Criteria for Defining the Origin

The determination of origin does not present special difficulties when the product is “wholly obtained or produced” in one State. But it has become increasingly complex as a result of the globalisation of the world trade and the activity of pannational companies. Producers may source the components from different countries or may manufacture the product in subsequent stages in different countries. In this case problems arise in determining the spot of production.

A product originates in a particular country either if it is “wholly obtained and produced” in its customs territory or if it has undergone “substantial transformation”.

The substantial transformation method states that a good originates from the last country where it emerged from a given process with a distinctive name, character or use. It requires that the product has been transformed into a new and different article.

It means that exporter, importer or producer are requested to furnish a great deal of factual information to prove substantial processing. What is to be determined is whether the change, manufacturing or processing is of such a substantial nature to justify the conclusion that the article is a product of the country where this change took place. A change of use is usually considered as a determinant factor if the processing or manufacturing transforms the product from one that is suitable to one use to one applicable for another use or for multiple uses. A processing operation that merely completes an article normally does not constitute a change in use sufficient to substantially transform the article.

Substantial transformation can be basically defined according to three criteria: the “value-added “ criterion, the “ process” criterion and the “change in tariff classification” criterion.

- The value-added or ad valorem percentage test: it defines the degree of transformation required to confer origin to the good in terms of minimum percentage of value that must come from the originating country or of maximum amount of value that can come from the use of imported parts and materials. If the floor percentage is not reached or the ceiling percentage exceeded, the last production process will not confer origin.

The value of the goods exported is normally calculated using the cost of manufacture and the price at exportation: the value of the constituent materials might be established from commercial records or documents. Two problems arise: firstly, border-line cases, determining a slight difference above or below the prescribed percentage, because a product failed to meet origin requirements; secondly, elements such as the cost of manufacturing or the total cost of the products are usually difficult to assess and may have different interpretations in the country of exportation and in that of importation. This criterion is applied by Australia, Canada, New Zealand and the United States and also by Bulgaria, the Czech Republic, Hungary, Poland, the Russian Federation and Slovakia. The latter group of countries has fully harmonised the criterion applied.

- The specified process tests of origin: it confers origin to the product based on the results of tests it must undergo. This criterion is applied by the European Community, Japan, Norway and Switzerland.

- The change in tariff classification method: it is the most widely applied criterion. It determines the origin of a good by specifying the change in tariff classification of the “ Harmonised System of Tariff Nomenclature” (HS) required to conferring origin on a good. As a general rule, imported materials, parts or components are considered to have undergone substantial transformation when the product obtained is classified in a heading of the HS at the four-digit level which is different from those in which the non-originating inputs used in the process are classified.

However, since sometimes the CTH rule is not able to determine the origin of a product, preference-giving countries have drafted a list, the Single List, of working or processing to be carried out in non-originating inputs in order that the final products may obtain originating status.