Fundamentals of Preferential Rules of Origin 5th Edition MODULE 5. Certification and verification of origin
Fundamentals of Preferential Rules of Origin. 5th Edition
Module 5
Author: Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector (INT) Course coordinators: Inter-American Development Bank (IDB) (www.iadb.org), through its Integration and Trade Sector, the Institute for the Integration of Latin America and the Caribbean (www.iadb.org/en/intal/), and the Inter-American Institute for Economic and Social Development (INDES) (www.iadb.org/en/indes/). Module authors: Jeremy Harris, Specialist at the Inter-American Development Bank, Integration and Trade Sector, and Rafael Cornejo, Consultant at the Inter-American Development Bank, Integration and Trade Sector. Teaching and editing coordination: The Inter-American Institute for Economic and Social Development (INDES) (www.iadb.org/en/indes/), jointly with the Economic and Technological Development Distance Learning Centre Foundation (CEDDET) (www.ceddet.org)
5th Edition 2017
Publication property of the Inter-American Development Bank (IDB). All rights reserved. Any partial or total reproduction of this document must be reported to: BIDINDES@iadb.org The opinions expressed herein are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank.
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Table of contents
Index of Figures .......................................................................... 5 Introduction ................................................................................ 6 Overall Objectives ........................................................................ 6 Learning oriented questions .......................................................... 7 Unit I. The Evolution of the Certification of Origin ............................ 8 Objective .................................................................................... 8 I.1. Evolution of the Certificate of Origin ...................................... 8 Unit Summary ........................................................................... 16 Unit II. Origin Certification Methods or Systems ............................ 17 Objective .................................................................................. 17 II.1. Origin Certification Methods .............................................. 17 Unit Summary ........................................................................... 21 Unit III. Advantages and Disadvantages of Origin Certification Methods .................................................................................... 21 Objective .................................................................................. 21 III.1. Advantages and Disadvantages of Origin Certification Methods ............................................................................................. 22 III.2. Common Features of Both Systems................................... 29 III.3. Self-Certification by Importers.......................................... 31 Unit Summary ........................................................................... 37 Unit IV. Certification Innovation .................................................. 38 3
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Objective .................................................................................. 38 IV.4. Changes and Innovations in Origin Certification .................. 39 Unit Summary ........................................................................... 44 Unit V. Digital Origin Certification ................................................ 45 Objective .................................................................................. 45 V.1. Digital Origin Certification: Concept and Features ................ 46 V.2. Impacts of Origin Certificate Digitalisation ........................... 51 Unit Summary ........................................................................... 55 Unit VI. Origin Verification .......................................................... 56 Objective .................................................................................. 56 VI.1. Origin Verification Concept ............................................... 57 Unit Summary ........................................................................... 65 Bibliography .............................................................................. 66
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Index of Figures
•
Figure No. 2.1. Certification Process Methods
•
Figure No. 2.2. Origin Certification Methods
•
Figure No. 3.1. Certification by Governments or Private Entities
•
Figure No. 3.2. Self-Certification by Exporters
•
Figure No. 3.3. Certification by Importers
•
Figure No. 4.1. Variations in Certification Systems
•
Figure No. 5.1. A Simplified Illustration of the Digital Certification of Origin Process
•
Figure No. 5.2. Origin Certification and Verification
•
Figure No. 6.1. Trade Subject to Verification of Origin
•
Figure No. 6.2. Context of Origin Verification
•
Figure No. 6.3. Origin Verification Subsequent to Importation
•
Figure No. 6.4. Verification and Risk Analysis
•
Figure No. 6.5. Verification of Origin: Aspects to be Considered
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Introduction After discussing origin determination criteria and the treatment of inputs that may be used in goods production and trading processes, this module considers the origin determination documents and procedures
most
commonly
established
by
preferential
origin
regimes.
Overall Objectives This module elaborates on two major procedures of origin regimes: origin certification and verification. This module pursues the following objectives: •
To learn about origin certification methods currently included in Caribbean and Latin American agreements.
•
To describe their advantages, disadvantages, and impacts.
•
To
identify
actions:
Digital
Certification
of
Origin,
and
Authorised Operator. •
To become familiar with changes and innovations regarding certification of origin.
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Learning oriented questions
•
What is a certificate of origin?
•
What
are
the
most
significant
arguments
regarding
self-certification and third-party certification? •
What are the most common origin certification systems?
•
What are the advantages and disadvantages of certification by governments/entities and of self-certification by producers and exporters?
•
What regulatory framework governs verification processes?
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Unit I. The Evolution of the Certification of Origin
Objective To define origin certification and to introduce the subject by briefly describing the evolution of the aspects and agreements that wielded the most influence on the certificate issuance process.
I.1. Evolution of the Certificate of Origin
The certificate of origin is a document whereby the issuer reports to competent authorities and economic operators that a product meets the conditions set forth in an agreement for such a product to qualify as an originating good. The issuer may vary and each agreement establishes who is responsible or authorised to issue the certificate of origin. The early agreements entered into by Caribbean and Latin American countries placed this responsibility on the governments, which, in turn, could delegate it to third parties (certifying entities).
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The purpose of a certificate of origin for the goods traded under the umbrella of an agreement is similar to that of the passport used by an individual when travelling to another country. Indeed, the information provided by the passport allows the competent migration authority to identify and register a citizen entering into another country. The certificate of origin includes data and informs the importing country’s customs authorities and economic operators about the production conditions of a good manufactured in another country. This information helps to ascertain the circumstances of the good’s entry into the importing country, and determine its tariff treatment; it is also relevant to procedural rules and other applicable foreign trade regulations. During the 90s the North American Free Trade Agreement (NAFTA) introduced a significant change in the certification process used by certifying entities in Latin American countries. The change consisted
in
delegating
the
certifying
power
to
exporters
(self-certification). During the second half of the 90’s, Mexico spread self-certification by including it into its agreements with Nicaragua, Chile, Costa Rica, and the North Triangle; Canada echoed such efforts in its agreements with Chile, Peru, Colombia and Panama. Mercosur, in turn, ratified the system of certifying entities in its agreements with Bolivia and Chile. In a nutshell, the arguments of those who advocate self-certification are based on: •
its zero cost, since certifying entities are not needed, and, in connection with this,
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•
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the low reliability of some entities regarding their duty to check the information they are certifying, and
•
the speed and facilitation of the system, which, as it needs no participation from a third party, allows the certificate to be quickly issued.
On their part, the advocates of certifying entities advance the following arguments: •
The cost of issuing a certificate is not significant, in comparison with the amounts involved in export transactions.
•
Speed
and
facilitation
are
being
achieved
with
the
introduction of computerised systems for certificate issuance. •
The advisory service on origin-related matters these entities provide helps to reduce exporters’ errors and facilitates the dissemination of origin requirements.
•
Certifying
entities
control
the
truthfulness
of
exporters’
statements, thus preempting the issuance of false or fraudulent certificates. •
At the same time, these advocates acknowledge the need to improve the system of penalties for entities failing to discharge their duties appropriately.
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Up until early in the last decade, it seemed that the above described were the only possible alternatives. However, free trade agreements show that one of the most dynamic and changing aspects in terms of origin is precisely that of certification. In fact, the most significant change was introduced by the United States, which made a substantial innovation in its agreements with Jordan, Singapore, and Chile, by making certificate issuance the importer’s responsibility; the same method was applied in its subsequent agreements (CAFTA-DR, Colombia, Panama, and Peru). For its part, in the agreement executed with the European Union, Mexico
continued
to
resort
to
certifying
entities,
which
the
Community strongly promoted and widely used. In its agreement with Uruguay, certification remains in the hands of the certifying entities. A similar pattern of alternation between certification by entities and self-certification is found in the agreements entered into by Colombia and Peru, which more recently started their trade liberalisation process with other countries in several continents. Chile, one of the most flexible countries in the Americas when it comes to origin certification – it has implemented all systems – introduced an innovative combined method in its agreement with South Korea by drafting Article 5.2, Sections 4 and 8, of the agreement as follows:
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4. Each Party shall: (a) require an exporter in its territory to complete and sign a Certificate of Origin for any exportation of a good for which an importer may claim preferential tariff treatment on importation of the good into the territory of the other Party; (b) provide that where an exporter in its territory is not the producer of the good, the exporter may complete and sign a Certificate of Origin on the basis of: (i) its knowledge of whether the good qualifies as an originating good; (ii) its reasonable reliance on the producer's written representation that the good qualifies as an originating good; or (iii) the Declaration of Origin referred to in paragraph 1. 5. The Declaration of Origin referred to in paragraph 1 should be completed and signed by the producers of the good and provided voluntarily to the exporter. 8. Each Party shall make all efforts to establish, according to its domestic legislation, that the Certificate of Origin completed and signed by the exporter is certified by competent governmental authorities or the body empowered by the government.
In
short,
this
agreement
requires
the
exporter
to
sign
certificates of origin, and leaves it to each country to decide whether
or
not
to
involve
their
certifying
entities
or
governments in the process. With such an open, non-mandatory wording, the agreement makes it possible for parties to use different certificate issuance methods.
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As
already
mentioned,
in
Latin
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American
intra-regional
and
extra-regional trade agreements, the negotiations of origin regimes and their content have evolved over time. The point marking the beginning of the most significant changes was clearly the execution of the agreement between Canada, United States and Mexico (NAFTA), which first introduced, among other things, innovative origin determination and certificate issuance systems, and detailed sanction, origin control, and verification procedures.1 Although it is true that many agreements subsequent to NAFTA incorporate some of its rules and regulations on origin, and even have marked “NAFTA-like” features, it is no less true that other subsequent
agreements
improve
and
clarify
such
rules
and
regulations in order to have them conform to the regional productive reality, and to assist in their application and enforcement. This development could be simply summarised as a process seeking to: • attain greater liberalism as to product requirements, and a more restricted use of exceptions to changes in tariff classification; • establish rules and regulations that can be verified with available resources; • create origin administration and verification units;
1
Other countries that usually applied the LAIA’s general system, or even had an independent origin regime, also began including some requirements, facilitative measures and procedures inspired by, or similar to, some of the NAFTA clauses, without this resulting in the abandonment of a quite different treatment that was a substantial characteristic of their regime. Such is the case of origin regimes in the Andean Community and MERCOSUR.
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• combine origin determination accuracy and truthfulness with trade facilitation; and • introduce digital certification of origin into their trade agreements. The following table outlines the changes in some features of various agreements. The table compares agreements in force in the 60s, 70s and 80s, with those in the 90s and thereafter, particularly concerning origin.
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Past negotiations
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Current negotiations
•
Imprecise texts of a general nature
•
Precise highly-detailed texts
•
Few disciplines
•
Numerous disciplines
•
Focus on tariff levels
•
Texts include various market access variables
•
Quick origin negotiation
•
Hard origin negotiation
•
Limited number of origin rules
•
Vast sets of rules
•
Inaccurate origin regimes
•
Accurate origin regimes
•
Focus on certification process
•
Relative importance of the certification
•
Rules of origin applicable to basic production processes
•
Supply concentrated in few suppliers
•
Loose implementation:
a) Lack of penalty regimes b) No verification mechanisms c) Static certification procedures d) Certificate of origin issuance procedure: manual and written
process •
Complex production processes and accurate rules of origin
•
Globalised sources of supply
•
Focus on implementation process:
a) Clearly-defined breaches and penalties b) Some verification mechanisms are set out c) Dynamic certification procedures d) Certificate of origin issuance procedure: manual and written
It is worth noting that in most agreements, despite these changes, the advances in IT and the desire to go paperless, certificates of origin are still issued, with very few exceptions, practically as they were in the 1960s. 2
See some changes recently introduced in a few agreements in Digital Electronic Certification. 2
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Unit Summary
This unit presented the concept and purpose fo the certificate of origin, the evolution that has been observed in its application in agreements in Latin America. Along the way, several agents were identified that are involved, directly or indirectly, in the certification process.
These include the producer, the exporter, the importer,
certifying entities, and the customs services of the exporter and the importer.
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Unit II. Origin Certification Methods or Systems 3
Objective This unit describes the various origin certification systems used in Latin America and the geographical distribution of the activities related to issuance of certificates and requests for preferences.
II.1. Origin Certification Methods Certification is one of the elements of origin regimes to have undergone changes throughout time, since agreements have modified how certificates are issued and signed. From the very beginning, two systems have co-existed.
3
In this module, the terms “systems” and “methods” will be used interchangeably.
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The first system entails a certification by third parties not involved in the transaction, whose only function is issuing the certificate. The second system comprises a certification by the operators involved in the transaction; a method usually called “self-certification.� The vast majority of trade agreements apply either of these systems. The third-party method includes two options: either governments will be directly responsible for this task or they will delegate this role to business chambers or organisations. These variations arise from the trade agreements themselves. In fact, trade agreements including third-party
certification
responsibility
to
issue
usually the
impose
certificates,
on
governments
but
they
also
the allow
governments to delegate this task to private -sector entities. Oftentimes
the
certification
responsibility
initially
rests
with
governments, which can fulfil this duty rather easily when their preferential trade is not too large. As preferential trade increases its share of overall trade, the number of certificates issued also increases significantly resulting in a growing demand for additional human and technological resources. Given their inability to promptly meet these needs or because they consider
that
origin
certification
is
not
their
province,
most
governments end up delegating this task in part or in full to private-sector entities.4
There are some exceptions to this statement, as in the case of Colombia, where origin has always been certified by government agencies. 4
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In the case of private entities, neither this workload nor the need for additional resources is a problem, since they usually charge a reasonable fee to issue and sign the certificate. This allows them to bear these costs and even make a profit, which in turn enables them to take on the costs of other activities. Self-certification by operators also includes two alternatives. In the first case, exporters are required to perform this task, while in the second the responsibility for origin certification is given to importers. Trade negotiations show that some countries have a clear preference for one of these systems. As already mentioned, Africa, the European Union, MERCOSUR, and other LAIA countries opt for third-party certification, whereas the US, Canada, and Central America prefer self-certification.
Colombia,
Chile,
Mexico,
and
Peru
use
both
systems.
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Figure No. 2.1. Certification Process Methods
Government and/or private entities
• Agents from different countries involved in preference request and certificate issuance. • Certificate issued in advance.
Self-certification by producers and exporters
• Agents from different countries involved in preference request and certificate issuance.
Self-certification by importers
• Process focused on importing country.
Source: Elaborated by author
Figure No. 2.2. Origin Certification Methods
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Source: Elaborated by author
The text in red shows instruments with limited use and in the process of implementation.
Unit Summary
This unit presented an overview of the different systems used for the issuance of preferential certificates of origin.
The two broad
categories are those systems where the certificate is issued by an entity that is not party to the commercial transaction (third-party certification) and those where the certificate is issued by a person that is interested in the transaction, whether the producer, exporter, or importer.
Unit III. Advantages and Disadvantages of Origin Certification Methods
Objective To examine the advantages, disadvantages and impacts of each origin
certification
method
and
their
variants,
as
well
as
implementation challenges and the objections raised against them.
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III.1. Advantages and Disadvantages of Origin Certification Methods
Intensive use of both systems reveals that each has its pros and cons and that, on many occasions, the choice is based on different reasons, such as the legal or economic framework, cultural aspects, or just custom. What also becomes apparent is that, in countries where both systems are used, exporters and importers face no particular obstacles for doing business and no special preference is necessarily observed.
Figure No. 3.1. Certification by Governments or Private Entities
Source: Elaborated by author
Certification by entities or governments has advantages and disadvantages, depending on how it is applied. Its benefits include: 22
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• Control and reliability: Having a third party participating in the certification process renders information more reliable and dependable, i.e. data are harder to falsify. • Advice: It offers the possibility of obtaining not only the certificate but also expert advisory services relative to rules of origin requirements, often not too readily available. • Accuracy: Information review and, if necessary, correction by the certifying entity or government allows exporters to avoid errors that may result in the loss of tariff preferences for their products and, in certain cases, additional penalties on certain operators. In some countries, however, this certification system has operational deficiencies, which, in extreme circumstances, may even offset its advantages. Some of those deficiencies include: • Governments do not always have a system for monitoring the operations of certifying entities; on occasions, their surveillance systems boil down to the provision of lists including issued certificates and some related data. For surveillance to be effective certain information about the issued certificates must be available and governments must verify on-site the accuracy of the data declared in some certificates. This governmental review is aimed at randomly controlling the work done by the certifying entity. This is not always done and, although it might be argued that in such cases it is the governments of those countries that are noncompliant,
it
is
true
that
some
certifying
entities
take
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advantage of this governmental laxity to issue fraudulent or inaccurate certificates.
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• Sanctions are not always available or imposed to punish improper behaviour by certifying entities. The experience in some Latin American countries that have been using this certification method for more than 50 years shows that, in this period, less than 1 %5 of entities had their issuing authority revoked. This low percentage of punished entities might be attributed to the system’s efficiency. Yet, comments circulate about the existence of entities selling signed blank certificates of origin in certain countries. • The vast majority of authorised certifying entities are serious and responsible. They fulfil their duties properly. However, the lack of an appropriate system of sanctions further brings about another unwanted circumstance. On occasions, law-abiding entities will not report infringements of which they are aware, merely because they believe that violators will go unpunished or out of team spirit. This impunity often undermines a country’s entire certification system, as all certifying entities are unfairly considered equally dishonest.
The imposition of other types of more benign sanctions –such as revocation of signature authority– provided for in agreements is not frequent either. 5
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• “Bureaucratization” of certificate issuance may also negatively affect the system of monitoring and punishing entities. This happens
when
certifying
entities
are
paid
for
by
an
automatically rendered service, without verifying or controlling the data furnished by the applicant. Under this distorted operation, certification becomes a mere toll, whereby the certificate is obtained while the true purpose of the service is missed. Finally, the claims that the certification process is costly and time-consuming are, to a certain extent, unfounded; efforts are being made to correct distortions, if any. In many developing countries, the cost of a certificate is less than 20 dollars, an insignificant amount when compared against the volumes involved in most exports and, particularly, when considered vis-à-vis the tariff benefit it provides and the enhanced security that obtaining certification from a recognised certifying entity gives investors.6
Sometimes cases of high costs of certificate issuance are mentioned when, in fact, in those cases goods are certified to be originating even when they do not meet the necessary requirements. Such operations are neither right nor lawful and, hence, their cost should not be considered. 6
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As to time, it is true that manually issuing origin certificates bearing hand-written signatures increases costs and takes longer in terms of processing the certificates, securing the signatures and obtaining the certificate. However, the advent of the digital certificate of origin has
represented
an
enormous
step
towards
process
streamlining. It has reduced to practically zero the cost of issuing each certificate and, as the entire process is computerised – including signatures – processing times have dropped drastically. On the other hand, the presence of two digital signatures renders alteration impracticable and no signer can repudiate it. Self-certification by exporters: In recent years this modality has become increasingly adopted by agreements involving the countries in the Western Hemisphere weighing more heavily with world trade, such as the United States and Canada. Self-certification is characterised by: Involving exporters in all aspects of the origin declaration process. Exporter participation is important particularly because, on occasions, the producer is unaware of its good’s final destination, and the importer has no contact with the good’s manufacturer. In this context, the exporter serves as the liaison between both operators. Being authorised as it is to sign the certificate, the exporter protects its participation and prevents the producer and the importer from contacting each other directly, thus bypassing the exporter which actually generated and enabled the exchange.
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Figure No. 3.2. Self-Certification by Exporters
Source: Elaborated by author
•
Expedites the certificate issuance process, as the document may be unilaterally filled out by any operator on the export side.
This
is
an
advantage
provided
there
is
fluent
communication between the producer and the exporter. This system, however, presents certain challenges: •
It increases the distance between the issuer of the certificate and the data source. Clearly, the only operator having accurate data about a good’s originating or non-originating status is its producer or manufacturer.
•
For cases where the producer or the exporter issues a certificate falsifying the origin of a good, trade agreements often include an article reading approximately as follows:
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“a false certification by an exporter or a producer in its territory […] shall be subject to penalties equivalent to those that would apply to an importer in its territory that makes a false statement or representation in connection with an importation, with appropriate modifications.” Experience shows that on occasions some countries’ customs regulations do not always provide for these violations by exporters. The absence of sanctions serves as an incentive or stimulus for exporters, in their zeal to close a deal, to erroneously declare a certain product to be originating. •
The exporter of a good, unless it is also its manufacturer, is often a service company. In these circumstances, if the exporter commits an origin violation, it can be “recycled,” relocated or, relatively easily, turned into a new firm and continue to do business under a different name.
This process is much more feasible and less costly than it is for the manufacturer of a good, and even for the importer which consumes or uses the traded product, since they are more established and will not find it that easy to create a new firm and relocate their facilities.
III.2. Common Features of Both Systems
Although these are two different systems, both present some similar features impacting on or characterising the origin certification and tariff preference application processes.
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In both systems the producer is authorised to sign the certificate of origin7. Of all the operators involved in an export/import transaction, only the producer knows what inputs the good contains, what their sources are, and what production processes were carried out to manufacture the good. In this context, no one is in a better position or has more accurate information than the producer about the data required for signing a certificate. The producer should also be able determine whether inputs meet the origin requirements established in the agreement under which the certificate is being issued and signed. This aspect should not be underestimated when analysing the pros and cons of the different origin certification methods. Additionally, in the event that a certificate is issued and the producer infringes any requirement, it has almost no grounds to justify its error. In both methods, for the exporter to be eligible for a tariff benefit, it must obtain a certificate conforming to the specific requirements of each FTA and submit it to the appropriate customs authorities. Certification and application for a tariff preference take place in different countries, since origin declaration and certificate issuance are carried out in the exporting country and the application for a tariff preference is submitted by the importer to the competent authorities in the country of importation.
In the self-certification scheme, if the exporter is not the producer of the good, certification by the producer is VOLUNTARY, provided VOLUNTARILY by the producer to the exporter. 7
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In general, under the FTAs using these two systems, explicitly or implicitly, certificates must be issued prior to the importation. In some
cases, this requirement
even establishes the
conditions
regarding the issuance date these certificates must bear in relation to the dates of other documents to be submitted in a foreign trade operation. These common features of both methods are important for they impact on the responsibilities of the operators involved in verification processes, as will be discussed below.
III.3. Self-Certification by Importers
Under the most recently adopted system known as self-certification, importers are allowed to issue certificates of origin. This newly authorised operator is an innovation introduced by the United States in agreements entered into after NAFTA. All US agreements with Latin American countries – save for Mexico – and even with other intra-regional partners, include this new issuer. This clearly shows that the issuance of certificates of origin is an unsettled issue for some countries; this has also triggered a debate regarding the advisability of having a new issuer. Like the previously discussed systems, this one also has its upside and downside. Being more recent, the new system presents certain difficulties and a greater lack of awareness regarding its operation and attending responsibilities.
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Figure No. 3.3. Certification by Importers
Source: Elaborated by author
•
The advantage of certification by the importer is that the claim for a tariff benefit and the statement that the product is originating are made by the same person.
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This means that the statement of product compliance with origin requirements and the claim for the resulting benefit are made by the same operator in a single country. Within this context, importers cannot claim the benefit if they are not certain of the product’s originating status; in any case, declaring that goods are originating and claiming the related benefit is done at the importer’s risk8. •
In return, merging roles in the importer strengthens the part played by Customs in the importing country, as the processes of submitting a statement of origin and claiming a preference are at the hands of operators under its direct control, in the country under its jurisdiction, and are thus more easily accessible.
•
There are also economic and cultural aspects that may facilitate implementation
of
this
certification
system.
Indeed,
the
information gathering process to be completed by the importer to ascertain that the product is originating becomes simpler when trade transactions are conducted between related companies. •
Another factor facilitating implementation is of a cultural nature. In certain economic systems it is assumed that statements made by those accorded a benefit have greater value or credibility than others. In these cases, authorities assume that applicants are telling the truth and grant the benefit on the basis of the statement made, which is regarded as truthful. These systems are also distinguished by the fact that, if the statement is false, severe and not easily escapable sanctions are imposed.
This system works in areas where sales between the exporter in one party to an FTA and the importer in another party to that same FTA are made on a duty-paid basis - in this arrangement, the exporter of record in the exporting country is also the importer of record in the importing country. 8
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This
interplay
between
truthfulness,
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access
to
a
benefit,
investigation, and effective administration of sanctions in the event of a false statement is vital for an adequate implementation of the system. However, certification by the importer is not without disadvantages or imbalances. These disadvantages may stem from the following: •
Difficulty to access information: In many trade transactions, for different reasons, importers do not possess origin information on the goods they are purchasing. This may be because o the goods are purchased from a distributor which does not have that information, o the importer has no contact with the manufacturer or producer of the goods, or o the exporter refuses to sign the certificate on the grounds that the importer is authorised to do so. o In case information cannot be obtained, what will the importer’s reaction be? Will it abstain from claiming the preference and pay the regular tariffs, or run the risk of issuing a certificate without grounds?
•
Limited
purchasing
power:
Purchases
by
importers
from
developing countries may represent very little of their suppliers’ sales volume, particularly if the suppliers are from developed countries. Within this context, the service that exporters offer or are willing to provide to importers may be limited.
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•
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Relative difference of export markets: The significance of the comments made in the preceding paragraph differs when the analysis is made from the standpoint of the market volume of a developed
country
to
which
goods
are
exported,
and
the
importance that that market volume may have for a manufacturer from a developing country. The purchase volumes of developed countries are usually quite significant when compared against the production volumes of companies located in a developing country. Such a large market share makes exporters from developing countries pay more attention to their customers’ requirements and be more willing to gather information on the origin of their goods and to issue origin certificates. Finally, this system presents certain difficulties depending on the size of the importing country’s economy, its tax and customs rules and regulations, and the implementation of the agreement itself. In this connection, the following may be noted: •
Impact of the imports: Import transactions with fraudulent origin have a greater impact on the industries of small, less open countries than on the industries of bigger countries facing more international competition.
•
Tariff policies: Effective tariffs applied in more open economies or under the Most Favoured Nation (MFN) tariff treatment reduce or dilute, from the tax collection point of view, the impact of imports whose origin has been misstated.
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•
Importer
vulnerability:
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Authorising
importers
to
issue
certificates and eventually prove origin requires information if this method is to be applied properly. Indeed, being adequately informed of the implications of this procedure and, particularly, of the
information needed
to issue
a certificate
is essential.
Assuming that, before implementing this method, importers or even customs agents are familiar with the subject of origin or, more than that, are aware of the mechanisms, data and documents required to prove goods to be originating, is a frequent mistake when implementing an agreement. Failing to take the necessary action with respect to these new players and the new activities
resulting
from
this
innovation
risks
the
correct
implementation of the agreement and places importers in a situation
of
uncertainty
or
vulnerability
against
the
other
operators and, eventually, the authorities involved. •
Arbitrariness
of
the
importing
country’s
customs
administration: Closely related to the previous point is the uncertainty arising from the importing country’s customs authority failing to develop guidelines for proving origin. Lacking procedures leads to arbitrariness on the part of the customs agents involved in
origin
verification.
It
may
even
lead
to
the
incorrect
implementation of the agreement and the powers granted to the parties for proving origin when releasing the goods. In sum, whatever the certification system chosen, proper operation of the system is essential. Proper operation requires suitable rules and regulations, and an adequate set of sanctions providing for, and punishing, any possible violations.
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Both regulations and sanctions are important; failure to consider one, or partial application of both, may dilute the merits of the selected system.
Unit Summary This unit presented the various advantages and disadvantages of the different systems for issuance of preferential certificates of origin. The advantages of having a third-party evaluation were highlighted, but it was also noted that in practice these third parties often certify without genuine knowledge of the originating status of the goods in question. Self-certification can simplify the commercial operations, but leave importers with a greater level responsibility, which they may be unable to assume.
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Unit IV. Certification Innovation
Objective •
This unit describes the latest innovations introduced in Latin American
agreements
in
the
field
of
origin
certification.
Particularly, the unit addresses the concepts of reasonable reliance introduced by the United States and “Approved Exporter” that the
European
Community
is
including
in
its
most
recent
agreements.
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IV.4. Changes and Innovations in Origin Certification 9
Some
changes
have
been
recently
introduced,
making
the
requirement of submitting origin certificates for each transaction more flexible. These innovations include the Approved Exporter (AE) in third-party certification and reasonable reliance in self-certification. Implementation of the approved exporter is similar to self-certification, as the operator is directly responsible for the declaration of origin, without requiring the participation of a certifying entity or government at the time of making the declaration. Approved Exporter (AE) This system allows governments to grant exporters, which regularly trade certain goods, the power to declare that the goods are originating by simply submitting a trading document, such as the import declaration or clearance. The European Union grants this facility to the so-called Approved Exporters and it establishes some origin requirements to be granted the status of Approved Exporter.10
9
Partially based on Rafael Cornejo’s article “Considerations on Certification and Verification of Preferential Origin,” (soon available in print) presented at the first meeting of the “Preferential Origin Experts Global Group,” held on 24 April 2013, in Doha, Qatar organised by the International Chamber of Commerce (ICC) based in Paris, and the Inter-American Development Bank (IDB). See paragraph II of Annex I for a transcription of the Explanatory notes concerning protocol No. 4 to the Europe agreements (1999/C 90/07). 10
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Other countries are more rigorous and use a form to disclose detailed information about the goods to be exported. The difference lies in the fact that the European Union countries conduct an a priori general check on the company, while other countries take a step further and look into the conditions in which the goods have been produced. In order to grant this authorisation, among other requirements, governments must check that: •
the exporter does business on a regular basis;
•
the exporter is aware of and understands the rules of origin;
•
the exporter can thus demonstrate the originating status of the goods; and
•
the exporter can actually comply with all the requirements imposed by the regime.
This type of authorisation obliges exporters to use it conscientiously, only for products actually meeting the origin requirements as evidenced in the relevant documents and records and for the products in connection with which it is willing to undergo an inspection by the authorities whenever they deem it fit. The AE is a simplified mechanism for origin declaration, since it does away with the need to submit a certificate of origin for each transaction, thus allowing exporters to declare the originating status in the invoice or in any other document. This system is used by the European Community in their preferential agreements, and it has also been adopted by other countries, for example in the agreement signed between Korea and Peru.
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Reasonable reliance: Besides the certificate of origin signed by the importer, the US has introduced an additional mechanism to declare origin called “reasonable reliance.”11 The US agreements lay down that an importer may make a claim for preferential tariff treatment based on: “the importer’s knowledge that the good is an originating good, including reasonable reliance on information in the importer’s possession that the good is an originating good.” No agreement provides a definition of “reasonable reliance,” and a three-year grace period is granted for the implementation of this facility. Some countries have extended the application of this mechanism and have introduced it into subsequent agreements, for example Chile and Costa Rica. Another
aspect
related
with
the
origin
declaration
based
on
reasonable reliance is that, when using this facility, there is no need to submit a certificate of origin, because having claimed preferential tariff treatment based on reasonable reliance entails that the importer knows the good is originating and that it will assume all responsibility for demonstrating such status should importing customs authorities so require.
The notion of “reasonable reliance” was also adopted by Chile in the agreements signed with Korea and Costa Rica. 11
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The features and the evolution of the origin certification process described above shows that both basic certification systems have aimed at facilitating the issuance procedure, by fostering the issuance
of
electronic
certificates
containing
a
digital
signature and by establishing mechanisms which do not require
submission
of
a
certificate
of
origin
in
every
transaction (reasonable reliance and Approved Exporter). The use of the AE streamlines and speeds up the origin declaration process and reduces the differences between certification by third parties and self-certification. A feature of this system is that one of the companies involved in the operation issues the certificate of origin; in the case of agreements allowing third-party certification, the AE facility makes it possible for exporters to make a declaration of origin without any need to resort to other institutions. However, it is worth noting that doing away with or reducing the use of certificates of origin does not mean that the origin control and verification functions will disappear. In short, in the case of true certificates of origin, self-certification systems are recommendable given their simple issuance procedure. However, when certificates are false, certifying entities become preferable mainly because: a)
In the case of certification by entities, two parties need to connive to falsify the certificate, which entails a higher degree of difficulty.
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Fundamentals of Preferential Rules of Origin. 5th Edition
b)
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In the case of self-certification by the exporter or that voluntarily provided by the producer, either may unilaterally issue a false certificate. Furthermore, the beneficiary of the tariff reduction and the affected country remain the same.
c)
In the case of self-certification by the importer, the importer may falsify the certificate and enjoy the immediate benefits of the tariff reduction. Figure 4.1. Variations in Certification Systems
Source: Elaborated by author
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Unit Summary This unit discussed recent innovations in the systems of origin certification: Authorized Exporters, principally in agreements of the European Union, and the concept to reasonable reliance in the agreements of the United States. Both seek to facilitate international transactions, but also require greater knowledge of origin rules on the part of traders.
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Unit V. Digital Origin Certification12 Objective This
unit
briefly
describes
digital
origin
certification
and
the
convenience to apply it in the region’s agreements. Current trends in international trade prioritise trade facilitation by means of paperless trade, single windows, and their interoperability. Rules of origin apply to all preferential trade and require a certificate of origin. Taking the path towards digital certification is a concrete measure to facilitate trade by eliminating paper documents and contributing to the interoperability of single windows systems.
For further details about digital certification, see Rafael Cornejo's and Marcela Bello’s La certificación de origen digital como mecanismo de facilitación de comercio, published by the Inter-American Development Bank (IDB), Integration and Trade Sector (October 2010). 12
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V.1. Digital Origin Certification: Concept and Features
Digital certification is a procedure that, by means of the new applications
of
technology,
provides
full
technical,
legal,
and
evidentiary guarantees to operators and public officials regarding the origin status of a given product. It is a digital procedure or mechanism
whereby
all
the
documents
related
to
the
origin
declaration of a product consist in electronic files containing digital signatures. This type of certification makes it possible to replace paper documents with electronic files. A digital signature is a mathematical non-replicable algorithm which cannot be reproduced and which, by means of a complex combination of numbers and letters, creates a unique chain of characters. This signature may be used solely by the signer. The implementation of digital signatures demands political will on the part of governments in order to coordinate correctly the operational processes conducted by all the parties involved in the issuance of a certificate of origin for exporting goods (companies, Customs, and the certifying entities). This procedure requires the coordination of all the parties involved as well as activities in different areas at the national and international levels.
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At the international level, it is necessary for trade agreement countries to agree on the recognition and use of digital signatures in order to grant them the same value usually attached to handwritten signatures. This is a prerequisite for the effective interoperability of all the systems of the signatory countries. At the national level, it is necessary to count on specific laws and rules and to develop specific software. From the legal point of view, there is a need for national legislation which recognises digital signatures and for rules which define and regulate their use and the operation of bodies allowed to grant digital signatures. As regards information technology (IT), it is necessary to develop software that will make it possible to create code, send, view, and verify the integrity of signatures, and to store digital certificates of origin. A sine qua non condition for an efficient implementation of this new certification system is the fact that this change is simply a change of medium – paper documents replaced by digital files – requiring no changes in the current flow chart or circuit of the certification process laid down in the agreements; nor does it require implementing additional controls, giving new roles to the agents involved in the issuance and control of certificates, or using major hardware or software resources. Of all the certificate issuance systems currently in use, the system of certifying entities is the most complex on account of the number of actors involved. The steps to be followed to digitalise this issuance system include:
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Fundamentals of Preferential Rules of Origin. 5th Edition
•
Module 5
The exporter or the producer, on a voluntary basis provided to the exporter, should electronically fill in the declaration form and the certificate of origin required by the agreement, which must contain their digital signature. 13
•
The exporter should electronically forward the certificate and the declaration of origin to the certifying entity.
•
The issuing entity should review the information and check and validate compliance with the origin requirements of the product. In case of approval, the authorised digital signature of the certifying entity should be introduced into the electronic file.14
•
The certificate, once duly signed, is returned by electronic means to the exporter, which must forward it to the importer by the same means.
•
Importer views and reviews the contents of the certificate, links it to its import declaration, and both documents are sent to the customs brokers or agents and/or the importing country’s customs office.
Extending this document exchange procedure to origin declaration, which in some agreements is issued jointly with the certificate of origin and serves as its basis, would be another valuable source of information for origin verification purposes. 13
The electronic file is exchanged in an XML format, an advanced data exchange system. In this file, each field is delimited by an initial and a final mark, which creates a structure easily and safely interpreted by different software. 14
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Fundamentals of Preferential Rules of Origin. 5th Edition
•
Module 5
Agents control the certificate of origin, verify the validity of the certifying entity’s signature and, depending on the procedure established by the importing country’s regulatory framework, keep this document or record for the statutorily prescribed period, and/or send the file containing the digital certificate of origin to the importing customs office.
•
The importing customs office receives the digital certificate, verifies its integrity, validates the signature of the authorised certifying entity, and stores it in a database.
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Figure 5.1. A Simplified Illustration of the Digital Certification of Origin Process
Source: Elaborated by author
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V.2. Impacts of Origin Certificate Digitalisation
Computerising the issuance and processing of certificates of origin should not be interpreted as an end in itself; on the contrary, this new certification form is a major step towards modernising and streamlining origin administration and verification, and implementing trade single windows. So far, certification and verification of origin have been viewed as two independent variables of an origin regime. Yet, both represent two sides of the same coin. The information used for determining whether a product is originating, the data included in a declaration of origin, the identification of the origin determination criterion for a product and the scope of its application, the review of all such data by a certifying agency before signing the certificate, all this is the same information the importing country uses when determining and verifying the origin status of a product. Origin certification digitalisation contributes significantly to the verification process. It makes it possible to systematise data that are currently only available in paper format in customs offices’ records – together with all the remaining import supporting documentation – or in the “minds” of customs’ officers.
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Fundamentals of Preferential Rules of Origin. 5th Edition
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Figure 5.2. Origin Certification and Verification
Source: Elaborated by author
By storing in a database the information typically contained in a declaration and a certificate of origin, governments broaden their information bases; this enables them to use the electronically available data for multiple purposes. By knowing what national and foreign inputs are employed to manufacture a product, it is possible to determine the chances that a country’s industry has of meeting the requirements of a rule of origin, information that is deemed essential for an effective negotiation.
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In addition, electronically available data render it possible to select and compare, jointly or separately, an n number of certificates using different variables, such as tariff code and/or product, exporter, producer, importer, country of origin, origin determination criteria, among others. When properly processed and analysed, these data constitute a critical mass of information that helps to lay down and underpin origin-related risk analysis criteria. The interoperability of customs systems required for effective electronic certification is also a sine qua non condition for successfully processing an electronic operation within a trade single window environment. The digitalisation of an export operation within a country, and its subsequent transmission, will not be complete until at least the customs clearance document and the origin certificate have been received in digital form. While digital certification of origin may be implemented independently from trade single windows, both projects are intimately related and supplementary from an IT perspective, since both need to be operational for an adequate trade single window implementation. Electronic origin certification obviously brings about the same advantages
that
any
process
automation
has
over
manual
performance. Digitalisation speeds up processing, reduces fraud, cuts down management and processing costs, enhances the security of the signature verification process by authorised entities, and helps to produce currently unavailable statistics.
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Fundamentals of Preferential Rules of Origin. 5th Edition
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Finally, in a world with increasingly globalised production, where preferential trade grows more prominent in the exports and imports of most Caribbean and Latin American countries as a result of the proliferation of FTAs, digital origin certification secures enhanced information quality and reliability and ensures its integrity, thus producing two supplementary outcomes: • the preferential product’s importer becomes reassured about the dependability of the document supporting the tariff reduction claim, and • eliminating the risk of certificate duplication and fraud protects the reputation of the exporting nation since, when these irregularities occur, it is the image of a country’s exporters as a whole that becomes tarnished. In sum, the digital certificate of origin entails a challenge bringing along a host of benefits for the parties involved, not only in terms of cost savings and efficiency as drivers of international trade but also in terms of control and legal certainty. Furthermore,
technological
innovations
relative
to
information
management and telecommunications offer countless applications for origin certification processes. In implementing them, attention should be paid to the legal aspects regulating and impacting on these technological applications and the IT developments available to ensure seamless implementation. In both cases it is of the essence that consensus be reached about the use of reliable and adequate electronic means.
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Unit Summary
This unit discussed the development in recent years of the possibility of
applying
information
technology
to
the
process
of
issuing
preferential certificates of origin. These systems hold the potential to increase the ease of issuing certificates, and also the security of the certificates in terms of ensuring that the information cannot be altered after issuance. However, implementation of such systems requires substantial cooperation and coordination among customs administrations in the countries party to an agreement.
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Unit VI. Origin Verification15 Objective This unit overviews the criteria and guidelines currently applied in origin verification processes in the region, their scopes and the different types of verification and circumstances in which they are performed.
For further information see “Recientes innovaciones en los regímenes de origen y su incidencia en el CAFTA” by Rafael Cornejo. Occasional Paper 33 IDB-INTAL November 2005. Available at: http://www.iadb.org/en/publications/publicationdetail,7101.html?id=8597%20&dcLanguage=es&dcType=All 15
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VI.1. Origin Verification Concept
Origin
verification
verification
of
encompasses
goods’
the
compliance
activities with
the
of
control
and
conditions
and
requirements laid down by origin rules in trade agreements. Each agreement provides for the scope, responsibilities, procedures, and results of such activities. This means that there is no universal or single origin verification procedure; on the contrary, procedures vary from agreement to agreement. Consequently, this section contains only general comments.16 Both
preferential
and
non-preferential
trade
are
subject
to
verification, given that sometimes countries paying tariffs higher than those under the Most Favoured Nation (MFN) treatment try to avoid paying these higher tariffs by masking the origin of their goods.
16
Since the comments and statements made here are of a general nature, they may not apply to a specific agreement.
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Figure 6.1. Trade Subject to Verification of Origin
Source: Elaborated by author
Origin verification encompasses two activities carried out at different times, with a different level of detail. First, a control takes place during customs clearance. Second, competent authorities confirm some time after the goods are cleared that they are indeed originating, as stated at the time of importation.
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Figure 6.2. Context of Origin Verification
Source: Elaborated by author
For various reasons, the scope of control at customs clearance may vary a lot. Firstly, it will depend on the risk analysis criteria used by the importing country’s customs office when carrying out controls – through different channels – the extent of such controls, and whether they involve an immediate release, the review of documents or a physical inspection.
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The document review and the physical inspection include checking the existence of a properly issued origin certificate; additionally, in the case of inspections, the goods are physically examined to check agreement with the certificate declaration and, if needed, to check consistency with origin as stated. In general, this is a visual inspection and, depending on the provisions of the agreement, it should not delay the release of the goods. When in doubt, some agreements provide for the possibility of furnishing guarantees for any duty that may have been waived on account of tariff preferences, in order to protect the interests of the Tax Authority. Some agreements also emphasise the need of facilitating trade and, in the event of doubt, they deem it convenient not to detain goods in customs since releasing them does not prevent the competent authority from continuing to investigate the stated origin of certified goods. Such steps or actions are not necessarily included in all agreements; some do not provide for furnishing guarantees and/or do not prioritise trade facilitation or a prompt clearance process in general, more so when doubts arise regarding the origin of the goods. Consequently, even though the scope of the control at customs clearance is governed by agreement provisions, these actions seem to be the most general or widespread in the latest agreements regarding this origin control practice. For numerous reasons, post-clearance origin verification also varies. One difference concerns the certification system.
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Indeed, when the certificate issuer is a government or a mixed public-private entity to which this power has been delegated, the importing country’s competent authority requests its counterpart from the exporting country – generally in writing – to verify the origin of any goods under review or suspicion. Such control and verification activities are performed by the authorities in the exporting country. In agreements using self-certification, verification is the responsibility of the authorities in the importing country, which may, by means of different methods, gather information from the operators trading the goods. Depending on the circumstances, said operators may be producers, exporters or importers. Different agreements place the verification responsibility on producers, exporters or importers; however, some court rulings are showing the advisability of always keeping the importer informed about the actions taken by the competent authority.17 The mechanisms or procedures used by authorities to gather information and confirm the accuracy of the goods’ origin entail looking into information available in public and/or private access sources, requesting additional data, sending questionnaires and even visiting the premises where the goods subject to verification have been manufactured. The
manner
of
implementing
these
procedures
varies
from
agreement to agreement, but verifications are many times governed by the agreement provisions and by the laws of the country where they are taking place. See “A la luz de las facultades sustantivas de PRODECOM,” Report by Mexico’s Consumer Protection Office (Procuraduría de la Defensa del Consumidor or PRODECOM), 2012, page 35 et seq. 17
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Figure 6.3. Origin Verification Subsequent to Importation
Source: Elaborated by author
The time elapsing between the importation and origin verification procedures also varies among agreements, but nowadays the term provided for is about four or five years. During this time, producers, exporters or importers are bound to keep supporting information proving that the batches of exported goods are originating and that they comply, not only with the requirement of the rule of origin, but also with all the specifications or requirements established in the chapter on origin18.
18
Examples of conditions to be met in addition to the rule of origin are transit and transshipment requirements, the prohibition for the goods to leave the territory of the agreement countries, among others.
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The number of verification procedures that may be carried out will depend on the allocated resources, the existing risk of infringements, and the weight and assessment of the variables involved in the risk analysis of each transaction as regards origin. However, and despite these
general
criteria,
there
is
little
verification
by
visiting
manufacturing plants compared to the number of transactions conducted in a bilateral relationship. Figure 6.4. Verification and Risk Analysis
Source: Elaborated by author
The figure below shows some other aspects of origin rules and regulations influencing the need for verification of origin.
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Figure 6.5. Verification of Origin: Aspects to be Considered
Source: Elaborated by author
The functions and responsibilities of competent authorities in both exporting and importing countries have an impact on their functional structures. Little
by little, countries
with a
large
number of
agreements or those without having such a big number but wishing to monitor preferential trade properly are starting to create functional units specialising in origin administration and control. These units must have skilled personnel, knowledgeable in the origin regimes of their respective countries.
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The personnel are generally responsible for managing origin regimes through the origin administration commissions or sub-committees that agreements usually set up. They also carry out origin verification work and provide advice on rules of origin to other departments and to private operators. These units may be within the Customs department or the Ministries of Trade, Economy, or others. Countries such as Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Peru, and Uruguay are some of the Latin American countries which have created such units or are in the process of implementing them.
Unit Summary
This unit
presented
the
broad
outline
of the
procedures for
verification of origin. Although in the particulars may vary from one agreement to the next, the important consideration is that each country must carry out some degree of control that generates incentives for the trading sector to take seriously the origin requirements established in the FTAs, such that there is a correct application of the agreement in question.
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Bibliography
Print Sources •
Annex I,
transcription
of
the
Explanatory
notes
concerning protocol No. 4 to the Europe agreements (1999/C 90/07). •
Mexico’s
Consumer
Protection
Office
(Procuraduría
de
la
Defensa del Consumidor, PRODECOM). (2012). Report “A la luz de las facultades sustantivas de PRODECOM”. •
Rafael Cornejo and Marcela Bello. (October, 2010). certificación
de
origen
digital
como
“La
mecanismo
de
facilitación de comercio”. Published by the Inter-American Development Bank (IDB), Integration and Trade Sector. •
24
April
2013.
“Considerations
on
Certification
and
Verification of Preferential Origin” (soon available in print) presented at the first meeting of the “Preferential Origin Experts
Global
Group,”–
Doha,
Qatar
organised
by
the
International Chamber of Commerce (ICC) based in Paris, and the Inter-American Development Bank (IDB).
On line sources •
Rafael Cornejo. (November, 2005). “Recientes innovaciones en los regímenes de origen y su incidencia en el CAFTA”. Occasional Paper 33 IDB-INTAL. Available at: http://www.iadb.org/en/publications/publicationdetail,7101.html?id=8597%20&dcLanguage=es&dcType=All
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