THE IMPORTANCE OF EFFECTIVE GOVERNANCE OF NON-PREFERENTIAL COUNTRY OF ORIGIN
In the current political and economic context, we see origin becoming a popular mechanism for controls by some countries, including quantitative restrictions, tariff quota, trade statistics, trade embargoes, marking and labelling requirements, most-favoured-nation (MFN) treatment and anti-dumping duties. As all tangible goods do have a non-preferential origin, ensuring proper country of origin (COO) management is increasingly important for companies, especially multinational businesses.
Since, for many countries, it is mandatory information for customs declaration, every year the challenges in declaring, obtaining, managing and disclosing correct COO information are increasing, with the risks increasing accordingly. It is also clear that we can expect more countries to adopt stricter rules on COO in future.
With COO regulation an important instrument for both government procurement and commercial policy, some countries are exerting their authority and using COO in steering their policies. Having the wrong COO information can cause delayed shipments, financial consequences or even a loss of reputation and privileges.
For those who procure to supply instead of producing themselves, the challenges in handling end-to-end origin information begin with making their suppliers aware of the relevance of the information.
Within the telecommunications industry, it is not uncommon to see suppliers expanding their producing plants according to the latest or upcoming trade restrictive intentions announced by various countries, allowing their businesses to provide a compliant COO solution to current and potential customers. The main challenge is therefore to steer origin information from the source until the end of the chain.
A single product processed in multiple countries is generally defined to originate from the country in which it has undergone its last substantial transformation.
Substantial transformation is not an interpretative concept, but the World Trade Organization (WTO) defined the criteria needed to determine the national source of a product. As a result, despite it being universally recognised, some governments do apply additional different criteria to it, perhaps change of tariff classification, or ad valorem percentage criteria, or other criteria such as manufacturing or processing operation. The reason for this is that the General Agreement on Tariffs and Trade (GATT) has no specific rules governing the determination of the COO of goods in international commerce.
The GATT is a legal agreement between 23 nations, signed in Geneva on 30 October 1947, whose purpose was to promote “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis”. Its preamble states that origin can be ruled “within the province of each importing country to determine, in accordance with the provisions of its law, for the purpose of applying the most-favored-nation provisions (and for other GATT purposes), whether goods do in fact originate in a particular country”.
The GATT Article VIII:1(c), which deals with border crossing formalities and fees, states that “the contracting parties also recognize the need for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying import and export documentation requirements”. The Interpretative Note 2 to this Article states that it would be consistent if, “on the importation of products from the territory of a contracting party into the territory of another contracting party, the production of certificates of origin should only be required to the extent that is strictly indispensable”.
Notwithstanding this, non-preferential origin information from multiple factories producing the same types of item, under a multidisciplinary demand/supply flow can easily be incorrectly recorded, affecting all subsequent border crossing transactions.
Clearly stating requirements to suppliers, ideally with COO clauses in a contractual framework, can make the difference. A clear technical description of what is required is extremely important, both to ensure the supplier understands what is needed, and to point out the rules and regulations that support legal requirements.
Explaining how this information should be provided may avoid misunderstanding and disputes. For that, it is strongly recommended that customs subject matter experts are available to draft and revise the commercial contracts’ specific sessions.
This includes, for example, ensuring COO information is on the invoice and on documents accompanying the shipment for each delivered item, detailed package and product label specifications. These, together with an established mechanism for proof of origin requests, such as certificates of origin and long-term declarations of origin, should cover the procurement portion. This provides the basis for a solid – and auditable – internal governance process, enabling proper COO handling, with or without the support of an enterprise resource planning (ERP) tool.
Always remember that acting in advance with preventive actions is much better than having to react to a risky or non-compliant situation. In our experience, an ethics-based approach to managing information flow, with an integrated mode of operation, ensures a reliable environment for a smooth and seamless end-to-end handling. We believe that a robust COO governance policy can provide the necessary framework to ensure that legal regulations and internal guidelines are followed by both the company’s employees and processes.
Agnes Cruz, Head of Customs, Nokia Global.
Jul-Sep 2019 Issue