Scenario. XYZ, a Philippine trading company, is planning to introduce in the domestic market generic notebook computers by next year. The notebook computers are to be assembled in Singapore using electronic parts mostly coming from China, Singapore and Taiwan (e.g. the adopter is manufactured in Taiwan). XYZ has two concerns: (1) how will the computers be marked as to the country of origin; and (2) how can the company avail of the special tariff rates under the AFTA-CEPT.
To address these concerns, XYX will require an in-depth understanding of the Philippine rules of origin and marking of imported goods.
Rules of Origin. Rules of Origin refer to the laws, rules and regulations of one country to determine the country of origin of imported goods. In principle, the origin of the article can affect tariff rate, tariff preference, safeguards or dumping duty, import quota, admissibility, marking and in some countries, procurement by government agencies.
Rules of origin may be categorized into two:
- Non-Preferential Rules of Origin
- Preferential Rules of Origin
Non-Preferential Rules of Origin. Non-Preferential rules refer to rules applicable for the application of the most-favored nation (MFN) treatment, dumping, safeguards and countervailing measures, origin marking requirements and tariff quotas. Non-preferential rules normally apply in the absence of bilateral or multilateral agreements.
For goods that are wholly the growth, produce or product of a country, the “wholly-obtained” criterion is normally applied. For goods that consist in whole or in part of materials from more than one country, the “substantial transformation” is generally applied. In the Philippines, the primary consideration for the “substantial transformation” criterion is the tariff shift or the change in classification in the HS nomenclature (e.g. change in chapter or heading level).
Preferential Rules of Origin. Preferential rules refer to such rules that grant tariff preferences under certain trading arrangements among trading partners, bilateral and multilateral agreements [e.g. AFTA-CEPT, Japan’s Generalized System of Preference (GSP)], or special laws.
Under AFTA-CEPT, the rule on country of origin is based on the concept of “substantial transformation”, which assigns origin to the country where the last substantial transformation occurred. Substantial transformation may be roughly defined on the basis of a change in tariff heading, achieving a threshold of proportion of value-added, or on the basis of certain manufacturing processes. Under AFTA, the basis of substantial transformation is based on a 40% threshold level of the value of the product. In other words, at least 40% of the value of the imported product must be considered as originating from ASEAN to avail of the preferential tariff rates under AFTA-CEPT.
WTO Agreement on Rules of Origin. Recognizing the fact that most countries have their own unique rules of origin, the WTO Agreement on Rules of Origin provides for the long-term goal of harmonizing the rules of origin. The agreement itself provides for a program based on a set of principles, including making Non-Preferential rules of origin objective, understandable and predictable. The program shall be implemented by the WTO Committee on Rules of Origin with the assistance of a Technical Committee under the auspices of the World Customs Organization (WCO).
While the agreement provided for a three-year program after the Uruguay Round, work has yet to be completed. While substantial progress has already been made, delays have resulted due to the complexity of the issues involved. In the meantime, member countries of the WTO are awaiting the completion of the harmonization program.
Origin Marking Requirements – Section 303, TCCP. Under Section 303 of the Tariff and Customs Code of the Philippines (TCCP), every article of foreign origin (or its container) imported into the Philippines must be “marked in any official language of the Philippines and in a conspicuous place, as legibly, indelibly and permanently as the nature of the article (or container) will permit, in such a manner as to indicate to an ultimate purchaser in the Philippine the name of the country of origin of the article”.
Stated otherwise, every imported article must indicate its country of origin when imported into the Philippines. In the absence of such marking, customs may levy a marking duty of 5% ad valorem on the imported article. In addition, an imported article that is not properly “marked” shall not be released from customs custody without first having been marked in accordance with the rules.
In the scenario provided above, it is obvious that the country of origin of the two main computer components (e.g. notebook and adopter) refer to different countries. An added issue is whether the assembled notebook computer qualifies for tariff preference under AFTA-CEPT.
The Future – Harmonized Rules of Origin. Upon completion of the harmonization program and its adoption by member-countries of the WTO, it is expected that a single origin can be determined for all products under a non-preferential commercial trading arrangement. Hopefully, this should provide consistency in the origin determination between trading countries. In the long term, a harmonized rules of origin will be widely appreciated similar to that of the harmonized nomenclature system.
The author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email at agatonuvero@yahoo.com and agatonuvero@customstrade.asia
