considerable amount of goods (primordially textiles and agricultural products) under GSP preferential treatment. The GSP is a system in constant development as the European Commission is continuously monitoring the impact of GSP and the correct use of the system. Within the GSP, the beneficiary countries are categorized in 3 groups called GSP, GSP+ and GSP LDC’s. The GSP is the group including developing countries to which a certain level of tariff preferences is conferred. The GSP+ goes even further in the level of preferential treatment and is deemed to be used by a limited number of countries included in the special arrangement for sustainable development and good governance. The GSP LDC’s is thought for countries in extreme precarious conditions acknowledged by the UN as the least developing countries (LDC’s). The GSP LDC’s includes the initiative called Everything But Arms (EBA) by which the LDC’s are granted nil tariff rates to practically any goods with exception of arms and ammunitions. The last developments on GSP consolidated in the new Commission Regulation 1063/2010 published in the Official Journal of the EU on November 23, 2010 which amends articles 66 to 97 of the Implementation Provisions (2913/92) of the Community Customs Code (CCC) (hereinafter the Implementation Provisions). Nevertheless, taking into account that the purpose of this essay is to show the trend towards which the EU is appointing with regard to origin and preferential treatment aspects, I will, for the purpose of comparison, draft briefly the structure of the system as it is laid down in articles 67 to 97 of the current Implementation Provisions.

1. Definition of the concept of originating products (articles 67 to 69)*

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a. Wholly obtained b. Sufficiently processed

2. Cumulation -bilateral, diagonal and regional cumulation- (articles 67 and 72 to 72b)

3. Insufficient working or processing (article 70)* 4. Unit of qualification (article 70a) 5. Application of rule 5 of the General Rules of the Harmonised System

(article 70a) 6. Percentage allowed of non-originating materials by way of derogation

of article 69 7. Accessories, parts and tools (article 73) 8. Sets of goods and percentage of non originating materials (articles 74) 9. Derogations in favour of LDC’s 10. Neutral elements (article 75)* 11. Returned goods 12. Direct transport* 13. Exhibitions 14. Proof of origin*

a. Form A (article 81) i. Responsibility of the issuing authorities (article 81-6,7 and

article 89) b. Invoice declaration (article 89 and 90)

i. Shipments >€6.000 ii. Authorised exporter in the EU iii. Proof of origin in case of cumulation with Norway or

Switzerland (article 90a) 15. Validity of proof of origin (10 months) (article 90b)* 16. Retrospective issuance Form A (article 85) 17. Replacement of certificates (article 87) 18. Import by instalments (article 82) 19. Methods of administrative cooperation and verification of proofs of

origin (articles 93 to 95)

Relevant provisions of the (old) GSP Origin criteria The GSP has pretty standard criteria to confer originating status to products elaborated of non originating materials. The most common criteria are:

• change of tariff heading,

• maximum percentage of non originating materials allowed in proportion to the ex works price,

• specific working of processing;

• a combination of the above mentioned criteria. Cumulation The GSP allows bilateral, diagonal and regional cumulation under certain conditions.

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Drawback The GSP does not allow drawback or suspension of duties on non originating materials that are used in the production of an originating product. Proof of origin The agreement provides for two major instruments as proof or origin: certificate of origin Form A and invoice declaration. As it can be seen from these two examples, up until now, the agreements in which the EU takes part share common provisions. In the following chapter, I will review the EU-Korea FTA and the new GSP provisions in order to identify whether there are substantial changes in the provisions in respect to the classic agreements.

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IV. (New) Trade agreements – main changes

In this chapter, I will exclusively describe the most relevant recent changes in place or scheduled for implementation in the near future. This section will therefore not include any judgement as to whether these changes will or not would be beneficial to the contracting parties altogether. Such an analysis will take place in a later stage of this essay.

EU-Korea FTA As stated in the introduction of this essay, the EU has acknowledged the need for a renewed concept of origin rules and has drafted the steps to follow regarding preferential duty treatment and the origin rules. The first FTA of this new generation is the EU-Korea FTA which will enter into force as of July 1st, 2011. In the words of the European Commission in a press release published in her website on September 17, 2010: “This agreement is the most ambitious trade agreement ever negotiated by the EU. It breaks new ground in delivering market access for European companies as well as in the way regulatory issues are addressed. The European Commission expects it to double European Union trade with Korea in medium term and to hence boost jobs and growth. The FTA is the EU's first deal with an Asian partner…”3 This FTA has exciting features new (or renewed) to the EU such as the Tariff elimination for EU's exports of industrial and agricultural goods, the improved market access for EU car manufacturers (duties dropping from 8% to zero), securing horizontal commitments on transparency, protection of intellectual property rights, commitment to sustainable development and a very important item is the inclusion of an effective and fast dispute settlement body with arbitration rulings within 120 days which is considerably faster than the dispute settlement body of the WTO which engages at least 1 year for non-appealed disputes and 15 months in case of appellation. As to the origin protocol concerning the EU-Korea FTA as such, there are no particular changes in structure compared to the classic trade agreements. However, the exclusion of the classic no-drawback clause and abolition of the certificates of origin in favour of the authorised exporter figure are the hot items. I will further analyse these two items in the following paragraphs.

3 http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/423&format=HTML&aged=0&language=EN&guiLanguage=en

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No-drawback clause Historically it has been the EU’s choice not to include a drawback system in any trade agreement unlike other trade blocs (e.g. NAFTA). The expression ‘once paid, remains paid’ is of common use when people refer to the international trade policy of the EU. Moreover, in the classic trade agreements signed by the EU it was explicitly prohibited to make use of the drawback system (or temporary import under duty suspension) in case that non-originating materials would be incorporated into products subject to export (to the EU) that would be granted preferential duty treatment upon importation. As an example, Article 14 to Decision 2/2000 of the EC-Mexico Joint Council dictates as follows: “Non-originating materials, used in the manufacture of products originating in the Community or in Mexico within the meaning of this Annex for which a proof of origin is issued or made out in accordance with the provisions of Title V shall not be subject in the Community or Mexico to drawback of, or exemption from, import duties…” “The prohibition in paragraph 1 shall apply to any arrangement for refund, remission or non-payment, partial or complete, of import duties applicable in the Community or Mexico to materials used in the manufacture, where such refund, remission or non-payment applies, expressly or in effect, when products obtained from the said materials are exported and not when they are retained for home use there…” The innovation in the EU-Korea FTA does not consist in the fact that that non originating materials might be incorporated in products that qualify as originating from either the EU or Korea as that was already the case under the condition that the duties on the non originating materials were ultimately paid in the country where they were imported. The innovation consists in the fact that upon exportation of the final product from the EU to Korea or vice-versa, the duties paid or under suspension upon import of the non originating materials, can be reclaimed upon exportation or are not deemed to be paid. This is rather revolutionary concept that provides for more sourcing flexibility and anticipate more export revenues. It is however important to bear in mind that the inclusion of the drawback clause in the EU-Korea FTA does incorporate periodical drawback revisions and statistical reports for a number of HS headings (e.g. imports from headings 8407, 8408, 8522, 8527, 8529, 8706, 8707 and 8708 and exports from headings 8703, 8519, 8521 and 8525 through 8528). Upon request the statistical reports could reach a broader range of headings. Should the drawback system would prove to have a negative effect on the competitiveness of domestic providers, limitations to the drawback system and the inward processing schemes may be implemented.

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Abolition of certificates of origin Under the EU-Korea FTA, certificates or origin are no longer required to claim the tariff preferences. Instead, the invoice declaration will become the rule. With regard to the invoice declarations, just as in the case of the classic trade agreements, the origin status can be stated freely by the exporter if and for so far the value of the goods subject to export does not exceed €6.000 (and of course that the origin criteria is met). For exports exceeding this value, the only option left for the exporters is to become an ‘approved exporter’, an already familiar item to the EU. To obtain the status of ‘approved exporter’, the exporter must offer to the satisfaction of the customs authorities all guarantees necessary to verify the originating status of the products. The authorities shall in principle monitor the proper use of such an authorisation. In chapter V titled: Repercussions of abolishing documentary proof of origin in favour of invoice declaration, I will comment further on this item.

New GSP rules As exposed in the introduction of this essay, the consultation process launched by the EU through the Green paper to tune up the rules of origin in existing and new preferential trade agreements, had a special interest in their impact on development-oriented arrangements such as the GSP scheme. According to studies, the potential benefits to developing countries as a result of GSP have unfortunately not yet been exploited in full. From consulting rounds and reports it can be read that the causes of this are the complexity of the rules of origin, the geographical, political and social situation of the beneficiary countries and the lack of knowledge of the people involved in the export process (both authorities and market operators). To tackle this challenge, the Commission evaluated various possibilities to simplify the rules of origin. While some were of the opinion that a single criterion based upon the value added in the beneficiary countries was the answer, many other brought attention to the fact that there are sectors for which a single criterion based upon added value is not well suited (e.g. agricultural products, fishery products, chemicals, metals, textiles, clothing and shoes). At the end seemingly in everybody’s opinion the most effective reform would be to relax the rules as much as possible and cluster them on an industry by industry basis rather than on a product by product basis. Proof of relaxation of the origin rules is the maximum content of non originating materials up to 70% for products originating in the LDC’s. Another

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important change is the increase of the percentage in the general tolerance rules (also known in other trade areas as minimis rule) from 10% to 15% (with exception of certain sensitive products). Regarding cumulation, the new rules provide for a new cumulation group called Group IV (comprising Argentina, Brazil, Paraguay and Uruguay). Another advance on cumulation is the creation of a new type of cumulation to be called ‘extended cumulation’ by which upon application of the beneficiary country and approval of the Commission, cumulation between the beneficiary country and other Europe partner countries with FTA’s, will be made possible. To protect the interests of the beneficiary countries, this type of cumulation can be claimed exclusively on a unidirectional basis. For easy reference, hereby the most important changes in a row:

1. General tolerance rule from 10% to 15% (except products textile products, as covered in chapters 50 to 63)

2. Less stringent rules of origin (in several cases increasing the amount of non-originating materials allowed). To this extent, it is to be noted with special interest that in case of some textiles a single-stage processing is allowed – so, manufactured from fabric - as opposed to the classic ‘manufactured from yarn’ criterion. This criterion is however, only applicable to LDC’s.

3. New and renewed types of cumulation o Bilateral cumulation (formerly the Donor Country content)

including Norway, Switzerland and now Turkey as well (except Chapters 1 to 24)

o Extended cumulation (cumulation with countries with which the EU has a FTA in place upon request from the beneficiary country and approval of the Commission)

o New cumulation Group IV (Argentina, Brazil, Paraguay and Uruguay)

o Possibility for Group I4 to cumulate with Group III5 upon request and approval of the Commission

o Possibility to manage of materials originating from the EU using the account segregation method for the purpose of bilateral cumulation

4. Replacement of value tolerance of non originating materials for a weight tolerance for certain agricultural products, for fishery products, the tolerance percentage based upon value remains

5. Replacement of the ‘direct transport’ concept for a form of non-manipulation concept

6. Possibility to calculate the value/weight of non-originating materials on an average basis rather than an item basis (year basis where available, minimum 3 months period)

4 ASEAN countries: Brunei-Darussalam, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam. 5 SAARC countries: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka

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7. Creation of a registered exporters database (officially coming into force in January 2017 with possibility to postpone to 2020)

8. Abolishment of Form A as proof of origin, registered exporter come in lieu thereto (starting in principle January 2017 with chance to postpone to January 2020)

In general terms, all these amendments are a welcome development, particularly, the percentage increase of non-originating materials allowed and the possibility for LDC’s to manufacture some textiles from fabric. With regard to the REX system, it is yet very premature to call whether the results will be positive altogether as the system will come into force in 2017 at earliest. I will further dissert on this particular item in Chapter V.

Pan-Euromed The ‘Barcelona process’ held in 1995 resulted in the launching of the Euro-Mediterranean Partnership having as main objective the creation of an area of peace, stability and prosperity through the progressive establishment of free trade between the EU and its Mediterranean partners6 and amongst the partners themselves by 2010 7. As a result of this partnership, a cumulation system was created in 1997 between the EU, the EFTA countries, the CEEC countries and the Baltic States with amendments in 1999 to include Slovenia and industrial products originating from Turkey. At present the cumulation system is being enlarged to include the Faroe Islands and the Mediterranean countries. With all the enlargements and amendments, the administration of the cumulation system has become increasingly complex as diagonal cumulation requires for identical protocols between the parties. Hence, whenever a change is made to one protocol, the other protocols have to be changed correspondingly before the diagonal cumulation can be applied. On April 21, 2010 the EC published a proposal8l to a convention to unify the protocols of the Pan-EuroMed cumulation area. This will be, without any doubt, a simplification to the application of the rules of origin in favour of cumulation.

6 Algeria, Bulgaria, Egypt, Faeroe Islands, Iceland, Israel, Jordan, Lebanon, Morocco, Norway, Romania, Syria, Switzerland, Tunisia, Turkey, West Bank and Gaza Strip 7 http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_origin/preferential/ article_783_en.htm 8 COM(2010) 168 final

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Having reviewed the main changes related to preferential treatment by analysing the new EU-Korea FTA, the new GSP provisions and the proposal to a new convention to unify the protocols of the Pan-EuroMed cumulation area, it is my opinion that in general terms, most of these changes do not have a major impact to the importer in the EU (from an operational and risk management point of view). There is however one particular change that has attracted my attention as this change can have important repercussions to the importers in the EU. This change is the abolition of certificates of origin as proof of origin. I will proceed in the following chapter to analyse the repercussions of this particular change.

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V. Repercussions of the new approach on

origin, in particular abolishing

documentary proof of origin in favour of

invoice declaration

After identifying in the previous Chapter the (proposed) changes to the traditional approach towards duty preferential treatment, I have encountered only one of the proposed changes to be controversial as to the impact that this may represent to importers in the EU. Therefore I have chosen to dedicate this Chapter entirely to this particular change, namely the abolishment of the certificates of origin in favour of the invoice declaration. Traditionally the issuance of a certificate of origin for preferential purpose is a task commended to the authorities of the exporting country. In addition to this, under most of the trade agreements in which the EU takes part, exporters are entitled to be granted the status of ‘authorised exported’ by which they are enabled to issue the preferential status of the goods to be exported by themselves, through stating their authorisation number on the invoice or another commercial document accompanying de goods. Both the certificate of origin and the use of the authorised exporter for preferential origin purposes constitute a proof of origin. Until now, it has been the exporter’s choice to decide whether to make use of a certificate of origin as a proof of origin rather than being an ‘authorised exporter’. It is true that from an administrative point of view the registered exporter status offers more flexibility and helps optimise time and resources. Notwithstanding this, it is to be considered that exporters are not all the time experienced in origin maters. In special, exporters in less developed countries have proven not to hold the knowledge nor the infrastructure to own, for instance, an automated origin compliance system/crew to rely on. If they choose to use certificates of origin as opposed to the ‘approved exporter’ facility one can figure two logic reasons thereto being the first that they do not export on a regular basis and the second that they prefer to have the authorities (double) checking whether their conclusions are correct. In other words, they might seek the authorities’ blessing. Such blessing arises out of the issuance of the certificate of origin. In the Articles of the Implementation Provisions9 concerning the GSP, one can read that the authorities of the beneficiary country shall issue the certificate of origin if the products to be exported can be considered as originating in that

9 Article 81 sub 5 to 7, Article 83, Article 85 sub 2 of the Implementation Provisions of the CCC

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country. From the previous, it can be read that the certificate of origin can be issued by the authorities only in case the goods can be considered as originating from the beneficiary country. By deduction, the authorities of the exporting country are not entitled to issue such a certificate without ascertaining first that the rules of origin are met. Having this in mind, the conclusion is that the certificate is truly a title to rights (in this case preferential treatment) and that as such, the certificate of origin should provide the importer with legal certainty. How certain is the legal certainty offered by the certificate of origin? When the authorities in the import country ascertain an issue regarding the origin of the imported goods, whether it is on the exporter’s or the export authorities’ side, the authorities in the EU will reject or withdraw the application of the preferential treatment and the importer will be confronted with an invalid certificate as well as with all the related consequences. What about the legal certainty offered by the certificate of origin altogether? Did the certificate of origin indeed provide ever with legal certainty? To some extent it did. The importer can endeavour to plead good faith, with success in some particular cases as will be described soon. Below the legal resource to which importers appeal in case they are confronted with invalidation of certificates of origin and with it, the obligation to pay duties under MFN as opposed to the duty preferential treatment that would have been claimed, should the certificate had been rightfully issued.

Good Faith The CCC establishes in Article 220 the following: “1. Where the amount of duty resulting from a customs debt has not been entered in the accounts in accordance with Articles 218 and 219 or has been entered in the accounts at a level lower than the amount legally owed, the amount of duty to be recovered or which remains to be recovered shall be entered in the accounts within two days of the date on which the customs authorities become aware of the situation and are in a position to calculate the amount legally owed and to determine the debtor (subsequent entry in the accounts). That time limit may be extended in accordance with Article 219. 2. Except in the cases referred to in the second and third subparagraphs of Article 217 (1), subsequent entry in the accounts shall not occur where:…” …” (b) the amount of duty legally owed was not entered in the accounts as a result of an error on the part of the customs authorities which could not reasonably have been detected by the person liable for payment, the latter for his part having acted in good faith and complied with all the provisions laid down by the legislation in force as regards the customs declaration.

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Where the preferential status of the goods is established on the basis of a system of administrative cooperation involving the authorities of a third country, the issue of a certificate by those authorities, should it prove to be incorrect, shall constitute an error which could not reasonably have been detected within the meaning of the first subparagraph. The issue of an incorrect certificate shall not, however, constitute an error where the certificate is based on an incorrect account of the facts provided by the exporter, except where, in particular, it is evident that the issuing authorities were aware or should have been aware that the goods did not satisfy the conditions laid down for entitlement to the preferential treatment. The person liable may plead good faith when he can demonstrate that, during the period of the trading operations concerned, he has taken due care to ensure that all the conditions for the preferential treatment have been fulfilled.” From the precedent piece of legal text, it can be derived that in principle, in the cases when the information was sufficient and correct but the conclusion of both the exporter and the authorities was incorrect (for instance due to a poor interpretation of the origin rules) or even in case the information was not correct but its incorrectness should have been discovered by the authorities, the importer could plead good faith insofar it can be demonstrated that due care was taken from the importers’ side to ensure the conditions subject to the origin status were fulfilled. With the new EU’s approach to preferential origin in new and existing trade agreements, the instrument of the certificate of origin will disappear. This means that under no circumstance the importer would be released of a possible customs debt as a result of errors made in the exporting country incurred by the authorities (based upon the current Article 220-2b of the CCC) as the responsibility of calculating and conferring the origin of the products will be fully in hands of the exporter. To this extent, it is remarkable that while on the one hand, the Commission has acknowledged during the consultation process that the preferential treatment is not claimed as often as it should be due to the fact that the rules of origin are regarded to be complex to understand by the exporters, on the other hand, withdraws the role that the authorities of the export country had in order to offer the exporter with some sort of advise and examination (and consequently provide the importer with legal certainty). Until now the exporter and the authorities of the exporting country had a sort of shared interest and responsibility to guarantee the correctness of the certificates. If the exporter is indeed not experienced and has no knowledge or struggles clearly on to how to interpret the rules, what is then the likelihood that without any official help whatsoever, the outcome will be more accurate than before? My first guess would be not high. But I cannot pledge that the outcome of this will be worse either. What could be then the motivation of the EU to release the authorities from the export countries from their task of

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issuing certificates of origin and reviewing the information prior to that, if it may not bring any benefit to the exporter? The answer to this can be interesting. The authorities of the exporting countries struggle as much as the exporters to determine the actual origin of the goods, not only because origin as such requires particular expertise but also because the authorities themselves have admitted not to have the knowledge or resources either. In practice the actual review of the information (in case such review did ever take place) was not always of added value making the certification illusory. The previous resulted in repeated errors from the authorities of the exporting countries which resulted consequently in losses to the European Union’s own resources. An error of the exporter may cost additional duties to the importer but an error of the authorities of the exporting country may represent a loss to the EU’s own resources. To this extent, I would like to quote a couple of paragraphs that are taken in the considerations of the regulation amending the Implementation Provisions of the CCC with regard to the GSP scheme. … “(17) At present, the authorities of beneficiary countries certify the origin of products and, where the declared origin proves to be incorrect, importers frequently do not have to pay duty because they acted in good faith and an error was made by the competent authorities. As a result, there is a loss to the European Union’s own resources and it is ultimately the European Union taxpayer who bears the burden. Since exporters are in the best position to know the origin of their products, it is appropriate to require that exporters directly provide their customers with statements on origin.” Bottom line, in return for the protection of the EU’s own resources, the exporter gets a set of simplified origin rules… is that the case? For so far I have been able to analyse, the new rules as such are not simpler to understand. The criteria have indeed been relaxed (meaning that the criteria are now easier to meet) particularly to LDC’s but the criteria concepts remain almost identical. If the problem to tackle was the difficulty to understand the rules (mind you: not the difficulty to meet them), we have a long way to go. Fortunately, the exporters have quite some years to get acquainted with the rules of origin before they will be inevitably flying solo. What gets the importer from all this? As a result of the abolishment of the certificates of origin, the only proof of origin available will be then the one emanating from the REX system (or approved exporter). Although the intention is to re-route the resources of the authorities of export countries to perform more directed post export examinations/controls, it is imperative to take into account that at the moment of import, the importer has to trust 100% the information and judgement of the exporter. If the exporter has committed a mistake, from a European Customs

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Law perspective, the importer will be the one to hold accountable for the Customs debt10. Now that good faith will no longer possible to plead due to an error from the authorities of the exporter country (as the export authorities will be cut out of the equation), will it then be possible to plead good faith as a result of an error from the exporter itself? We have already learned that the opinion of the ECJ on cases whereby the party claiming unrightfully a benefit or right in good faith due to incorrect information supplied by the counter party cannot absolve him from a possible (customs) debt as this is regarded as an ordinary commercial risk11. In a national case12, regarding invalid certificates of origin issued in Laos for the purposes of preferential duty treatment upon importation into the EU, the Court of Amsterdam dictated as follows: Legal consideration 5.4.2: “Met haar kennis en ervaring als douane-expediteur kon belanghebbende weten dat zij zou worden aangesproken voor de douanerechten als de overgelegde certificaten onjuist zouden blijken te zijn. Het risico dat voortvloeit uit de gedragingen van de opdrachtgever en uit de toezichtstructuur op de toepassing van het APS is voor belanghebbende een normaal bedrijfsrisico, dat voor haar rekening komt. Op belanghebbende rustte daarom een onderzoeksplicht naar de juistheid van de gestelde oorsprong. Nu zij heeft nagelaten dit onderzoek te doen, kan zij niet worden geacht te goeder trouw te zijn…” This consideration relates to a customs expeditor but can as well be applicable to the importer as the CCC makes no distinction between the declarant, or the person on whose behalf the customs declaration is made for the purposes of customs debt13. This indicates that from a Customs Law point of view, the importer has a an obligation on its own to pursuit the correctness of the alleged origin. In case the importer has neglected such pursuit through not performing the corresponding research, good faith cannot be pled. The obligation to investigate is (or should be) the importer’s own. This plays an important role in origin matters, especially in the new approach, as the proof of origin will be issued by the exporter. The importer has then as only resource to prevent risks attached to origin matters, the own research that is to be done towards the exporter.

10 Article 201 sub 3 of the Community Customs Code

11 Case C-210/00 Käserei champignon Hofmeister GmbH & Co.KG, July 11, 2002 – on

unrightfull but in good faith application of export refunds on agricultural products (Regulation (EEC) 3667/87) 12 LJN AN8900, Gerechtshof Amsterdam, 98/90114

13 Article 201 sub 3 of the Community Customs Code

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However, how far can the importer go in his pursuit to perform his research towards the exporter and the safekeeping of a proper determination of origin? Is the information needed to determine origin with accuracy, not often of confidential nature to the exporter from a commercial point of view? It seems from these questions, an mostly from the corresponding answers that the importer not always is in state to fulfil its duty to investigate in such a way and to the extent that the risk emanating from inaccurate determination of origin, can be avoided. At least not from a Customs Law point of view.

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VI. Conclusion At the beginning of this essay, I posed the following question: Which are the effective changes resulting from the new approach of the EU towards preferential duty treatment and what are the preponderant actual consequences to importers in the EU? In this essay, I have first identified the actual changes in the new approach from reviewing the EU-Korea FTA and the amendments to the Implementations Provisions of the CCC corresponding to the application of the GSP. Changes as the drawback clause, the more relaxed rules of origin, the creation of a database of approved exporters, the renewal of the types of cumulation, the renewal of the ‘direct transport clause’ and the introduction of a faster and efficient dispute settlement system are all welcome changes. Such changes as a whole can translate in more flexibility to the importer as well as a tool to optimise the use of foreign resources while indirectly contributing to international welfare. Consequently, I focused on analysing the consequences to importers resulting from what in my opinion is the only change that represents a preponderant impact to the importer regarding its liability against customs debts. From my analysis I can conclude that with the withdraw of the certificate of origin-system, from a pure Customs Law perspective, the importer is completely left to his fate as he has to rely 100% on his fellow trade partner. Even when the importer aims at complying with its obligation to investigate sufficiently in order to ensure that the exporter is observing the rules of origin correctly, the scope of such research will always be limited by commercial reasons. The importer will have to become aware of the risks attached to the use of preferential treatment from this new perspective and take actions to limit these risks by other means, but then of a more civil character such as contracts.

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VII. Bibliography, Case Law References and

Internet Sources

- Ricardo, David. Principles of Political Economy and Taxation, 1817 - Smith, Adam. The Wealth of Nations, 1799 - Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing

the Community Customs Code, OJ L 302, 19.10.1992 - Commission Regulation (EEC) No 2454/93 of 2 July 1993 laying down

provisions for the implementation of Council Regulation (EEC) No 2913/92 establishing the Community Customs Code, OJ L 253, 11.10.1993

- Commission Regulation (EU) No 1063/2010 amending Regulation (EEC) No 2454/93

- Council Regulation (EC) No 732/2008 applying a scheme of generalised tariff preferences for the period from 1 January 2009 to 31 December 2011

- Regulation (EEC) 3667/87 - COM(2010) 168 final - COM(2005) 100 final of 16.3.2005 – Communication from the

Commission to the Council, the European Parliament and the European and Social Committee on the rules of origin in preferential trade arrangements, orientations for the future

- Annex III to Decision 2/2000 of the EC-Mexico Joint Council of 23 March 2000

- EU-Korea FTA Protocol concerning the definition of ‘originationg products’

- Mid-term Evaluation of the EU’s Generalised System of Preferences: Final Report by CARIS, Centre for the Analysis of Regional Integration at Sussex – European Commission 2009

- LJN AN8900, Gerechtshof Amsterdam, 98/90114 - Judgement of 11.7. 2002 – case C-210/00 Käserei Champignon

Hofmeister Gmbh & Co. KG - TAXUD/GSP-RO/IA/1/10 – EN Update of the impact assessment on

Rules of origin for the Generalised System of Preferences (GSP) - www.wto.org - http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_or

igin/preferential/article_785_en.htm - http://ec.europa.eu/trade/creating-opportunities/bilateral-

relations/regions/africa-caribbean-pacific/ - http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/4

23&format=HTML&aged=0&language=EN&guiLanguage=en - http://ec.europa.eu/taxation_customs/customs/customs_duties/rules_or

igin/preferential/article_783_en.htm

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