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Rules of Origin – the 51st state or People’s Republic of Albion?

In this article we look at what RoO are, why they are so important and how they will impact the UK reaching a Free Trade Agreement with the EU.

As the UK and EU’s Transition period head towards 1 July 2020 and the last date when the Transition period can be legally extended, many topics from fishing rights to rolling over VAT simplifications remain to be agreed.

One of the most difficult issues to resolve will be around the origin of goods and how the EU and UK will decide when a product is deemed to meet the requirements of all existing and future standards in terms of quality, the true origin of raw materials, and the location and level of manufacturing process to allow it to be sold in the respective marketplaces.

The EU is concerned that any relaxing of the regulations surrounding the Rules of Origin (RoO) and their interpretation, monitoring and enforcement may allow a surge of goods into the EU via the UK from third countries, many of which do not meet current EU standards. There is a genuine concern within the EU that the UK may simply become an ‘assembly plant’ for Chinese and US companies seeking a ‘back door’ into the EU marketplace and manipulating the RoO.

Why are RoO so important?

But why are RoO so important? The answer is the impact such rules have on the rate of customs duty to be charged on those goods. As we know, duty is a ‘sticking tax’ and a cost to business. Therefore, RoO allows a true value for customs purposes to be based on the true origin of the item and any of its constituent parts.

If the UK and the EU agree a comprehensive Free Trade Agreement (FTA) then the concern is that goods originating in other countries – with whom the EU does not have its own FTA or preferential agreements on the rates of duty – could find their way into the EU marketplace.  This could result not only in a loss in revenue to the EU’s central budget (the majority of customs duties from all member states are remitted to the EU) but a potential lessening of the EU’s negotiating strength with regard to trade policy and a reduction in standards of safety and quality.

As we know, the EU negotiates trade agreements as a bloc and provides preferential rates of duty to certain countries and products based on a number of factors. These sometimes include:

  • the local and international sustainability of a product
  • a desire to build up the economies of poorer nations for economic and social reasons, reciprocation, and
  • political objectives.

Some of these factors are worthwhile, altruistic and supportive, some less so; but the element of control remains with the EU. Having this control undermined is rightly concerning.

Returning to the mechanics of RoO, the rate of duty will hinge on three elements:

  • the type of goods
  • the country the goods are being imported into, and
  • where they are believed to have ‘originated’.

RoO also take account of the proportion and origin of any intrinsic parts or raw materials of the finished good and where the predominant or a portion of the manufacturing process of the finished good takes place. As you can see it can all become exceptionally complex to judge ‘origin’. Hence, the EU’s concern come January 2021.

At the moment, there is a whole cadre of Certificates of Origin, Preference documents and declaration documents that need to be submitted with customs entries and export declarations for different countries and their use is closely monitored by the fiscal authorities.

However, the EU is committed to ensuring that a robust RoO system must form an important part of the negotiation process to ensure that the ‘assembly line’ processes of third country products in the UK (doubly so as the Government presses on with its support of Freeports and processing of items within those zones) is not used by companies wishing to circumvent the RoO regulations.

This article is taken from the latest edition of our Customs Digest newsletter, looking to help businesses and individuals keep up to date with the latest customs and excise duty regimes and issues. If you would like to receive future editions of this publication, please register on our insights page here.

For more information, please contact Simon Sutcliffe.