Seminar on Rules of Origin in the CEFTA 2006 – Agreement Shkodra/Albania, Nov. 2010 Helmuth Berndt © 2010

Period of re-orientation and transition CEFTA 1992: Period of re-orientation and transition

Poland 1992 2004 Hungary 1992 2004 Czechoslovakia (then) 1992 2004 CEFTA 1992 - Member states: Entry: Leave (EU): Poland 1992 2004 Hungary 1992 2004 Czechoslovakia (then) 1992 2004 --------------------Visegrad Goup----------------------- Slovenia 1996 2004 Romania 1997 2007 Bulgaria 1999 2007 ------------- ------- ------ Croatia 2003 ------ Macedonia 2005 ------

Stabilisation- and Association Pact 1999 Cologne 40 participants: All participants of CEFTA 2006, EU, Canada, Switzerland, Russia, Japan, USA, IMF, World Bank, OECD; NATO, UN, Turkey et alt.

Targets of the Stability Pact: 3 „working tables“ -. Democracy - Targets of the Stability Pact: 3 „working tables“ - Democracy - Economy - Security

„Working table economy“: To assist economic development by trade liberalisation in the region and in the trade with partners of the European Economic Area (EEA)

on Trade Liberalisation and Facilitation Key targets: 2001 Memorandum of Understanding on Trade Liberalisation and Facilitation Key targets: - Bilateral Free Trade Agreements - Enhance the WTO accession - Stimulation of the EU accession process

2003 – 2005: Network of 32 bilateral Free Trade Agreements („Matrix“) „Virtual Free Trade Zone“

Elements of the Free Trade Agreements: Liberalisation of at least 90% of the trade within 6 years - Application of preferential rules of origin - Harmonisation of legal regulations with the EU legislation (Customs nomenclature, phyto- and sanitarian protection, tax system etc.) - Protection of intellectual property rights - Approximation of laws with WTO-rules

Joint Declaration of June 2006: Creation of a single modernised and improved CEFTA (1996) Agreement in - full conformity with the WTO rules - and establishing a zone of diagonal accumulation

Agreement on Amendment of the CEFTA (1996) Agreement 19.12.2006: Agreement on Amendment of the CEFTA (1996) Agreement

Conditions for the accession: WTO-membership (in case of non-membership a committment to application of WTO-rules mutatis mutandis is imposed, actually relevant for Serbia, BiH and UNMIK/Kosovo) Free Trade Agreement with the EU Free Trade Agreements with all member states of CEFTA

Structural elements of the Agreement: Preamble -with reference to EU-accession and WTO compliance- Objectives Industrial products Agricultural products Technical barriers General provisions New trade issues - with reference to „TRIPS“ Joint declaration – containing WTO-Annexes 1 A, B, and C

Main targets of CEFTA 2006 (trade related): Free trade in the area Trade facilitation by - Customs preferences - - In general duty free trade - - Support for technical co- production - Modern and harmonised Customs Law - Lesser technical barriers - Harmonisation of standards

Customs preferences in detail: - Abolition of quantitative restrictions - No export duties - No new import duties - Industrial goods: - - Duties abolished at entry into force (exceptions in Annex 2/dismantling) - Agricultural goods: - - Duties abolished, reduced or retention of MFN-tariff (Annex 3)

Conditions for Customs preferences: - Goods are eligible or preferences - Goods are originating in the country of exportation - Technical conditions are met

The cornerstone: Rules of Origin Different trade within a Free Trade Zone and a Customs Union

Free Trade Association 3% 2% 4% 10% Japan Japan

Free Trade Association Customs Union 3% 7% 2% 7% 7% 4% 10% 7% Japan

Intensity of EU-Preferences per 1.8..2010 Complete integration: European Union Customs Union: With Turkey (except steel products) EU-EFTA Agreements: Norway, Iceland, Liechtenstein, Switzerland “Europe Agreements”: No more countries Stabilisation and Association Agreements with Croatia, BiH, Macedonia, Albania, Montenegro, Serbia (Interim) Economic Partnership Agreements ( EPAs, see “Abroad”) Mediterranean Agreements :North Cyprus (Turkish part), Maghreb states: Morocco, Tunisia, Algeria. Mashrek group: Egypt, Jordan, Syria, Lebanon. Plus Israel and PNA Abroad: South Africa, Mexico, Chile, EPAs: Cariforum, Pacific Terr. Unilaterally: 178 (176) developing countries in the GSP, Balkan beneficiaries: UNMIK/ Kosovo and Moldova

CEFTA System of Origin Preferential definition Commercial definition Non-preferential definition “Made-in” origin EU-system System of other countries EU- definition Worldwide definition UK in 1887 WTO mandate to WCO Madrid-Agreement 1891 General system of Preferences (UNCTAD) Rules for specified products (i.e.textiles) and Madrid-Agreement 1958 Actually in process National legislation PAFTA ASEAN CEFTA AGADIR Most important: TRIPS, (WTO-accession!) Rules for all the rest of products Contains elements of the preferential origin WIPO-Geneva

Criteria for the origin of goods. Wholly obtainment. or Criteria for the origin of goods Wholly obtainment or sufficient processing

What is “Wholly obtained” ??

See Article 5 of the Origin Protocol: Mineral products: Extracted from the soil Vegetables: Harvested there Live animals: Born and raised up …..

Tomatoes, 0702, harvested “WHOLLY OBTAINED” ORIGIN BECAUSE Processing: Heading 2103 “WHOLLY OBTAINED” ORIGIN BECAUSE EXPORT: ORIGIN, BECAUSE RAW MATERIAL IS ALREADY WHOLLY OBTAINED But bottle, spices? Tomatoes1

4403 4403 4407 IS IT WHOLLY OBTAINED? 9504

Wholly obtainment frequently used for agricultural goods: Chapter 07 Edible vegetables: Fresh, chilled, provisionally preserved Chapter 08 Edible fruits: Fresh, dried Chapter 20 Preparations of vegetables: In general all vegetables and fruits used must be wholly obtained (with little exemptions). Chapter 21 Miscellaneous edible preparations: With one exception no wholly obtainment „Chapter“ means Chapter of the „Harmonised System“ – see below).

The alternative for the processing industry: Sufficient processing

Most frequent basic principles : Change of the HS-heading (4-digits!) Limited percentage of the used materials - Manufacturing procedure -- AND COMBINATIONS THEREOF— Recommendation: To start with the production on the lowest level possible

10% of materials which should not be used, are allowed. General tolerance: 10% of materials which should not be used, are allowed. The tolerance rule cannot be applied for textiles (Chapter 50 – 63) and in case of insufficient working or processing.

Column 3 an 4 only refer to imported materials Where to find these criteria? See „List of working and processing“ = Annex to the Origin Protocol Column 3 an 4 only refer to imported materials

Importance of the HS for the. rules of origin: - Importance of the HS for the rules of origin: - For preferential origin: 4 digits (for used materials: See Customs declaration) - for export goods: See export declaration - For help: Binding tariff information by Customs! - For non-preferential origin: 4 digits, 1 KN- code-line with 8 digits - Tariff reduction schemes: 6 – 8 digits

The Structure of the HS 01 04 20 90 00 10 Heading HS Subheading HS Chapter HS Heading HS Subheading HS Subheading National Statistic (Combined Nomenclature, TARIC) National Internal

The HS / version 2007 is divided into 21 SECTIONS 97 CHAPTERS 1221 HEADINGS 5052 SUBHEADINGS General Rules I – V, also binding

Determination of the origin in case of „sufficient processing“: - HS-heading of the finished product - HS-heading of the used materials - Exact calculation of the ex works- price per unit (= exact bookkeeping!)

The value of the used materials is their Customs value. So: Important is to check the Customs value carefully! Be aware of the exchange rate!

Some examples for sufficient processing:

Combined criteria - Medicine HS headings 3003, 3004: 1. Tariff change of all used materials But: materials of headings 3003 and 3004 only up to 20% ex-works and 2. Used materials must not exceed 50% of the ex works-price. Combined criteria - Medicine

Example for Exclusion of a heading, exclusion specific imported materials and restriction of imported materials: Heading 1904, I.E. Corn Flakes Question: Is it allowed to use imported mineral salts?

Example for minimum- input of originating materials: HS-heading 2402, … Cigarettes…: At least 70% by weight of the used tobacco must be originating in the country

Notice: Chapter 1 = Live animals! Preparations of meat of Chapter 16: " Manufacture from animals of chapter 1” Notice: Chapter 1 = Live animals! (sanitarian conditions of slaughter houses!)

„Manufacture from yarn“ Clothes and garments of Chapter 61 and 62: „Manufacture from yarn“

Rules for cotton products: 1.Natural cotton fibers, not prepared for spinning HS 5201

2. Cotton yarn, HS 5203 Manufacture from natural fibers, not prepared for spinning

3. Cotton Fabric HS 5208 Manufactured from natural fibers, can be prepared for spinning

3. Jeans HS 6203 Manufactured from YARN

Alternative 1/ for fabrics: Alternative for the fabric: Printing of the raw fabric (Plus at least two finishing steps) But: Value of the unprinted fabric allowed only up to 47,5 % of the ex-works price of the goods Alternative 1/ for fabrics:

Alternative for clothing: Embroidered clothing: Manufacture from unembroidered fabric with a value of not more than 40 % of the ex-works price of the finished good

Insufficient treatment (“simple operation”) in general not accepted as to confer origin. For details see Art. 7 of the Origin Protocol, but see cumulation rules (below).

Alternative criteria: Column 3 of the “List”: Alternative criteria: Why do you need and when should you use the alternative criterion??

Fertilizers Ex - 3105 Standard rule col. 3: Manufacture, in which all materials used are classified within a Heading other than that of the product. However, materials classified within the same heading may be used, provided their value does not exceed 20% of the ex-works price of the product

And the value of all materials used does not exceed 50% of the ex-works price of the product - COMPLICATE -

Alternative Rule Col. 4: Manufacture in which the value of all the materials used does not exceed 40% of the ex-works price of the product Simple and allows products of heading 3205 up to 40%

If the conditions of the „List“ cannot be met, a co-production with a partner state can help in order to get the origin for the finished product. How? By processing materials originating in this or in more partner states. Which possibilities are actually offered by the Free Trade Agreements?

1. Bilateral accumulation 2. Diagonal accumulation Actual models of co-production: 1. Bilateral accumulation 2. Diagonal accumulation 3. Full accumulation, actually only by EU applied in the trade with the Maghreb states, some former ACP states and in the EEA (EU + NO, IS, FO, CH is connected). Principle: Non originating material as first processing step allowed, but all accumulations must lead finally to “List compliance” -.

Bilateral accumulation PREFERENCE AREA A CONTRACTING PARTY B

Conditions for bilateral accumulation 1. Agreement between the partners 2. Processing of originating materials more than insufficient - but less than sufficient processing is allowed - 3. If only insufficient processing: Origin will be retained 4. Non-originating materials have to be processed sufficiently (“List”)

The bilateral accumulation today is integrated as standard rule in all modern European Free Trade Agreements. The „pan-european accumulation“, which covers the bilateral and the diagonal accumulation with more than two involved trade partners, nowadays constitutes the most favourable and most modern system of trade facilitation by Customs technique.

B A D MULTILATERAL/DIAGONAL ACCUMULATION PREFERENCE PARTY AREA PARTY C CONTRACTING B PARTY PREFERENCE A AREA D C CONTRACTING PARTY MULTILATACCUM

Advantages of the Pan-European accumulation No more differentiation between bilateral and multilateral accumulation Insufficient operation can lead to the origin Facilitation and enhancement of regional cooperation

The diagonal accumulation is used - in the trade within EEA (European Economic Area) = EU plus EFTA- states Norway and Iceland, while Switzerland incl. Liechtenstein are associated to the EEA, - in the trade of the EEA with Turkey, - in the trade of the EU and Turkey with the SAP-partners, - within the CEFTA-region

Accumulation in the CEFTA-Origin Protocol: Origin in CEFTA-states, 2 options: Art. 3 of the Origin Protocol: - - Using originating materials only from CEFTA-member states (Art. 3, Item 1), - - Using originating materials from CEFTA-member states, the EU, Iceland, Norway, Switzerland and Turkey (Art. 3, Item 2).

Origin in CEFTA-states a n d in the EU: Art. 4 of the Origin-Protocol: - Using originating materials from any other CEFTA-party or from the EU (Art. 4 (1) of the Origin Protocol) Question: How to be applied?

Conditions for CEFTA-accumulation: Agreements with all other involved partner states with identical rules of origin 2. Origin of the materials and processing of more than “insufficient operation” 3.) Publication in the Official Journal/Gazette ----- same conditions as in pan-european model ----

Principles of CEFTA-accumulation 1. Processing more than insufficient operation: = Origin in this country, Compliance to list-criteria is not necessary! 2. Processing only as insuficient operation: = Origin in the last country only if the added value there is higher than the highest value share of originating materials of the other involved countries 3. Processing of non-originating materials: = Origin only by sufficient working or processing (according to “list criteria”) 4. Unchanged sale of the materials: Goods retain their origin

Example for CEFTA-accumulation Export product: Woven fabric of wool, HS 5112, woven in Albania, export to Montenegro Input: yarn of wool of HS 5107, originating in BiH and Serbia The weaving in Albania is more than insufficient processing. The criterion of fabric is: Manufacture from natural fibre.

Result: The fabric gets Albanian origin Reason: BiH, Serbia, Montenegro and Albania are contracting parties to the CEFTA-2006 Free Trade Agreement. Preference in Montenegro. In case of only insufficient operation in Albania, i,e, only packing of the yarn, the origin goes to the country with the highest input of originating materials. Applied: Art. 3, Item 1 of the Origin Protocol

Same example,but export to the EU: Same result: The woven fabric has Albanian origin and is eligible for preference in the EU, because all involved parties have Free Trade Agreements (actually as Interim Agreements) with the EU and between themselves. Preference in the EU. Applied: SAP-Agreement Question: Yarn from Croatia ??

Example with export to Turkey: Yarn ( HS 5204) - origin: EU goes to Albania for weaving into raw fabric ( HS 5208) - origin: Albania fabric goes to Serbia for dyeing - origin: Serbia fabric sold from Serbia to Turkey Both processings are more than unsufficient operation within the CEFTA accumulation. But: There is no Agreement between Turkey and Albania (but between Turkey and EU and Turkey with Serbia) . No preference in Turkey, non-preferential origin only!

Example with 10%-tolerance and “insufficient operation” Assembling of a ball point pen of HS 9608 for export to the EU - All used parts are of HS 9608: - Cartridge, origin EU, value 2.—€ - Plastic parts, origin BiH value 1,-- € - Clip, origin Montenegro value 1.-- € Ex-works price in Albania 5.-- € Export → Serbia: Origin is EU ( highest share) Applied: Art. 3, Item 2 of the Origin Protocol The “ List” does not apply because of “insufficient operation”! If: Cartridge is of origin BiH: Origin of the pen will be BiH If: Cartridge is of origin Albania: Origin of the pen will be Albania If: Clip is of origin China: No preferential origin for the pen at all - 10%-tolerance rule does not apply: - - “Insufficient operation” is given and - - 10%- tolerance is exceeded

Example with “insufficient operation” only Jeans / Origin BiH ( HS 6203) with EUR.1 go to Albania for packing and export to the EU: Values: Jeans 20.- Euro Packing costs 2.- Euro Plastic bag (Albania) 0.5 Euro Other costs/profit 2.5 Euro Price ex works 25.- Euro Added value in Albania: 5.-- Euro Highest value input = BiH, Origin = BiH Applied: SAP-Agreement Question: If the plastic bag is of origin Ukraine?

No Draw Back rule Art. 15 of the Origin Protocol General background Concerned goods

Example: TV tube Origin : South Korea Processing in Albania for TV-set Value not exceeding 25% of the ex - works price of the TV (HS 8528)

Export of the finished TV to other CEFTA-partner state with EUR.1 1. Duty free access of the Korean TV tube to the CEFTA - market, 2. disadvantage for CEFTA producers against Albanian producers because of customs duties to be paid by the CEFTA producer for his importations of tubes. Question: Exportation to EU-market ?

Additional special rules: Accessories, spare parts Neutral elements Principle of territoriality Direct transport Free zone processing Sanctions

Impact of the rules of. origin on the internal. structure of your Impact of the rules of origin on the internal structure of your company:

Purchase Calculation Production Preferences Sales Marketing Case Worker Preferences Sales Marketing Calculation 2

Formal simplification: - Invoice declaration for all shipments up to 6.000.- € or as „Approved Exporter“ --- in future: „Approved Economic Operator“/AEO: Approved for Security aspects, Customs procedures or both---

Details for the „approved exporter“: - Legal base in the Agreement - Irrespective of the value - Origin declaration by typing, stamping or printing on the invoice or any commercial doc. - Wording must be according to the legal text The declaration must be signed ( principle) - Non-originating goods indicated only on the invoice - Written application and basic audit - Frequent shipments, knowledge of rules of origin - Proper records and stock accounts - Full responsibility by the exporter - Regular audits by the Customs - Withdrawal of the authorization in case of non-compliance

Internal proof of origin of materials: „Supplier‘s declaration“ as part of the contract: Certification for the - - status of non-originating materials - - status of already originating materials - Issued for single shipments and as long term declaration. Responsibility by the manufacturer, auditing by the Customs. Actually formally applied and based in the Agreements within the EEA and between EU, Turkey and the Maghreb states, but informal use is highly recommended.

Thank you for your attention!

Thank you for your attenion Helmuth Berndt Senior Customs Advisor E-mail: berndt_consult@gmx.de Tel.: + 49 30 824 07 657 fax : + 49 30 824 07 658 Mob.: + 49 177 203 7508 LV-CEFTA-Maced-2010 Thank you for your attenion