Country of Origin Rules: How to Determine the Origin of Imported Goods

Understanding Country of Origin in International Trade

Customs authorities inquire more than description, value, and HS code when a product enters a new market. This is the application of the rules of origin.

Country of origin is a term that is used to define the country in which goods were produced or sufficiently worked upon. It does not indicate the country where goods were shipped from or bought. For instance, a product manufactured in Vietnam with parts bought from other countries and then shipped from Singapore has a claimed origin that might vary from its shipping country.

Why is that crucial?

Whether the goods are subject to customs duty or not and whether tariffs, trade measures, trade quotas, sanctions, origin identification and numerous other requirements are applied depends on the origin of imported goods. The actual rules of origin depend on the import country, the product and the application for preferential treatment. Thus, for those engaged in international business, knowing how and why the rules of origin should be applied is an important aspect of customs compliance.

What Does Country of Origin Mean?

In short, the concept of country of origin is the economic nationality of a product. According to the World Trade Organization (WTO), rules of origin are the criteria that help determine in which country a product is considered to have originated. Rules of origin may apply to both preferential and non-preferential treatments.

Take, for example, a laptop that is manufactured in country A, but has processors manufactured in country B, memory that is manufactured in country C, and other components from mixed origins. Therefore, simply looking at the shipping documents does not necessarily help us find out the right country of origin. The authorities responsible for customs have to determine where the product has been produced or where the processes of manufacture or transformation have taken place.

Why Origin Is More Than the Shipping Country

It is a misconception to think that the country listed as the shipping address is automatically the country of origin. This is definitely not the case.

To give you just a few examples:

• Products made in China might get shipped from the Netherlands into the UK.
• Components from Germany might get assembled in France.
• Agricultural produce could be grown in one country, harvested in another, and processed somewhere else.
• The final product might include ingredients from several different countries.

Which origin rules must be followed in order to declare the correct country?

How Country of Origin Is Determined

There is no single universal formula that applies to every product and every trade relationship. Different customs regimes and trade agreements can contain different requirements. The WTO identifies concepts such as substantial transformation, tariff classification changes, percentage-based criteria, and specified manufacturing or processing operations as approaches used in origin determination.

This means businesses need to examine the applicable rules rather than relying on assumptions.

Wholly Obtained or Produced Goods

The simplest situation occurs when a product is wholly obtained or produced in one country.

Examples can include:

• Minerals extracted from a country's territory
• Crops grown and harvested in a country
• Animals born and raised in a country
• Fish caught under applicable conditions
• Products manufactured entirely from qualifying materials.

The precise definition varies by the applicable legal framework, but the underlying concept is straightforward: the goods do not contain relevant non-originating materials that would change the origin determination.

For example, if agricultural goods are entirely grown and harvested in one country, determining their origin is generally more straightforward than determining the origin of a product assembled from components sourced from five countries.

Substantial Transformation

When many countries are involved, the complexity of the situation increases. In this case, a key principle is that of substantial transformation, which means that when processed through the country, goods must be transformed enough to be viewed as having originated in that country.

Nevertheless, businesses should not think that every type of manufacturing means substantial transformation. The exact definition is based on the relevant customs regulations. For instance, the EU relies on the term last substantial transformation with particular reference to some instances of non-preferential origin requirements. This means that the type of processing is important.

Change in Tariff Classification

A few rules of origin determine whether or not non-originating materials will undergo a given change in tariff classification upon processing. This method links origin determination with the Harmonized System (HS) of classification.

As an example, the agreement can provide that if the materials are classified under one tariff heading, they must be converted into an end product that falls under another classification in order for the end product to gain originating status.

This is one of the many reasons why proper HS classification plays a role in customs declaration and origin analysis. A company must ensure that they refer to the proper specific rule instead of assuming that the origin determination is guaranteed through a change in tariff classification.

Value-Based and Processing Requirements

Some rules of origin are based on value calculation. There may be rules stipulating the maximum value or % of non-originating materials that may be used in the importation of the product.

Other rules may need a specific process applied. In the case of preferential trade agreements, the rules of origin will be of product specific nature.

Preferential vs. Non-Preferential Origin Rules

Businesses must first figure out what rules of origin apply to any shipment they intend to make. Preferential and non-preferential origin rules serve different functions.

What Are Preferential Rules of Origin?

Preferential origin rules determine whether goods are eligible for preferential tariff treatment in a free trade agreement or preference system. If a product meets the conditions of preferential origin it may be milled duty-free or at a much lower cost depending on the applicable scheme.

For instance, a company that brings products in under a free trade agreement will have to show that the products meet the origin requirements stated in that agreement.

Origin requirements may include:

• Criteria for being wholly obtained
• Processing requirements specific to products
• Tariff classifications
• Regional value content
• Cumulation regulation requirements
• Documentation or proof of origin

What Are Non-Preferential Origin Rules?

Non-preferential origin rules are defined as regulations which do not relate to preferential tariffs.

For example, the EU outlines various customs regulations which involve non-preferential origin; these include regulations concerning anti-dumping measures, countervailing duties, buffer measures, quotas, prohibition measures, customs statistics, and origin trademarks.

The reason for such distinction is that it is possible for product to have origin in non-preferential sense, but not qualify for getting preferential tariff treatment under any specific treaty. This should help businesses to avoid treating the 'origin country' as a number calculated for different customs purposes.

How to Identify and Apply Rules of Origin

Businesses have to follow a standard procedure in order to simplify the identification of country of origin of goods.

It is important to clarify questions such as: “What country do I declare?” by gathering the data that will help you in taking decision regarding the country of origin of the products.

Start With the Product and HS Code

HS code plays an important role, since many rules of origin refer to specific product categories. Thus, rules of origin reference to different HS codes according to the conventions of trade.

Here is what you need to have:

• Description of the product
• HS classification
• Production technology
• Components of the goods
• Countries of the suppliers
• Places of production
• Transactional information.

Mistakes in classification can lead to incorrect estimation of duties and choice of wrong rules of origin.

Map the Supply Chain

Now detect where the raw materials and manufacturing processes happened.

Research:

• Where are the raw materials obtained?
• Where are the components manufactured?
• Where is the final product produced?
• What processes are undertaken in every country?
• What raw materials are originating and non-originating?
• Was any processing done at all?

This data clarifies a better understanding of how the product got its origin.

Check the Applicable Origin Rule

Upon understanding the supply chain and the product, find out the relevant regulations that apply. For preferential trade, refer to the appropriate trade agreement. For non-preferential origin, see the respective customs rules and regulations in the importing nation.

For instance, the European Commission states that preferential origin is regulated by the respective preferential agreement. It also has ROSA, an application for self-assessment of rules of origin in the European Union. This is a crucial step as applying rules of origin based on assumptions can lead to erroneous conclusions.

Documents and Evidence Needed to Prove Origin

Establishing origin is only one step of the process. Other evidence may be required to back the verification. The required documentation depends on the country, free trade agreement, the product itself, and the customs procedure.

Certificates and Statements of Origin

Some transactions require an origin certificate, while some preferential trade arrangements allow different proof.

For instance, under the UK-EU Trade and Cooperation Agreement – proof of the originating status may include an origin declaration and, in some cases, documents proving importer's knowledge.

Businesses should always check the exact agreement or customs regime, rather than presuming that a certificate is necessary for each shipment.

Supplier Declarations and Manufacturing Records

Possible supportive documents include:

• Supplier declarations
• Bills of materials
• Manufacturing records
• Production details
• Purchasing documentation
• Commercial invoices
• Country of origin statements
• Specification sheets
• Cost data
• Processing data

The main purpose is to developed a log of paperwork explaining why a certain country of origin is stated. This is especially vital in cases when goods comprise materials from different countries.

Common Challenges When Determining Origin

What causes the difficulties for firms in figuring out where their products and materials originate? Many times, the obstacle lies less in the definition than in the sheer amount of information to be collected for the proper application of the rule.

Complex Multi-Country Supply Chains

In this day and age, products hardly ever follow the “made in one country” principle.

A manufacturer can be getting raw materials from one country, components from several other countries, carrying out production in another country, and shipping the item from somewhere else.

More specific information can give rise to more complicated compliance of origin requirements.

Incomplete Supplier Information

To engage in the origin process, the manufacturer has to rely on the supplier’s information. When a supplier indicates the name of the country only without specifying how the materials used in production were sourced or produced, an importer may end up having inadequate evidence needed to perform accurate origin decision-making.

The problem is particularly urgent in the case of preferential treatment, in which case the importer has to prove that goods comply with all possible requirements of the agreement.

Confusing Origin with Shipment Location

One common issue to consider is that the country where products have been shipped is not necessarily the country of origin. Goods can cross many countries without changing their origins.

In the same way, goods may not have originated from the country where they have been purchased. The origin must be identified according to the regulations in force.

Minimal Processing

Not all processes lead to the change of the origin of the goods.

For example, the rules on non-preferential origin of the EU state that certain minimal procedures may not change the origin of goods. This matters because simple operations such as handling, packaging, or other activities may not fulfill the requirements for determining the origin of the goods.

Using Technology to Improve Origin Compliance

The process of determining the origin can generate a lot of information in terms of products, suppliers, classifications, and manufacturing data. For organizations that deal with countless shipments, managing such information manually can be more challenging in terms of compliance.

This is where automation comes to the aid of customs and trade compliance teams.

Centralize Product and Trade Data

With the help of centralization, compliance teams can keep information in the following way:

• Product names
• HS codes
• Information about suppliers
• Country info
• Commerce documents
• Evidence of the origin
• Customs declarations
• Compliance documents

Storing all of this information in a single operation will allow teams to avoid constantly flipping through separate documents and emails.

Automate Data Extraction from Documents

AI-based document processing systems can extract relevant data from forecast, invoices, packing lists, and other kind of documents related to trade.

For example, Droblet offers customs and trade compliance solutions that can help product exporters with processing their documents and automating the processes.

If a business is already working with the automated data extraction, it is important to link the origin data with the customs process for smooth functioning.

Build an Audit-Friendly Workflow

Using technology helps create a log of customs information processing. Structured workflow tracks:

• Documents of origin
• Information pulled out
• Validation processes
• Classification information
• Proof of origin
• Declaration information
• Processing history

Automation doesn’t eliminate the need-to-know legal regulations, but rather helps apply it properly and manage supporting information more efficiently.

Conclusion

Although determining the country of origin may appear to be straightforward, many aspects need to be addressed once a product crosses different borders with the presence of various resources from different territories. The main point here is that the place from which goods are purchased, transported from, or where they were last processed does not have anything to do with defining the country of origin.

Companies should distinguish among preferential and non-preferential origin, understand such terms as “wholly obtained goods” or “substantial transformation”, be aware of goods-related requirements in particular industries, and collect enough evidence in favor of their statements.

As far as importers, exporters, custom brokers, and forwarders are concerned, having a systematic method of identifying and applying rules of origin will make the process of determining country of origin easier and less complicated.

With the development of international supply chains, implementing clear procedures of obtaining the country of origin has become possible through the availability of perfect trade information and automation.

FAQ

1. What are rules of origin?

Rules of origin are criteria used to determine the country where imported goods are considered to have originated. They can affect tariffs, trade preferences, quotas, and other customs requirements.

2. How is the country of origin determined?

Origin is generally determined by whether goods are wholly obtained in one country or undergo sufficient processing or substantial transformation according to the applicable origin rules.

3. Does the shipping country determine the country of origin?

No. The country where goods are shipped from is not necessarily their country of origin. Origin depends on where the goods were produced or sufficiently processed under the applicable rules.

4. Why is country of origin important for customs compliance?

Country of origin can affect customs duties, preferential tariff eligibility, trade measures, origin marking, and other import requirements. Incorrect origin information can create compliance risks.

5. What documents can prove the origin of imported goods?

Depending on the applicable trade rules, supporting evidence may include certificates or statements of origin, supplier declarations, commercial invoices, bills of materials, and manufacturing records.