Under UK-EU trade agreement, preferential tariffs depend on a good’s economic nationality.
UK-EU Trade and Co-operation Agreement (TCA)
The UK left the EU on 31 January 2021 and the TCA has governed trade relationships between the UK and EU since then. It allows businesses to trade goods between the two blocs on a tariff free and quota free basis. However, this benefit only applies to goods which originate from whichever side exported them. There are detailed rules of origin governing this arrangement. The TCA also addresses the procedural requirements for importers and exporters to demonstrate compliance with the rules of origin when claiming preferential tariffs.
It has proved difficult for many businesses to adapt to these new requirements, despite some temporary relation of the rules. This is because the rules are complex and the need to prove origin involves additional customs bureaucracy. Problems are heightened for those with highly integrated supply chains and distribution networks. As a result, many businesses have experienced disruption to trade this year.
Rules of Origin (RoO)
RoO govern how customs authorities determine the ‘economic nationality’ of goods. The origin of goods is based on where the products or materials used in production come from and to access zero tariffs there must be a qualifying (minimum) level of processing in the country of export. Exporters therefore need to understand how their products are classified under the RoO to ensure compliance. There are two types of originating products:
- Wholly obtained: goods which have been exclusively obtained or produced in the territory of one country, without using materials from any other country. e.g. extracted minerals.
- Substantially worked or processed: goods which have been substantially processed in line with a product-specific rule. Product-specific rules of origin apply to products which incorporate components originating from outside the EU/UK and many conditions and exclusions may apply here.
However there are three basic principles for deciding whether a product has been substantially processed in a particular territory:
- Value Added Rule: the value of the materials which don’t originate from the territory in which the product is processed must fall below a maximum level.
- Change in Classification of goods: the exporter’s manufacturing process must result in a finished product being classified differently to the non-originating inputs.
- Manufacture through certain products or through specific processes: some types of materials used in the production of a finished product are disregarded for the purpose of determining the origin of the product on the basis that they are not part of the core product, e.g. packaging. Some operations are also considered as constituting ‘insufficient production’, e.g. if a product is merely stored in a particular territory it will not be considered to have been processed in that territory.
Rules known as “bilateral cumulation” mean that a product originating from the UK can also be treated as originating from the EU (and vice versa). These rules, although helpful in avoiding tariffs, add further complexity in establishing proof of origin, since supplier declarations may be needed. Products originating in a third country with which either the UK or the EU has a free trade agreement cannot be brought within the scope of these rules, adding another element of complexity where a party imports products outside the UK (or EU) for export to the EU (or UK).
Claiming preferential tariffs
Procedural requirements for claiming a preferential tariff and demonstrating proof of origin can be burdensome. Proof can be either a statement of origin completed by the exporter on a commercial document, or knowledge obtained and held by the importer as to the origin of the goods.
Proof based on an importer’s knowledge is likely to be less straightforward than obtaining an exporter’s statement of origin, because this could involve conducting due diligence on the suppliers in the manufacturing process. The importer may also be required to provide other documents or a supplier’s declaration as to the originating status of materials used in the final product. It is usually the importer who makes the claim for a preferential tariff via a customs declaration, but the importer will probably expect the exporter to provide some supporting information on proof of origin even if the importer is relying on its own knowledge.
When an exporter makes a statement of origin it may also have to obtain a supplier declaration. The necessity for supplier declarations depends on product specific rules. The EU and UK have agreed a temporary relaxing of this rule, until 1 January 2022.
Importers must keep certain documentary records for 3 years and exporters for 4 years.
Commercial Implications
RoO compliance and procedures for claiming preferential tariffs can involve considerable effort and cost. Businesses should first check the tariff level for their product’s classification to ensure this commitment is commercially worthwhile. Additional benefit may be gained from tariff exemptions by adjusting production processes and supply chain operations e.g. inputs may be sourced from the UK and EU rather than parties in third countries, or manufacturing operations may be relocated to the EU or vice versa.
It is important that provisions are made in commercial agreements to reflect the additional administrative and financial burdens that may be involved:
- Suppliers should consider the how these rules will impact on their costs when negotiating agreements with customers.
- When negotiating a contract both parties should consider the fact that failure to provide adequate proof of origin could prevent shipment, or lead to loss of preferential tariffs or fines, and decide how these risks should be allocated under the contract.
- The contract should also clearly set out the obligations of the respective parties (and their suppliers) to interpret the rules, provide proof of origin documentation, and maintain records.
- Importers need to ensure that exporters and export suppliers can satisfy the stricter rules on evidence required from next year.
If you would like further advice about how to incorporate rules of origin requirements into your commercial contracts, please contact our Commercial & Technology team.
