Vietnam is considered one of the countries actively integrating into the global economy. Up to now, we have signed 15 bilateral and multilateral Free Trade Agreements (FTAs). Each FTA brings special tariff incentives for goods exported to other countries. However, to enjoy this incentives, exported goods need to have a Certificate of Origin (C/O) as prescribed. Businesses need to know the origin criteria well to be able to apply for C/O accurately and quickly. The following article of HDG Logistics will help customers better understand these criteria when applying for C/O for export goods.
1. WO criteria – Wholly Obtained
Most Free Trade Agreements (FTAs) stipulate that goods of pure origin (Wholly Obtained) are goods that are fully harvested or produced unadulterated in the territory of the exporting member country. Below is a list of products that are considered to be of pure origin.
- Crops and their products are harvested, picked, or collected in the country of export.
- Live animals are born and raised in the country of export.
- Products obtained from live animals mentioned in Clause 2 are regulated as goods of pure origin.
- Export products may be hunted, caught, cultivated, or gathered in that country or territory.
- Minerals and other natural substances taken from the sea, land, or waters of such country or territory are not included in paragraphs 1 through 4 of this Article.
- Products obtained from water, seabed, or seabed outside the national territory are subject to international law that permits exploitation.
- Products caught or seafood from the high seas by a ship registered and flagged of that country.
- Products processed or manufactured on board a ship under paragraph 7 need to be registered in the country or territory and allowed to fly the flag of that country.
- Items obtained in that country or territory no longer retain their original function and can only be discarded or converted into production materials or raw materials for recycling.
- Products obtained or manufactured from the products mentioned in Clauses 1 to 9 in the country or territory of the exporter.
2. PE (Produced Entirely) criteria – Produced entirely from “originated” materials
Goods produced from raw materials of pure origin mean that they are created entirely from the original raw materials of that country. This includes:
- Goods produced from raw materials that meet the WO criteria.
- Goods using raw materials that meet the criteria of RVC, CTC, or SP.
- Export goods need to be manufactured from raw materials that meet PE criteria.
- Export goods must be manufactured from raw materials that meet the criteria of WO, PE, RVC, CTC, or SP.
3. RVC (Regional Value Content) criterion for calculating regional content
The regional value content is the threshold level that goods need to meet to satisfy the origin criteria, usually 40%.
Depending on each Free Trade Agreement (FTA) and the type of item, this threshold can be specified differently.
Each FTA sets out a separate method for calculating the regional value content. To facilitate trade, FTAs usually allow businesses to apply two calculations: direct or indirect RVC.
The direct method (BuildUp) calculates the RVC as follows:
RVC = (VOM/FOB) x 100%
In particular, VOM – Value of Originating Materials refers to the value of raw materials of origin, including the value of raw material costs, direct labor costs, direct production costs, other costs and profits.
The indirect method (BuildDown) calculates the RVC as follows:
RVC = (FOB – VNM) / FOB x 100%
In particular, VNM – The value of raw materials without origin, including the CIF price at the time of import of raw materials, parts, or input goods, or the price at the time of purchase of raw materials, parts, or input goods at the earliest if it has not been clearly determined.
4. CTC (Change in Tariff Classification) criteria – Convert HS code
Conversion of HS codes of goods is the process of changing HS codes (2-digit, 4-digit or 6-digit issuance) compared to HS codes of non-origin input materials (including imported raw materials and raw materials of unknown origin) to produce export goods.
The CTC criteria are divided into 3 levels: the tightest is Chapter Transformation (CC), the moderate level is Group Transformation (CTH), and the loosest is Group Transformation (CTSH). The CTC criteria only apply to exported goods without origin criteria and only when raw materials without origin are consolidated into goods.
Chapter Conversion (CC) Change in Chapter requires all non-origin materials to perform the HS code conversion process at the Chapter level (2 numbers), i.e. from one Chapter to another in the Tariff.
Group Conversion (CTH) Change in Tariff Heading requires goods to convert HS codes at the Group level (4 digits), that is, from one Group to another in the Tariff Schedule.
Change in Tariff Subheading In the production of finished goods, enterprises using raw materials of no origin must convert HS codes at the subheading level (6 numbers), i.e. from one Subheading to another in the Tariff Schedule.
5. PSR – Product Specific Rules – Item Specific Rules
The PSR rule is usually applied to goods that fall into the special category. To comply with the PSR rule, the raw materials used in production need to go through the process of converting HS codes or specific processing stages. In addition, the product needs to meet the percentage or combined value of the above-mentioned criteria in the production process of the specific goods in the category.
The PSR rule also allows the importer to choose between criteria such as RVC, CTC, SP, or a combination of these criteria to determine the origin of the goods. Each member country of the FTA has the right to allow importers to decide for themselves which criteria are suitable to use to determine the origin of products.
6. GR (General Rule)
The general rule applies to all types of goods, except those that fall under the item-specific rule category. Specifically, each agreement will have its own criteria for the origin of goods as follows:
- The ATIGA, AKFTA, AJCEP and AANZFTA agreements require goods to be converted to a level 4 code or have a minimum area value content of 40%.
- The ACFTA Agreement applies the general criteria of RVC of 40%.
- The AIFTA Agreement sets the general criterion of 35% RVC and adds the CTH criterion, requiring the conversion of 6-digit commodity codes.
FTAs signed in the past often used the general rule (GR) and the item-specific rule (PSR). FTAs signed later or amended from previous versions only apply the specific rules of PSR items, starting from the 6-digit level HS code from Chapter 1 to the last chapter of the Tariff. For the most part, FTAs that only use PSR are considered friendly and easy to look up and use.
7. SP (Specific Process)
The specific processing stage (SP) is applied to products made from raw materials without origin, requiring this raw material to be processed and processed in a member country of the FTA.
For example, product A (according to the WO criteria), product B (according to the RVC criteria), product C (according to the CTC criteria), and product D (according to the “RVC or CTC” criteria), then product E, when manufactured under a specific process, will not be subject to any of the individual criteria stated above. Instead, this product will follow a special manufacturing process, which is described in 36 specific regulations or a combination of one or more of the mentioned origin criteria.
The advantage of this criterion is stability; If a specific production process is followed, a standard product will have a source without depending on the cost of raw materials, labor or other inputs of the product. In addition, the product is also not affected by fluctuations in the supply of raw materials.
8. Chemical Reaction Origin Rule (CR)
Any goods subject to a chemical reaction are considered to have originated in a member country if the reaction occurs there. Chemical reactions are the process of creating new molecules with different structures through breaking intramolecular bonds and forming new bonds, or changing the spatial structure of atoms. Specific steps in a chemical reaction include:
– Solubility in water or other solvents.
– Solvent removal, including dehydration.
– The addition of water or the removal of water from the crystallizers.
9. De Minimis – The Rule of Insignificant Proportions
The insignificant ratio rule applies to ingredients that do not meet the HS code conversion criteria of the product, but are still considered to be of origin if they do not exceed a certain threshold, usually X% in value or weight.
This rule allows ingredients that do not meet the HS code conversion criteria to be included in the origin of the product, as long as they do not exceed the X% threshold in terms of the value or weight of the product.
This ratio is determined by dividing the value or weight of raw materials that do not meet the CTC criteria by the total FOB value or weight of the finished product. The X% level can vary depending on the provisions of each FTA, but is usually 10% in value or weight. Some FTAs have stricter regulations, only allowing a threshold of 7% – 8% for certain items.
10. Cumulation – Rules of Inclusion
The aggregation rule allows the use of goods originating from the country participating in the agreement as raw materials for production in other countries. This commodity will be deemed to have originated from the country of manufacture of the following.
Accumulation is a method applied in all FTAs that Vietnam participates in and is the most common method in international trade. If raw materials meet the criteria of origin, they will be counted as 100% raw materials in the production process and determine the origin of the final product.
Full Cumulation is applied in new FTAs or for specific commodity groups such as textiles and garments (AJCEP, AANZFTA). According to this regulation, raw materials do not need to fully meet the criteria of origin but can partially meet them. However, they are not included when making ingredients for the next product. Instead, only the actual added value is calculated, not the entire value of raw materials as is usually combined.
Partial Cumulation is applied in ATIGA, meaning that materials that meet the aggregation regulations will be counted as 100% of the value. If the material only meets 20 or 39%, that actual percentage will be added if used for further production. From there, this percentage of raw materials will determine the origin of the goods.
In ATIGA, when applying “partial cumulation”, raw materials are still issued C/O form D. In the C/O, “Partial Cumulation” will be noted so that the customs authority can distinguish the C/O used for aggregation and not enjoy tariff incentives under ATIGA.
11. Direct Shipping – Regulations for Goods in Transit Through Third Countries
For goods in transit through a third country, it is necessary to demonstrate compliance with direct transport regulations to enjoy tariff preferences. Shipping regulations in FTAs often require goods to be shipped directly from the exporting country to the importing country.
For goods in transit through a third country, whether or not they are part of an FTA, carriage is considered direct if:
– Transit is necessary due to geographical or transportation factors.
– Goods that are not engaged in commercial transactions or consumed in transit countries.
– Goods are not further processed, except for loading and unloading or other stages necessary to ensure the safety of goods.
12. Simple processing stage
Simple processing stages will be carried out independently or in combination with each other and shall not be considered when determining the origin of goods in a country, group of countries, or territorial area (according to Article 9 of Decree 31/2018/ND-CP dated 08/03/2018, detailing the origin of goods in the Law on Foreign Trade Management upon issuance of C/O).
In fact, the “simple processing” in each Free Trade Agreement (FTA) has different regulations, and goods in these stages will not be considered for origin. This category can be long or short and may apply one or several criteria such as WO, PE, RVC, CTC, or SP depending on the provisions of each FTA. Simple processing steps include:
– Preservation of goods during transportation and storage such as ventilation, spreading, drying, refrigeration, soaking in salt, sulfur bathing, adding additives, removing damaged parts, and similar works;
– Work such as dusting, screening, selecting, sorting, cleaning, painting, dividing into parts;
– Changing packaging, packaging, and dismantling or assembling shipments;
– Affixing trademarks, labels, or other distinguishing signs to products or packaging;
– Simple mixing of products, whether of the same type or different type;
– Simple assembly of product parts to form a complete product;
– Combine two or more of the tasks listed from point a to point g;
– Slaughter of animals.
These criteria may vary depending on the type of goods and the specific trade agreement. Therefore, it is very important to refer to and comply with the specific provisions of the agreement or agreement when determining the origin and issuing the C/O.
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