EU Exit: Rules of Origin (ROOs)

Date : 29 January 2021

The new EU-UK Trade and Co-operation Agreement (TCA) removes tariffs and quotas on trade in goods between the two parties. This relieves a major source of economic uncertainty and threat facing UK citizens.

However, this valuable benefit (the “preference”) is only available on goods which are genuine products of one of the two parties to the treaty (“originating goods”). This is determined by use of Rules Of Origin (“ROOs”).

“Non-originating” goods can still be traded between the two parties, but are subject to the normal tariffs – either the EU Common External Tariff or the UK Global Tariff.

Preference is not automatic, even for originating goods – traders must request preference, proving that their goods are eligible and must hold their evidence on file in case of dispute.

There are two main routes for goods to qualify as originating within TCA territory. They may be:

  • “Wholly-originating” within the territory

or

  • “Substantially transformed” within the territory

Annex ORIG 2 of the TCA lays out the method to be used for each type of product and these are the requirements that traders’ evidence must support. Products are identified using the HS code system.

Wholly-originating

“Wholly originating” means that a particular product has been created or obtained entirely, within TCA territory.

Some agri-food goods use this method - mainly un-processed items - and providing proof is normally straightforward.

For example, according to TCA Annex ORIG 2 (page 423), fresh, unprocessed tomatoes (HS code 07 02) must be wholly-originating in order to qualify for preference.

So, to get tariff exemption the tomatoes must be grown within the EU or the UK, which is what evidence must show.

Precursors, like seeds and cuttings used to grow the tomatoes do not need to be wholly-obtained however. These could come from elsewhere, as long as production of the crop was within the scope of the TCA.

Substantially-transformed

For many other products, the rules are more complex. In these cases, a product must be “substantially transformed” within either the EU or the UK to qualify as originating. Transformation may be demonstrated through some combination of:

  • Significant change of value (say, 50% or more)

or

  • Change in tariff / HS code

or

  • Specified types of processing

There are various “product specific rules” (PSRs) that provide guidance here. Again, these appear in the TCA in Annex ORIG 2.

Fresh tomatoes brought into the EU from, say, Morocco, would not gain preference under the TCA, since this product must be wholly-originating.

If the tomatoes were turned into juice, the HS code chapter would change from 07 to 20. This is more than enough to prove transformation, turning “non-originating” tomatoes into “originating“ juice, as specified on page 427 of the TCA.

However, the juice will only count as “originating” it is also meets requirements for sugar. Any non-originating sugar added must not exceed 40% of the final product, by weight.

Insufficient processing

Goods which have received substantial transformation within TCA territory can qualify for preference under ROOs. Conversely, goods may be disqualified if there is “insufficient production”.

Insufficient production describes certain minor industrial operations, as laid out in the TCA. Some examples, relevant to agri-food businesses are:

  • Animal slaughter
  • Certain cereal processing
  • Certain sugar processing
  • Labelling
  • Peeling, shelling or stoning of fruit, nuts or veg
  • Preserving (eg: freezing)
  • Simple cutting
  • Simple mixing or diluting
  • Simple packing (eg: bottling)
  • Sorting or classifying

Terms like “simple mixing” are potentially problematic. UK government guidance suggests that “simple” operations do not require special skills or dedicated equipment. Activities such as tea blending may go beyond “simple mixing” since they require high levels of skill and experience.

Tolerance and fungibility

The TCA allows for some “tolerance” when determining whether a product qualifies for preference. “Tolerance” is a certain flexibility or allowance for error.

There are both “general” and “product specific“ tolerances. For agri-food goods, the general tolerance is 15% of the total amount, assessed by weight.

This seems straightforward, but there are also the product-specific tolerances to consider. Products qualify for either the general tolerance or the product specific tolerance, not both.

The PSR takes precedence so, if an item is covered by a PSR, then no additional general tolerance is available.

The TCA also covers issues of “fungibility”. Fungible goods are essentially interchangeable; examples would include key food inputs such as flour, oil, sugar and so on.

In these cases it is hard to distinguish “originating” from “non-originating” products. If they cannot be kept physically segregated, then the TCA allows for “accounting segregation”.

This involves using financial records to show that goods are compliant with ROOs. This is potentially very helpful for businesses, but it does require detailed and reliable record-keeping - authentication is key.

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