Rules of Origin Explained: CTH, RVC 40%, De Minimis, Cumulation, Proof

Preferential or non-preferential origin: two different questions

Every rule of origin answers the question "where do these goods come from?", but for different purposes. Non-preferential rules apply to all imports. The World Trade Organization (WTO) lists their uses: deciding whether goods get most-favoured-nation (MFN) treatment, applying anti-dumping duties and safeguard measures, labelling and marking requirements, and government procurement. The EU adds embargoes and sanctions, tariff quotas, trade statistics and public tenders. Non-preferential origin is usually given to the country of the last substantial transformation; in the EU, Article 60(2) of the Union Customs Code.

Preferential rules decide only one thing: whether goods may enter at the lower rate of a free trade agreement (FTA) or a preference scheme. The WTO Agreement on Rules of Origin covers non-preferential rules and excludes rules "related to the granting of tariff preferences", although its Annex II applies basic principles such as transparency to preferential rules too. The WTO programme to harmonise non-preferential rules missed its original three-year deadline, and each FTA writes its own preferential rules. A product can therefore originate under one agreement and not under another, and a proof made under one agreement cannot support a claim under another.

A chamber of commerce certificate of origin or a "Made in" mark shows non-preferential origin and gives no duty reduction. The World Customs Organization (WCO) notes that a certificate is needed only when a trade measure or a preference requires one, and refers traders to the customs administration for procedures. Separate notes on certificates of origin and on country of origin marking cover the non-preferential side.

Wholly obtained or sufficiently processed

Agreements give origin in three ways. Article 3.2 of the Regional Comprehensive Economic Partnership (RCEP) is typical: a good is originating if it is (a) wholly obtained or produced in a party, (b) produced in a party exclusively from originating materials from one or more parties, or (c) produced in a party using non-originating materials, if it satisfies the product-specific rule in Annex 3A and the other requirements of the chapter.

Wholly obtained goods have no foreign input: plants grown and harvested in the party, live animals born and raised there, minerals and other goods extracted there, and the other items the agreement lists. Most manufactured goods qualify instead under (b), when every material is itself originating, or (c), when the non-originating materials were processed enough to meet the product-specific rule.

Some operations never give origin on their own, however much they cost. RCEP Article 3.6 lists these minimal operations, and other agreements have similar lists. If the only work done in your country is one of them, the goods are not originating there, even if a tariff shift seems to happen on paper. Typical minimal operations:

• Operations to preserve goods in good condition during transport and storage.
• Packaging and repackaging, for example filling imported bulk cream into retail jars.
• Simple processes such as sifting, screening, sorting, classifying, sharpening, cutting, slitting, grinding, bending, coiling or uncoiling.
• Affixing or printing marks, labels or logos on the goods or their packaging.
• Simple dilution, simple mixing, simple painting or peeling, disassembly, and slaughter of animals.
• Any combination of these operations.

Product-specific rules: tariff shift, value content or a specific process

For goods made with non-originating materials, the agreement's annex gives a product-specific rule (PSR) for each HS chapter, heading or subheading. HS is the Harmonized System, the international goods classification used by customs. Almost every rule uses one of three methods, alone, combined or as alternatives:

• Change in tariff classification (CTC): each non-originating material must be classified in a different HS chapter (CC, change of chapter), 4-digit heading (CTH, change of tariff heading) or 6-digit subheading (CTSH, change of tariff subheading) from the finished good. Under CTH, a non-originating material in the product's own heading breaks the rule unless de minimis applies.
• Regional value content (RVC): the value added in the party or the region must reach a minimum share of the good's value. In RCEP, RVC40 means a regional value content of no less than 40% calculated under Article 3.5.
• Specific process: the rule names a production process that must take place in the party. Form RCEP, the RCEP certificate of origin, has a separate origin criterion code for one such process, CR (chemical reaction), next to WO, PE, CTC and RVC.
• Alternatives: many rules offer a choice. The RCEP rule for food preparations of subheading 2106.90 is "CTH or RVC40", so meeting either test is enough.

RVC formulas and a worked RVC40 example under RCEP

RCEP Article 3.5 calculates the RVC by either of two formulas. The indirect or build-down formula is RVC = (FOB − VNM) ÷ FOB × 100. The direct or build-up formula is RVC = (VOM + direct labour cost + direct overhead cost + profit + other cost) ÷ FOB × 100. FOB is the free on board value of the good, VOM the value of originating materials, parts or produce used, and VNM the value of non-originating materials: their CIF (cost, insurance and freight) value at importation or, for materials obtained in the party, the earliest ascertainable price paid or payable. Values follow GATT Article VII and the WTO Customs Valuation Agreement.

Other agreements set their own formulas, value bases and percentages; the United States-Mexico-Canada Agreement (USMCA, CUSMA in Canada), for example, has its own origin criteria in Article 4.2 and its own value content methods in Chapter 4. Use the formula and threshold of the agreement you claim under.

Illustration only: the figures below are invented round numbers that show the arithmetic and describe no real product or company. A food preparation of subheading 2106.90 is made in one RCEP party and sold to another; the rule is "CTH or RVC40". One imported flavouring preparation is itself classified in heading 21.06 and is not originating, so the exporter checks RVC.

• FOB value of the good: USD 100.
• Non-originating materials (VNM) at their CIF value when imported: USD 55, including the heading 21.06 flavouring worth USD 20. At 20% of FOB it is above the 10% de minimis limit, so CTH fails.
• Build-down: (100 − 55) ÷ 100 × 100 = 45%. That is no less than 40%, so the good meets RVC40 and is originating, although CTH fails.
• Build-up check with the same invented figures: originating materials (VOM) USD 15 + direct labour USD 10 + direct overhead USD 8 + profit USD 7 + other cost USD 5 = USD 45; 45 ÷ 100 × 100 = 45%.
• If VNM were USD 62, the RVC would be 38% and the good would fail. With the other materials changing heading, it could still meet CTH only if the flavouring were originating in an RCEP party or worth no more than USD 10 (10% of FOB).
• Work out the FOB value even if you invoice CIF or EXW, keep the invoices behind each figure, and recalculate when prices, exchange rates or recipes change. Form RCEP shows the FOB value (box 12) only when RVC is used.

De minimis, cumulation and direct transport

De minimis, also called tolerance, rescues a good that fails a tariff shift rule because of a small amount of non-originating material. Under RCEP Article 3.7 the good still qualifies if the non-originating materials that did not make the required change are worth no more than 10% of its FOB value, or, for goods of HS Chapters 50 to 63 (textiles), weigh no more than 10% of the good. Their value still counts as VNM in any RVC calculation, and the certificate shows the criterion DMI. Other agreements set different limits.

Cumulation lets you treat partner-country materials as your own. Bilateral cumulation counts originating materials from the other party to a two-country agreement; diagonal cumulation extends this to materials from other countries linked by the same or connected agreements, as in the Pan-Euro-Mediterranean (PEM) zone; full cumulation also counts processing done in partner countries on materials that did not become originating there. RCEP Article 3.4 treats goods and materials originating in any RCEP party as originating where they are further processed, and the parties agreed to review extending it to all production and value added within the parties. Materials from non-parties stay non-originating, and you need the supplier's proof of origin or supplier's declaration to count a partner's material.

Direct transport protects origin on the way. RCEP Article 3.15 keeps a good's origin if it is transported directly, or through other countries where it undergoes nothing beyond unloading, reloading, storing or operations to preserve it or transport it, and stays under customs control there. Some agreements word this as a non-alteration or non-manipulation rule. Keep the through bill of lading (B/L) and transit documents. Hubs may also certify the goods: Hong Kong Customs issues a Certificate of Non-manipulation for cargo transhipped to the Chinese Mainland under arrangements including RCEP and the China-Korea FTA; it is not needed when a single through bill of lading covers the journey.

How to read the product-specific rule for your HS code

Product-specific rules sit in an annex to the origin chapter or protocol, ordered by HS chapter, heading and subheading and written in the HS version the agreement uses. RCEP's Annex 3A is published in an HS 2022 version, so look up your code in HS 2022 terms. For agreements with the EU, the European Commission's Access2Markets portal points traders to its ROSA tool in My Trade Assistant to check whether a product meets the rules. Work through the rule like this:

• Confirm the 6-digit HS code of the finished good in the annex's HS version, ideally with the importer's customs broker or an advance ruling.
• Find the line for that subheading or heading; a rule written for a heading covers every subheading under it.
• Decode the rule: WO (wholly obtained), CC, CTH or CTSH (tariff shift), RVC with a percentage (RVC40: at least 40%), or words that name a process.
• Read "or" as a choice: under "CTH or RVC40" either test is enough. Read "and" or "provided that" as conditions that must all be met, and note any exception attached to the rule.
• Apply the chapter's general articles on top of the rule: minimal operations, de minimis, cumulation, packing materials and direct transport.
• Check each non-originating material in the bill of materials against the rule, and record the criterion you will declare (on Form RCEP: WO, PE, CTC, RVC, CR, ACU for cumulation or DMI for de minimis).

Proof of origin and record keeping

Meeting the rule is not enough: the importer must claim the preference with the proof the agreement requires, and customs can deny the claim if the proof is missing, wrong or not supported by records. Agreements use one or more of these forms:

Records prove origin later, when customs verifies a claim after import. Keep the bill of materials, supplier invoices and declarations, production records, cost calculations and transport documents. RCEP requires exporters and producers to keep them for at least three years from the date the proof of origin was issued, and importers for at least three years from importation; national law can require longer. Under RCEP Article 3.26 customs disregards minor errors that create no doubt about origin; do not count on this for a wrong HS code or criterion.

• Certificate from an issuing body: Form RCEP, in English, with a unique number, signature and seal, valid for one year and issuable retroactively up to one year after shipment; or the EUR.1 or EUR-MED movement certificate of many EU agreements, supplied in the UK by chambers of commerce or the Institute of Chartered Shipbrokers.
• Exporter's own statement: a statement on origin by an exporter registered in the EU's Registered Exporter (REX) system, or by any exporter for consignments up to EUR 6,000 (ex-works price); an origin declaration on the invoice, which UK exporters may need approved exporter status to make above GBP 5,400, depending on the agreement; or an RCEP declaration of origin by an approved exporter.
• Certification in any format: under USMCA, the importer, exporter or producer completes a certification with nine minimum data elements, on the invoice or any other document. CBP no longer accepts the old Form 434, and none is needed for US commercial imports whose originating goods are worth USD 2,500 or less.
• Importer's knowledge: under the EU-Japan, EU-New Zealand and EU-UK agreements the importer may claim on the basis of information it holds, and Japan accepts an importer's declaration of origin under RCEP.
• Low-value waiver: RCEP needs no proof of origin when the customs value is no more than USD 200 or a higher amount set by the importing party, unless the import is part of a series split to avoid the rules.