Australia-United States Free Trade Agreement - Guide to the Agreement
5. Rules of Origin
1. Purpose and Structure
This Chapter sets out the rules for determining which goods are originating and therefore eligible for preferential tariff treatment under the Agreement (see also Chapter 2). The text comprises 17 Articles and an Annex (5-A). It also refers to Annex 4-A which is part of the Textiles Chapter.
2. Originating Goods (Article 5.1)
Originating goods are those that:
- are wholly obtained or produced entirely in the country, such as minerals extracted there, vegetable goods harvested there, and live animals born and raised there;
- are produced in the country wholly from originating materials; or
- are produced in the country partly from non-originating materials. In this case, the non-originating materials must meet the requirements of the origin rules in the Annex 4-A (Textiles - see Chapter 4) and Annex 5-A (Goods other than Textiles). These Annexes contain the product-specific changes in tariff classification that non-originating materials must undergo for the finished goods to qualify as originating. The goods must also satisfy all other applicable requirements.
3. Change in Tariff Classification Approach to ROOs
The concept of change in tariff classification used in the Annexes means that inputs sourced outside the territories of the FTA may not come from the same tariff item as the good in question nor from a defined set of related tariff items. This approach ensures that sufficient transformation has occurred within the US or Australia to justify a claim that the good is a legitimate product of the US or of Australia. The exact nature of the change of tariff classification required for a specific good can be found by referring to the rule in the Annexes covering that good.
4. Accumulation (Article 5.3)
Materials imported from the US are treated as originating goods under the FTA for purposes of determining the origin of goods produced in Australia. The production processes of a chain of producers in Australia, or the US, (and the tariff classification changes effected by that whole chain) can be taken into account in determining origin.
5. Regional Value Content (Article 5.4)
For a proportion of products, the change of tariff classification rule is supported by a local content threshold component called the regional value content (RVC) requirement, i.e. domestically sourced materials and processes must represent an agreed proportion of the final value of the product. The RVC component can take the form of either an additional requirement to the specified change in tariff classification, or can provide an optional test, allowing the product to meet a lesser degree of tariff shift if the threshold is reached. The Agreement provides for three formulas to determine the RVCs:
- The Build-Down method, where the RVC threshold is determined by calculating the value of the final product after subtracting the cost of non-originating materials and comparing this to the value of the exported product. Article 5.4.1(a)
- The Build-Up method, under which the RVC threshold is based on the proportion of the value of the final product represented by locally sourced materials. Article 5.4.1(b)
- A Net Cost method that is applied only to certain automotive products. This method akin to Australia's traditional RVC calculation under the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA). See Article 5.4.2.
The normal thresholds under the Agreement are 35 per cent using the Build-Up method, 45 per cent per cent using the Build-Down approach and 50 per cent for the Net Cost automotive method. In many cases, importers have the option of choosing which of these methods will apply to their products. For some products the thresholds are higher.
For some cases, only one of the cost formulas will apply. For automotive, the Net Cost method is obligatory where an RVC is required. For non-automotive products, the single formula is generally the Build-Up approach. The use of this single approach ensures that there is no more than a set maximum contribution from imported materials in production of a qualifying export product.
The formulas used to calculate regional value content refer to the "adjusted value" of the export product. This value equates to the free-on-board (FOB) value of the product - i.e., the price paid by the importer, less international shipping and related costs.
The value of imported materials (Article 5.5) is based on the WTO Customs Valuation Agreement, which is normally the price paid by the importer adjusted to exclude international shipping costs. Materials sourced locally are valued on the same basis as for imported materials, with some minor modifications. Self-produced materials are valued on the basis of all production costs and an amount for normal profit. Indirect materials are treated as originating regardless of where they are produced. The source and cost of packaging materials does not affect a product's origin status.
Where non-originating material is processed in Australia or the US, the cost of that processing and any local materials used may be deducted from the cost of the non-originating material for the purposes of calculating the RVC.
6. De Minimis (Article 5.2)
The Agreement contains a proviso that if all inputs which fail the ROOs test for a particular product account in total for less than 10 per cent of the value of the product, the final product will still be considered to be an originating product. What this means is that very small amounts of non-originating inputs will not disqualify an export product from access to preferential treatment.
This "de minimis" principle does not apply to dairy products, citrus fruit, certain animal or vegetable fats or sugars used in some food preparations, and some alcohol products if used in the production of other specified alcohol products.
A separate de minimis principle applies to products covered by the Textiles Chapter (see Textiles Chapter).
7. Essential Tools and Spare Parts (Article 5.6)
A product that otherwise qualifies for preferential treatment will not be disqualified on the basis that any essential tools, accessories or reasonable quantities of spare parts shipped with the product, do not pass the test of origin for those products.
8. Fungible Goods and Materials (Article 5.7)
Fungible materials are materials that are interchangeable and whose properties are essentially identical, e.g., fasteners used in metal manufacture. In determining whether they are originating or not, they may be tracked by means of physical segregation or by inventory management (averaging, last in first out, or first in first out).
9. Packing Materials and Containers for Retail Sale (Article 5.8)
Packing materials and containers for retail sale are disregarded in terms of their origin and thus do not affect the treatment of the goods concerned in terms of change of tariff classification rules. However, if the good is subject to an RVC, the value of the packing materials and containers is taken into account as originating or non-originating as the case may be.
10. Packing Materials and Containers for Shipment
Packing materials and containers for shipment are disregarded in determining their origin and in terms of RVC calculations.
11. Third Country Transportation (Article 5.11)
The Agreement provides that an exported good will lose its origin status if it undergoes any process of production en route from one Party to the other, other than necessary unloading or reloading. In other words, a partially completed product could not be completed in a third country following export from either Australia or the US and en route to the other country.
12. Claims for Preferential Treatment (Article 5.12)
Under the Agreement, the onus for making a claim for preferential treatment for a product rests with the importer. This is a change from the practice under the FTA with Singapore and the Closer Economic Relations Agreement with New Zealand, both of which place the onus on the exporter.
This Agreement does not require that the importer provide a certificate of origin in support of a claim preference. However, importers claiming a preference for a good must be prepared to submit, upon request by Customs authorities, a statement setting out the reasons that the good qualifies, including pertinent cost and manufacturing information. No particular format for such a statement is specified in the Agreement.
Customs officials can require importers to maintain documents relating to purchases and costs for up to five years after importation should investigation and verification of claims be required. Customs officials can also seek information from exporters in verifying claims.
March 6, 2004