rules of origin

The Potential Impact of Rules of Origin Changes After Brexit

July 30, 2018 in Distance Sales, Ecommerce Tips, News, Partners, VAT

Guest Article: The Potential Impact of Rules of Origin Changes After Brexit

Exporting to the EU in recent years has been a relatively easy task due to the freedom to move goods within the trade bloc. However, with Brexit on the way, there is a strong chance that many of the conditions by which goods are moved between the UK, the EU and third-party countries will change. For instance, how will ‘rules of origin’ impact after Brexit and how could they be affected once the UK starts agreeing new trade agreements with its other trade partners beyond the EU?

To explain, rules of origin are how customs authorities classify where an exported product has originated. The rate of duty that importers are required to pay when bringing goods into a country depends on three elements – the type of goods (which is classified by a ‘tariff code’), the country the goods are being imported into, and where they are judged to have ‘originated’ from – i.e. the origin.

So if a UK company is importing certain goods from France, if the goods can be proven to have come from France, they won’t have to pay duty on those goods because they come from within the EU (and would therefore have an EU origin); if the goods come in from China, then a certain import duty may need to be paid according to what the good is, because an agreement isn’t in place to remove or reduce those duties for that certain type of good, for example a Free Trade Agreement.

The rules proving origin for the importation into the UK are currently defined within the EU relationship with WTO. UK businesses should understand the rules the EU set in order to classify the origin of the goods they are exporting or importing so that duty can be reduced in some cases, depending on the tariff code and whether trade agreements are in place between the EU and the third party country.

The EU does have some trade agreements with third party countries – Canada for instance. If goods are from Canada, and the Canadian exporter provides proof that the cargo is from Canada, then there could be a reduction or removal of duty to be paid by the UK importer for certain goods as specified by the trade agreement. Where agreements are in place between the EU and other markets, the exporter will need to check if their exported goods qualify for any preferential treatment upon importation into that market, which is what the tariff code system allows them to do.

There are 2 main categories of origin for traders to consider:

  • Goods wholly obtained or produced in a single country
  • Goods whose production involved materials from multiple countries

Unsurprisingly the second category has more complex criteria to consider when determining its overall origin. To be considered are the origins of all the component materials, the country in which the majority of the production or assembly took place, and the value added in each country where work or processing has taken place on the product.

Obviously a significant proportion of assembled goods going out and into the UK have complex manufacturing processes relying on components sourced from around the world, with most companies relying on globalised supply chains to some extent. Many businesses will be dealing with products that are manufactured entirely in the EU, but in cases where components are manufactured in the EU but assembled in another country, say, the origination may be judged to be in the country where the goods are assembled, with the duty to be paid then dependent on the trade arrangement between the countries of assembly and importation.

NAFTA very generously uses 50%. Typically, around 65% of the value added to a product needs to be proven to have come from the country you are looking to prove origin from.  For instance 65% of the manufacturing of a car – in terms of materials, production, assembly and work – would need to be proven to have come from Canada for it to be viewed as a car with Canadian origin. Within the EU, with EU origin rather than UK origin required for duty payable for importation into the Canada to be reduced, 50% of this manufacturing process would need to be proven to be from within the EU (not the UK).

Brexit could well change this, with UK origin separate (or independent) from EU origin. Given the complexity of many of the UK’s businesses supply chains, changes to the rules by which origination is proven and the duty rates payable per origin will be significant.

Consider a good that previously would have required to have had 50% of its value add come from within the entire EU for EU origin to apply and duty to be reduced. If UK origin is required for this duty to be reduced, in a hypothetical trade deal between the UK and Canada post-Brexit,  then value added from within the EU would detract from the UK’s value add, making it harder for that good to be classifiable for a duty rate cut via UK origin. For UK companies who have manufacturing processes that are deeply embedded within EU supply chains, this could preclude them from using origination as a way of removing or reducing duty payable when their goods are imported into Canada, say.

So in summary, what was once European value-added will now be split into UK and EU value-added, making it harder to reach the value-added threshold to export with duty reductions through origin, unless businesses domesticate their supply chains to some extent. Otherwise, should companies not be able to alter their manufacturing process in order reach a 50% UK value-added threshold, they may have to pay duty they previously would not needed to have paid.

We at the Institute of Export & International Trade are keen to raise awareness of the potential impact that the UK’s exit from the EU will have for our exporters. Of course, in time, Brexit may well free the UK to sign trade agreements with partners around the world, allowing for the proof of UK origin to be used to reduce duty into more countries for more goods than ever before. In the meantime, many of the UK’s businesses will need to reassess their export strategy with EU origination potentially no longer being something they can take advantage of.

This is one of the many impacts we factor into our training for businesses looking to increase their exports, and is a prominent topic in our Post-Brexit Planning Workshop. We also host four bitesize VAT modules from SimplyVAT which are a fantastic resource for companies unfamiliar with international rules and regulations around taxation.

Whether it’s tax, origination, shipping, insurance, or marketing, businesses need to be on top of all these key issues in trade, particularly with Brexit likely to significantly alter the future conditions by which they will be able to trade overseas.

This was a guest article by William Barns-Graham: Chief Content Editor at The Institute of Export & International Trade

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