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Determination of Origin (Rule 2 of the Protocol on Rules of Origin)

Stephen Otieno

Determination of Origin (Rule 2 of the Protocol on Rules of Origin)

Article 48 of the Treaty Establishing the Common Market for Eastern and Southern Africa (hereinafter referred to as the “Treaty”) provides that goods shall be accepted as eligible for Common Market tariff treatment if they originate in the Member States, and the definition of products originating in the Member States shall be as provided for in a Protocol on Rules of Origin referred to in Annex IX. Rules of Origin.
Under the COMESA trade regime, a product shall be considered as originating in a Member State if it is consigned directly from a Member State to a consignee in another Member State and has either been wholly produced or undergone substantial transformation in that Member State.

Origin Criteria

The COMESA Rules of Origin have five independent criteria, and goods are considered as originating in a Member State if they meet any of the five.
Goods shall be accepted as originating from a Member State if they are consigned directly from a Member State to a consignee in another Member State and:

The goods should be wholly produced in a Member State; or
The goods should be produced in the Member States and the c.i.f. value of any foreign materials should not exceed 60% of the total cost of all materials used in their production; or
The goods should be produced in the Member States and attain a value added of at least 35% of the ex-factory cost of the goods; or
The goods should be produced in the Member States and should be classifiable under a tariff heading other than the tariff heading of the non-originating materials used in their production; (the processes are specified in Appendix V)
The goods should be designated by the Council of Ministers as “goods of particular importance to the economic development of the Member States” and should contain not less than 25% value added, notwithstanding the provisions of paragraph (iii) above.

Wholly Produced Goods- Rule 2(1) (A)

Goods are considered to be wholly produced in a Member State if they meet the provision of Rule 2(1) as read together with Rule 3 of the Protocol.
Rule 3 provides a list of products that are considered as “wholly produced” in the Member States. Such products contain no materials imported from outside the COMESA region.
Goods wholly produced in the Member States:
- Mineral products extracted from the ground or sea-bed of the Member States;
- Vegetable products harvested within the Member States;
- Live animals born and raised within the Member States;
- Products obtained from live animals within the Member States;
- Products obtained by hunting or fishing conducted within the Member States;
- Products obtained from the sea and from rivers and lakes within the Member States by a vessel of a Member State;
- Products manufactured in a factory of a Member State exclusively from the products referred to in sub-paragraph (f) of paragraph 1 of this Rule;
- Used articles fit only for the recovery of materials, provided that such articles have been collected from users within the Member States;
- Scrap and waste resulting from manufacturing operations within the Member state.

Determination of the Place of Production of Marine Products

In determining the place of production of marine, river or lake products and goods in relation to a Member State, a vessel of a Member State shall be regarded as part of the territory of that Member State. In determining the place from which goods originated, marine, river or lake products taken from the sea, river or lake or goods produced there from at sea or on a river or lake shall be regarded as having their origin in the territory of a Member State if they were taken by or produced in a vessel of that Member State and have been brought directly to the territory of the Member State. (Rule 2(4))
This means that a vessel of a Member State as defined in the Rules is part of the territory that Member State and any products taken by that vessel and brought directly to the territory of the Member State shall be considered to originate in the Member state.
Rule 1 in the interpretation of the terms used in the COMESA Rules of Origin Defines the Vessel of a Member State as follows:“Vessel of a Member State” means vessel of a Member State if it is registered in a Member State and satisfies one of the following conditions:
- At least 75% of the officers of the vessel are nationals of a Member State; or
- At least 75% of the crew of the vessel are nationals of a Member State; or
- At least the majority control and equity holding in respect of the vessel are held by nationals of a Member State or institution, agency, enterprise or corporation of the Government of such Member State.”

Material Content Criterion– Rule 2(1)(B)(I)

Rule 2(1)(b)(i) provides for the Material content criterion where goods have been produced in a Member State wholly or partially from imported materials (or from materials of unknown origin) and the c.i.f. value of materials imported from outside the region does not exceed 60% of the total cost of materials used in production.
Under this criterion, only the cost of the materials (domestic and imported) used in production is considered for purposes of determining origin.
Materials whose origin is unknown are considered as “imported/non-originating” for purposes of this rule, and their price shall be the earliest ascertainable price paid for them in the Member State where they are used in a process of production
- The value of the imported materials is the c.i.f. value accepted by Customs at the time of clearance for home consumption or under temporary admission procedures.
- Formula for calculation of material content (%):
- Import material content:
Import material content = C.I.F. value of imported materials
cost of local materials + C.I.F. value of imported materials
- Local material content:
- This rule can also be expressed in terms of domestic materials, where a minimum of 40% local content should be achieved for the finished goods to qualify as originating in a Member State.
Local material content = cost of local materials
cost of local materials + c.i.f. value of imported materials

Value-Added Criterion– Rule 2(1) (B) (II)

Rule 2(1)(b)(ii) provides for the value added criterion where goods are considered to originate in a Member State where they have been wholly or partially produced from imported materials (or materials of unknown origin) and the value added resulting from the process of production accounts for at least 35% of the ex-factory cost of the finished product.
The value added is a result of the process of production.
The value added is the difference between the ex-factory cost of the finished product and the c.i.f. value of imported materials used in production.
Ex-factory cost means the value of the total inputs required to produce a given product.
In applying this criterion, domestic material content may be either low or non-existent in the composition of the products to be exported.
- Materials whose origin cannot be determined shall be deemed to have been imported/non-originating.
- Value added= Ex-factory cost – value of imported material x 100
Ex-factory cost
- Calculation of ex-factory cost
When calculating ex-factory cost some charges and expenses are included whereas others are excluded. The following costs, charges and expenses should be included:
- The cost of imported materials, as represented by their c.i.f. value accepted by the Customs authorities on clearance for home consumption, or on temporary admission at the time of last importation into the Member State where they were used in a process of production, less the amount of any transport costs incurred in transit through other Member States. Provided that the cost of non-originating materials not imported by the manufacturer will be the delivery cost at the factory but excluding customs duties and other charges of equivalent effect thereon;
- The cost of local materials, as represented by their delivery price at the factory;
- The cost of direct labour as represented by the wages paid to the operatives responsible for the manufacture of the goods;
The Cost of direct factory expenses, as represented by:
1. the operating cost of the machine being used to manufacture the goods;
2. the expenses incurred in the cleaning, drying, polishing, pressing or any other process, as may be necessary for the finishing of the goods;
3. the cost of putting up the goods in their retail packages and the cost of such packages but excluding any extra cost of packing the goods for transportation or export and the cost of any extra packages;
4. the cost of special designs, drawings or layout; and the hire of tools, or equipment for the production of the goods.

General Provisions of the Agreement

The objectives of the World Trade Organisation Valuation Agreement are contained in the preamble of the Agreement and are as follows:

1. To further the objectives of GATT 1994 Agreement and secure additional benefits for developing countries.
2. To provide greater uniformity and certainty.
3. A fair, uniform and neutral system that precludes the use of arbitrary or fictitious customs values
4. Customs values should be based on simple and equitable criteria consistent with commercial practices.
5. Valuation criteria should be of general application without distinction between sources of supply.
6. Valuation procedures should not be used to combat dumping.

Example

A producer in Member State X makes wooden tables for sale to a buyer in Member State Y. The producer uses local timber and timber imported from Member State Z and Malaysia, respectively. The producer incurs the following costs per table, but he is not sure whether the tables qualify for preferential tariff treatment or not:

Materials Cost (currency unit)

Timber:

Local timber 200

From Member State Z 100

Malaysian origin 900

Other costs:

Glue (imported from Brazil) 5

Varnish (imported from Germany) 8

Factory overheads:

Rent and rates 100

Depreciation of machinery 80

Direct labour 300

Ex-factory cost 1693

Required.

Determine the origin of the consignment above.

Material Content Criterion

Originating Material: 200+100 = 300

Non-Originating Material: 900+5+8= 913

Total Material= 300+913= 1213

Imported Material 913 *100 = 75.27% Approximately 75%

1213

Under the Material Content Criterion, the chairs do not originate.

Value Added Method:

Ex-Factory Cost: 1693

Imported Material: 913

Local Value Added: 1693-913 = 780

Value Added: 780 * 100 = 46.07. Approximately 46%

1693

The Chairs Originate as the Value Added is 46% which is above 35%

Change in Tariff Heading (CTH) Rule – Rule 2(1)(B)(III)

The goods have been produced in a Member State wholly or partially from imported materials and are classified or become classifiable under a heading other than the tariff heading of the imported materials.
Under this criterion, origin is conferred if the manufacturing or processing carried out in the Member States is substantial and results in a product which falls under a heading of the Harmonized Commodity Description and Coding System (HS) which is different from that under which the non-originating materials used in its manufacture fall.

However, the actual application of the CTH Rule in COMESA is guided by the provisions of Appendix V to the Rules. The appendix is titled “Workings and Processings for Determining Origin of a Good Under Rule 2(1)(B)(iii) of The COMESA Protocol on Rules of Origin.
In this case the product named in Column Two of the Appendix V must meet the corresponding CTH criteria in Column three for it to be considered to originate under the CTH rule.

In applying the CTH Rule (Appendix V) particular attention should be given to exclusions.

Example I

CTH RULE Under Appendix V the CTH Criteria is a below:

HS Code	Description of goods	Working or processing carried out on non-originating materials that confers originating status
15.17	Margarine; edible mixtures or preparations of animal or vegetable fats or oils or of fractions of different fats or oils of this Chapter, other than edible fats or oils or their fractions of heading No.15.16.	Manufacture from materials classified in a heading other than that of the product, except from materials of headings 15.07, 15.08, 15.12 and 15.15

This means that Margarine of tariff heading 15.17 manufactured in a COMESA Member State can only qualify as a COMESA originating product if it is manufactured from imported materials classified in headings other than 15.07, 15.08, 15.12 and 15.15.
However, it worth noting that if the materials of 15.07, 15.08, 15.12 and 15.15 which are originating are used in production the product will still be deemed to originate.

Goods of Particular Importance to Economic Development – Rule 2(1) (C)

The goods have been produced in the Member States and should be designated by Council as “goods of particular importance to the economic development of the Member States” and should contain not less than 25% value-added, notwithstanding the provisions of Rule 2(1)(b)(ii).
These goods are specified in Appendix VI of the COMESA Rules.

Direct Consignment & Cumulation

The Rules provide that goods should be consigned directly from one Member State to a consignee in another Member State. This implies that goods should be transported directly from a consignor in another Member State. However, goods can be consigned from one-member state to another Member States to another indirectly as long as the principles governing direct consignment are met.
Rule 2(3) of the COMESA Rules of Origin provides that Raw materials or semi-finished goods originating in accordance with the provisions of this Protocol in any of the Member States and undergoing working or processing either in one or two or in more States shall, for the purpose of determining the origin of a finished product, be deemed to have originated in the Member State where the final processing or manufacturing takes place. This means that full cumulation applies within the COMESA.

Processes Not Conferring Origin- Rule 5

- The Protocol contains a list of operations and processes, which shall be considered as insufficient to support a claim that goods originate from a Member State.
- The list is as follows:
  - packaging, bottling, placing in flasks, bags, cases and boxes, fixing on cards or boards and all other simple packaging operations;
(i) simple mixing of ingredients imported from outside Member States
(ii) simple assembly of components and parts imported from outside the Member States to constitute a complete product;
(iii) simple mixing and assembly where the costs of the ingredients, parts and components imported from outside Member States and used in any of such processes exceed 60% of the total costs of the ingredients, parts and components used.
- operations to ensure the preservation of merchandise in good condition during transportation and storage such as ventilation, spreading out, drying, freezing, or other aqueous solutions, removal of damaged parts and similar operations;
- changes of packing and breaking up of or assembly of consignments;
- marking, labelling or affixing other like distinguishing signs on products or their packages;
- simple operations consisting of removal of dust, sifting or screening, sorting, classifying and matching, painting and cutting up;
- Slaughter of animals.
- Products resulting from these operations and processes retain their foreign origin and are thus not entitled to preferential tariff treatment.

Unit of Qualification-Rule 6(1&2)

The COMESA RoO provide that each item in a consignment shall be considered separately. However, where particular items constitute the standard equipment customarily included on the sale of articles of that kind they shall be treated as part of that article.

Split Consignments- Rule 6(3)

Unassembled or disassembled articles, which for transport or production reasons may have to be exported at different times shall for purposes of granting preference, be treated as one article.
This means that upon importation of the first consignment the importer should agree with the Customs authorities for the goods to be treated as one article and hence a single proof of origin (certificate) should be produced.

Separation of Materials

There are some industries or processes or circumstances where in the process of production it is impossible to physically separate originating and non-originating materials because they may be similar. For instance, a vehicle wiring system made with originating and non-originating copper wire.
Rule 7 provides that such separation may be replaced by an appropriate accounting system, which ensures that no more goods are deemed to originate in the Member State than would have been the case if the producer had been able physically to separate the materials.

Treatment of Mixtures

In the case of mixtures, not being groups, sets or assemblies of goods dealt with under Rule 6 of this Protocol, a Member State in application of Rule 8 may refuse to accept as originating in the Member States any product resulting from the mixing together of goods, which would qualify as originating in the Member States with goods which would not qualify, if the characteristics of the product as a whole are not different from the characteristics of the goods which have been mixed.

Treatment of Packing

Rule 9 provides as follows:
- Where for purposes of assessing customs duties, a Member State treats goods separately from their packing, it may also, in respect of its imports consigned from another Member State, determine separately the origin of such packing.
- Where 1 of this Rule is not applicable, packing shall be considered as forming a whole with the goods and no part of any packing required for their transport or storage shall be considered as having been imported from outside the Member States when determining the origin of the goods as a whole. This however only applies to the packing with which goods are ordinarily sold at retail shall not be regarded as packing required for the transport or storage of goods.
- Containers which are used purely for the transport and temporary storage of goods and are to be returned shall not be subject to customs duties and other charges of equivalent effect. Where containers are not to be returned, they shall be treated separately from the goods contained in them and be subject to import duties and other charges of equivalent effect.