EU-UK Trade and Cooperation Agreement: Rules of Origin

After months of missed deadlines and increasing doubt that the EU and the UK could come to an agreement, the EU-UK Trade and Cooperation Agreement (TCA) was agreed on 24 December 2020. For many, the greatest benefit of the deal came in the form of continued tariff-free trade between the EU and the UK. This alleviated some of the greatest concerns around EU-UK supply chains, especially in industries including the automotive industry where parts and components are moved between the UK and the EU frequently, and where, absent a deal, supply chain costs may have rocketed as tariffs were incurred on each movement.

While the TCA provides businesses some certainty and has avoided some of the most significant potential risks and disruption to supply chains, the EU-UK trade under the TCA is by no means business as usual. Our previous Trade Truths article on Rules of Origin (ROO) introduced Rules of Origin and their relevance in the context of the UK’s changing trading relationship with the EU. In this week’s article we explore some of the challenges that the ROO in the TCA are presenting businesses, and the potential mitigation measures available.

Free trade… with a hitch

Only goods which are of EU or UK origin will benefit from preferential tariff rates under the TCA, so goods must meet the UK-EU preferential ROO. These rules generally allow the following goods to be traded tariff-free:

• goods wholly obtained in the UK or the EU;
• products produced in the EU/UK exclusively, from originating materials from EU/UK; and
• products that incorporate non-originating materials (i.e. materials not from the EU or the UK), where the processing goes beyond threshold of “insufficient production” and meets either:
  • the product-specific ROO in the TCA; or
  • the tolerances included in the main ROO provisions, as detailed below.

Where a product includes materials or components that are:

• neither of UK nor EU origin;
• do not undergo a change of tariff code as a consequence of sufficient processing under the relevant product-specific rule; or
• are of a value exceeding the threshold stipulated under the relevant product-specific rule, the product will attract a tariff unless it meets one of the tolerances (see below).

These rules ensure that preferential tariffs are only applied to goods that originate or are sufficiently processed in the UK or EU. If goods are unable to benefit from preferential treatment under the TCA, “third country” tariff rates will apply to their import into the UK under the UK Global Tariff and into the EU under the Common External Tariff.

Bilateral cumulation

Importantly, the UK and EU have agreed to include “full bilateral cumulation” in the ROO. Bilateral cumulation is an important facilitation found in modern Free Trade Agreements (FTAs), which – at the most basic level – provides a system that allows originating products from one party to be treated as if they are originating in another when determining whether a good is able to meet a product-specific rule.

For example, this means products or materials originating in the EU can be considered as originating in the UK if those products are further processed in the UK or incorporated into another product prior to re-export to the EU.

Under the TCA arrangements, exporters are not only able to cumulate originating materials or products, as set out above, but also processing or production carried out on non-originating materials (”full bilateral cumulation”). This means that all operations carried out in the UK or EU are taken into account when determining whether a good is able to meet a product-specific rule.

By way of example, if the ROO stipulate that, to qualify for “originating status” non-originating materials must constitute no more than 10% of the ex-works value of the product, then:

• EU/UK-origin materials, and/or
• value-added sufficient processing of non-originating materials in the EU/UK, can count towards the 90% “originating” ex-works value of the product.

The UK Government had also hoped to agree to include “diagonal cumulation” within the TCA, which would have allowed materials or value-added processing from third countries (i.e. non-UK and non-EU countries) that have FTAs with both the UK and EU to count towards the originating status of products. This would have benefited many businesses which rely on non-UK and non-EU materials and processing in their supply chain. However, these provisions were ultimately not included in the TCA.

Tolerances

Tolerance is a relaxation of the rules of origin under certain conditions. It provides that, even if a product does not meet its product-specific rule, it can nevertheless be originating if only a limited amount of non-originating materials is used in the production of that product. For example:

• where the total weight of non-originating materials used in the production of certain agri-food products does not exceed 15% of their weight; and
• where the total value of non-originating materials for all other products, except for clothing and textiles, does not exceed 10% of the ex-works price of the product.

More caveats – interim rules

Certain goods are also subject to interim ROO, which will change over time. Particularly relevant for the automotive sector are ROO on electric accumulators (batteries) and electric vehicles. Businesses in those sectors will therefore need to be prepared for changes taking place in 2023 and 2026. Until 2023 electric batteries can have as much a 70% non-EU/non-UK content and still meet ROO, and electric vehicles can have 60% non-EU/non-UK content. Between 2024 and 2026, batteries can have 50% non-EU/non-UK content and electric vehicles can have 55% non-EU/non-UK content. From 2027, the normal product-specific ROO in the TCA will apply.

Procedure for claiming originating status

There are also new rules which require traders to certify the origin of their exports if they want to claim preferential treatment. Either the exporter (more commonly) or the importer can make the certification:

Statements on origin

• Exporters have to make a statement on origin which declares the origin of the goods being exported. This statement should be contained in the commercial invoice or another document that describes the originating product in detail. Annex ORIG 4 of the TCA contains a template statement of origin.
• The statement on origin can be valid for up to 24 months from the date it was made. It may apply to a single shipment of one or more products; or multiple shipments of identical products imported into the UK/EU within the period specified in the statement of origin, which should not exceed 12 months.
• An exporter making a statement on origin must hold information demonstrating that the product is originating, including information on the originating status of materials used in the production of the product. This may include declarations obtained from their suppliers – supplier's declarations.
• A supplier’s declaration is a declaration by which a supplier provides information to their customer concerning the originating status of the goods being supplied. The supplier is the person who has the knowledge of the originating status of the delivered goods. By making a supplier’s declaration, the supplier declares the originating status of the goods they supply to their customer. The customer can rely on this declaration in making out a statement on origin when exporting. Long-term supplier’s declarations are one-off declarations valid for supplies delivered during a period up to two years. A long-term supplier’s declaration is valid for all the goods mentioned in the supplier’s declaration that are delivered within the specified period. Annex ORIG 3 of the TCA contains templates for suppliers declarations and long-term suppliers declarations.

Importer’s knowledge

• ‘Importer’s knowledge’ is an option that allows the importer to claim preferential tariff treatment based on their own knowledge about the originating status of imported products. It can be used as an alternative to a Statement on origin provided by the exporter.
• As the importer is making a claim using their own knowledge, the exporter or producer does not need to take any action to officially state the originating status of the goods.
• As this option requires the importer to have knowledge that the products meet the relevant rules of origin, the exporter or producer may have to provide information about the production to the importer – for example, suppliers’ declarations. This may be in addition to other information, such as supporting documents or records, which may already be in the possession of the importer.

Exporters and importers must retain copies of the statement of origin, suppliers’ declarations and any other documents that demonstrate that the products satisfy the requirements for obtaining their originating status for a minimum of four years and three years, respectively.

Up until the end of 2021, supporting documentation will not be needed when importing products which benefit from preferential origin. Exporters or importers, depending on who certifies origin, may have to provide this documentation subsequently, because, from 1 January 2022, UK and EU customs authorities will have the power to retrospectively verify traders’ originating statements dated 1 January 2021 onwards.

Interaction with the ROO in other FTAs

The various FTAs which the EU has agreed with third countries, along with those FTAs the UK has agreed with third countries, have different ROO. This can cause issues for:

• goods from third countries, imported into the EU, which are then subsequently shipped, unaltered, to the UK; and
• goods from third countries, imported into the UK, which are then subsequently shipped, unaltered to the EU.

In such situations, additional tariffs may be charged on goods (on the second movement) even where both the EU and UK have an FTA with the third country. This will depend on individual FTAs and whether they include a direct transport rule or a non-alteration rule in the specific ROO. As a general overview, however:

• Earlier EU FTAs require direct transport of goods from the country of origin in order to keep their originating status (e.g. the FTA with South Korea, and Central America) (direct transport rule). The impact of this is that if an EU or South Korean-origin good transits through an additional country in the supply chain between the EU and South Korea, a tariff could be payable on the import from the transit country into the EU or South Korea.
• In the more recent FTAs (e.g. with Canada and, Japan, Vietnam and the agreement in principle with Mexico) the EU has sought to introduce a non-alteration rule to replace the direct transport rule. Under this rule, using the example above, if the transit in the additional country is under customs control, for example the goods are stored in a bonded warehouse or are under a temporary admissions procedure, a tariff should not be payable on the import from the transit country into the EU or South Korea. The conditions for the non-alteration rule to apply are that the goods are a) under customs control and b) unaltered while in the transit country. Traders can apply for a certification of non-alteration / manipulation from the relevant customs authorities in the transit country as proof of point b).

DLA Piper’s Global Trade and Regulatory Affairs team is advising clients on the new ROO regime under the TCA, and wider FTA ROO. Please do not hesitate to contact us if we can be of assistance.