The Generalised System of Preferences (GSP) rules of origin are finally being simplified. According to HMRC in 2009, circa £635m of customs duty was saved by UK importers who imported goods under the GSP system.
However, consistent European Commission research has suggested that the present system of rules requires a radical overhaul. Finally, after seven years of negotiations new provisions will come into force on 01/01/2011.
Why are the rules changing and what are the main changes?
The current rules of origin are overly complex and restrictive. This has in some cases hindered rather than helped developing countries from accessing the world economy. As well as being overly complex to understand and apply, the European Commission suggests that the bar has been set too high for goods to qualify for preferential treatment and so accordingly have lowered some of the requirements.
The rules are now based on a sector-by-sector approach rather than a product-by-product basis. The aim of this is to simplify the rules and in some cases to relax them. The main changes are concerned with agricultural and industrial products:
• The number of product-specific rules has been reduced
• The number of occasions where products must be wholly obtained in the GSP beneficiary country has been reduced- thereby allowing greater use of non-originating (Imported) materials
• A weight tolerance for non-originating materials replaces a value tolerance. This has been introduced as it is considered to be more stable and does not suffer from fluctuations in prices and exchange rates. A value tolerance will continue to apply to fishery products of Chapter 16 but at the new level of 15%
• In many cases there will be two sets of rules – one set for the standard GSP beneficiary countries and one set for the Least Developed Countries (LDCs)
• The LDC rules will be more relaxed allowing for a higher value of non-originating materials, components and parts to be used, and in the case of clothing they will allow for a single stage of transformation – i.e. for non-originating fabric to be made up into the finished garment
• For textile imports the requirement for linings and interlinings to originate in the country of the manufacture of the finished garment has been removed
General Tolerance Rule
The general tolerance for the use of non-originating materials, components or parts has been increased from 10% to 15% of the ex-works price of the finished product. This new relaxation does not cover textile products of Chapters 50-63. As noted above, a range of agricultural products, the 15% value tolerance is replaced by a 15% weight tolerance.
Many origin rules are based on the value or weight of originating materials as a percentage of the ex-works price of a product (e.g. the non-originating materials must not exceed 40% of the ex works price). One key obstacle to importing under preference has been to need to apply the origin test at an item unit level. This has caused real problems where costs fluctuate and almost necessitated complex audit trails. The ability to calculate average component and manufacturing costs over a period of time overcomes the problems of fluctuating material costs and currency exchange rates.
The average ex-works price of the product and the average value of non-originating materials used must be calculated on the basis of the sum of the ex-works prices charged for all sales of the products carried out during the preceding financial year and the sum of the value of all non-originating materials used as defined in the country of export. Where figures for a complete year are not available, a shorter time-period can be used but it must not be less than three months.
Simplification of the fishery rule
The requirement that 50% of the crew of the vessel catching the fish on the High Seas must be nationals of the EU or a GSP beneficiary country has been scrapped.
Accounting Segregation for EU Exporters
Bilateral Cumulation (Former ‘Donor Country Content’)
UK exporters who wish to send originating products to a GSP beneficiary for further processing and inclusion in a finished product for export back to the EU under the GSP can now seek HMRC agreement these parts qualify as “GSP-originating” for the final product concerned. This simplifies the evidential trail and reduces the administration costs involved in enjoying the benefits of preference. Please be aware that this is a “one-way” system and EU manufacturers cannot treat GSP-originating materials as if they originate in the EU.
The ability to use book-keeping principles
Accounting Segregation enables traders to use book-keeping principles (such as stock records) to determine the preferential origin of the product to be sent to the GSP beneficiary where it is not possible to physically separate raw materials of different origins which are used to manufacture the product concerned.
Cumulation effectively allows for the merging of countries or trading areas for the purposes of determining whether a product undergoes sufficient processing to qualify for preferential rate of duty.
Cumulation between GSP Beneficiaries and Countries who have Free Trade Agreements with the EU
There is the possibility for GSP beneficiaries to apply to the EU Commission to cumulate with certain materials originating in countries with which the EU has Free Trade Agreements (FTAs). Under these arrangements GSP beneficiaries will be able to treat materials originating in the FTA countries as their own, provided that they have met the rules of origin that would have applied if the goods had been exported direct to the EU from the FTA country concerned. So for example, the EU has an FTA with Mexico- therefore a manufacturer in The Philippines (GSP-qualifying) could count any Mexican-originating parts (Mexico has a FTA with the EU) as originating in the Philippines (and thus qualify as GSP-qualifying) as long as they have met the rules of origin that would have applied had the goods been exported directly from Mexico to the EU.
Extension of Bilateral cumulation to include Turkish Goods
At present, the bilateral cumulation arrangements enable GSP beneficiary countries to treat parts that originate in the EU, Norway and Switzerland as GSP-Originating. This has now been extended to also cover goods originating in Turkey. However, please be aware that components in Chapters 1 to 24 which originate in Norway, Switzerland and Turkey are not covered by the bilateral arrangements.
New GSP Regional Cumulation Group
There will be a new (fourth) GSP Regional Cumulation Group encompassing Argentina, Brazil, Paraguay and Uruguay:
Brunei-Darussalam, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam
Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Panama, Peru, Venezuela
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka
Argentina, Brazil, Paraguay, Uruguay
Cumulation between Regional Groups
There is the possibility for the ASEAN Group of Countries (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam) to apply to the Commission to cumulate with the SAARC Group (Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka)
Simplification of Regional Cumulation arrangements
Businesses have experienced real difficulties trying to determine which country an item originates in when processing is carried out in a number of different countries within a regional group. Now products will be deemed to originate in the last country in the group of final processing provided that the processing undertaken there is more than a minimal operation. If the processing is not more than minimal the finished product will originate in the country in the Group which accounts for the highest share in terms of the value of the materials provided to manufacture the finished product.
Replacement of the Direct Transport Rule by a ‘non-manipulation’ requirement
The direct transport rule will be replaced by a ‘non-manipulation’ requirement. Goods will be assumed to have met the requirements unless the importing customs authorities have reasonable doubts. Importers will no longer have to systematically obtain evidence of direct transport (which is often difficult) for every consignment. They will, where required, be able to produce any documentation which shows that the imported goods are the same as those leaving the exporting GSP beneficiary country.
A Database of Registered Exporters
The European Commission will maintain a central database of exporters registered to export under the GSP. This database will be available for consultation by the public via the internet. However, the implementation of this will not be until 1 January 2017 to allow states to implement robust systems and procedures.
Use of commercial documents for the statement of origin
The statement of origin issued by the registered exporter will be similar to the current preferential invoice declaration and it can be inserted on a commercial document which can be transmitted and stored electronically. Importers should always be in possession of the required statement at time of release of the goods and should no longer have to provide around £19m per annum in security because the required proof is not available at the time preference is claimed.
Replacement of GSP Form A
The GSP Form A certificate will be replaced by statements of origin issued by registered exporters on documents that can be transmitted electronically.
Splitting of consignments
There are new provisions in place to provide for the possibility of splitting of consignments that are en route to the EU provided that the products remain under customs supervision in the country of transit.
The new product specific rules, non-manipulation requirements and cumulation arrangements will apply from 1 January 2011.
The changes to the documentary requirements (replacement of Forms A) will not apply until 1 January 2017 – GSP Beneficiary Countries and EU Member States need time to register their exporters and the Commission needs time to determine the IT requirements for, and to develop the Central database of registered exporters. GSP Beneficiaries who cannot make that date will have until 1 January 2020 to put the necessary procedures in place.
The new, simplified rules of origin for GSP beneficiaries are a welcome development. The present system is overly complex and a frequent complaint from importers is that the high level of risk when importing under GSP, in some cases, outweighs the benefits, thereby defeating the very point of having GSP in the first place.
There have been a number of cases where GSP Form A certificates have been “cleared” by the exporting state customs authority only for them to have been challenged and later found to be invalid, thus exposing the importer to fines and back-duty demands as well as putting a black mark against their compliance level. The database of registered exporters and the new supplier declarations will hopefully reduce these risks. There are some concerns with regard to the registered exporter database and in particular how companies in GSP beneficiary states will actually become “approved” but the consensus is that a publically available database is on the whole a positive development.
The replacement of the direct transport rule by a non-manipulation requirement is another welcome development though we are anticipating a number of cases in the courts as to how far “non-manipulation” stretches.
Perhaps the most positive development is the ‘lowering of the bar’ with regard to the percentages of non-originating products and the introduction of averaging and book-keeping principles. On the political side, GSP exists in order to assist lesser-developed countries to expand and grow but if the rules are too restrictive and the risks too high, then these countries will not achieve the full level of benefits accorded to them. On the practical side, at present it can be quite a task to not only “prove” that imported products are indeed GSP-qualifying but it is also difficult for the authorities to police.
We are anticipating that the simplification of the rules will lead to greater clarity and consistency in application but we are also anticipating that importers who get the (new) rules wrong will face a higher level of sanction than at present.
We are anticipating some real opportunities for cost reductions (duty and administrative savings under the new GSP regimes and are working with a number of clients to carry out a systematic analysis of the impact of these changes on their business. If you would like to discuss how we can help your business or if you have any customs-related query call us on (01905) 619229 or alternatively email our team of customs specialists at firstname.lastname@example.org.