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Taichi Kawazoe

Case study of Build-down and Build-up method e.g.”washing machines”

2019-09-26 By Taichi Kawazoe

Here is a case study of Build-down and Build-up method

Company Y manufactures washing machines in Japan and plans to
export them to Chile under the Agreement.

Case study of Build-down and Build-up method

The product specific rule for washing machine (HS8450.11) under the Agreement is:

A change to subheading 8450.11 through 8450.20 from any other heading; or
No required change in tariff classification to subheading 8450.11 through
8450.20, provided that there is a qualifying value content of
not less than 45 percent when the Build-down method is used,
or of not less than 30 percent when the Build-up method is used.

To prove that the washing machine qualifies as an originating good of Japan,
Company Y has to prove that the washing machine satisfies either the CTC rule,
or the 45% value-added rule (Build-down method) or the 30% value-added rule
(Build-up method).

(a)Build-down method

When Company Y uses the method based on the value of non-originating materials
(Build-down method)

Case study of Build-down and Build-up method

The formula for calculating the qualifying value content (Build-down method) is:

Case study of Build-down and Build-up method

QVC is the qualifying value content of the good, expressed as a percentage;

TV  is the transaction value of the good adjusted to F.O.B. basis; and
VNM is the value of non-originating materials used in the production of the good.
Since the origin of Parts D and E are not determined, in applying the formula,
value of those Parts should be considered as part of the value of non-originating
materials(VNM).

Thus, the calculation of the QVC of the washing machine is:

Case study of Build-down and Build-up method

This calculation shows that the washing machine qualifies as an
originating good of Japan.

 

(b)Build-up method

(b) When Company Y uses the method based on the value of originating materials
(Build-up method)

Case study of Build-down and Build-up method

The formula for calculating the qualifying value content (Build-up method) is:

Case study of Build-down and Build-up method

QVC is the qualifying value content of the good, expressed as a percentage;
TV  is the transaction value of the good adjusted to F.O.B. basis; and
VOM is the value of originating materials used in the production of the good.

Since it is known that Parts A is originating good of Japan, Company Y found that it
would be easier to use the Build-up method because it is clear that QVC of the
washing machine will be more than 30%, taking into account the value of Parts A
only. In this case, Company Y does not need to check the originating status of other
parts and other costs.

Thus, the calculation of the QVC of the washing machine is:

Case study of Build-down and Build-up method

This calculation shows that the washing machine qualifies as an
originating good of Japan.

Filed Under: Case Study

What is “Net cost method”?

2019-09-26 By Taichi Kawazoe

“Net cost” represents all of the costs incurred by the producer minus expenses for
sales promotion (including marketing and after-sales service), royalties, shipping
and packing costs and non-allowable interest costs.

Example
An electric hair curling iron (subheading 8516.32)

Case study of Value Added method(VA)

Parts & Costs Cost Origin Value
Non-originating materials(8516.90) Net-cost Non-Originating 1.2
Cost of production Net-cost 2.45
Profit Cost 0.5
Transport Cost 0.25
FOB Price 4.4

Case study of Value Added method(VA)

Retrieved from:WCO ORIGIN COMPENDIUM

An electric hair curling iron (subheading 8516.32) is made in Mexico from
Japanese hair curler parts (8516.90). Selling price value 4.40; the value of
the non-originating hair curler parts is 1.20.

Example of Product-specific rule for headings 8516.32 is

(a). 60 percent where the transaction value method is used, or
(b). 50 percent where the net cost method is used.

There are two requirements to satisfy the rule of origin.
(a) calculation, adopting for “Transaction value method”
(b) calculation, adopting for “Net cost method”

If Transaction value method is used in this example,
The formula for calculating the qualifying value content is:

On the other hand, if the Net cost method is used,
The sum of “Non-originating materials” and “Cost of production” are
considered as a Net cost.

Filed Under: General

Compare Build-down and Build-up method under the FTA

2019-09-24 By Taichi Kawazoe

Main differences between “Build-down method” and “Build-up method”

Compare Build-down and Build-up method under the FTA

Build-down method Build-up method
Overview The use of foreign input materials in the
manufacturing or processing operations
carried out in a contracting party or a
specified area is limited to a maximum
amount.
The domestic content, e.g. the
value of originating materials and
the manufacturing or processing
operations carried out in a
contracting party or in a specified
area, must be equal to or exceed
a given percentage of the value of
the final product.
Calculation
method
This method requires a comparison
between the value of the foreign input or
the materials with undetermined origin
and the value of the final product.
This method requires a
comparison between the value
added in a contracting party or in
a specified area, and the value of
the final product.
Examples of
Calculation
Method
Indirect method
Transaction value method
Net cost method
Focused value method
Maximum Allowance for NonOriginating Material
Direct method
Minimum Requirement of
Domestic Content

 

Calculation method of Build-down

Calculation method of Build-up

Features of the Ad-valorem rule/Value-added criterion:

The exact methods for calculating the input materials and the final product are
stipulated in the aplicable agreement.

A direct comparison between the percentages used in the different methodologies
cannot be made because of the different calculation bases.

The higher the allowed percentage for use of non-originating material, the more
liberal the origin rule.

The higher the minimum requirement for the domestic content, the more
stringent the origin rule.

The ad-valorem calculation may also vary according to the price basis used for the
final product, i.e. the price of the final product at the moment when it leaves the
factory (ex-works price), or the price of the final product at the time of exportation
or importation (FOB or CIF price).

1,Suitable for goods which have been further refined or processed without a change of tariff
classification;

2,Value-added criterion is relatively easy to understand and to apply in practice;
value-added rules allow simple and flexible adjustments for different stages of
development of developing countries;

3,Economic operators are familiar with the cost components of their inputs as the values are
known for commercial and Customs purposes;

4,The administration of value-added rules is complex for small and medium sized companies
and may demand additional book-keeping and sophisticated accounting systems;

5,Requires disclosure of sensitive commercial information by suppliers;

6,Relatively high administrative burden due to the necessity to calculate the various cost
components;

7,Susceptible to the impact of fluctuating exchange rates. A weakening of the exchange rate
raises the value of the foreign inputs in relation to the total cost/ex-works price of a given
product. An increase of the exchange rate of a foreign currency (imported goods are often
invoiced in foreign currencies) will cause an increase of the value of all imported components
priced in a foreign currency. This will render a given ad-valorem rule more restrictive;

8,Susceptible to commodity value fluctuations.

Retrieved from:WCO ORIGIN COMPENDIUM

Filed Under: General

Case study of Value Added method(VA) e.g.”drilling machine”

2019-09-23 By Taichi Kawazoe

Regardless of changes in its tariff classification, a product is considered as
originating when the value of the product is increased up to a specified level
expressed by an ad valorem percentage.

The rules based on a value-added/ad-valorem criterion may be described
primarily in two distinct ways:

a maximum allowance for non-originating materials

maximum third country content allowance, meaning that a final product can be
considered as an originating product provided that the foreign inputs do not
exceed a certain threshold;

Example 1
A drilling machine of heading 84.59 is manufactured from the following materials:

Case study of Value Added method(VA)

Parts & Costs Origin Value
case with origin from a free trade partner country Originating 100
electronic control panel, from country outside the
free trade area
Non-Originating 250
electric motor, from country outside the free trade area Non-Originating 100
other parts of undetermined origin Non-Originating 50
labour costs and manufacturer’s profit margin 500
Selling price of the final drilling machine(Ex-works) 1000

 

Product-specific rule (European model) for headings 84.56 to 84.66 is
Manufacture in which the value of all the non-originating materials used does
not exceed 40 % of the ex-works price of the product.

Thus, the value of the non-originating materials incorporated in the drill
(electronic control panels, motor and other parts = value 400)
(N.B. input with undetermined origin counts as non-originating input) does not
exceed 40 % of its ex-works price,
i.e., the percentage required for substantial transformation;

the drill therefore qualifies as the originating product.

 

a minimum requirement of domestic content

a minimum requirement of domestic content,  meaning that a final product can be
considered as an originating product provided that the domestic inputs exceed a
certain threshold;

Example 2
An electric hair curling iron (subheading 8516.32)

Case study of Value Added method(VA)

Parts & Costs Cost Origin Value
Non-originating materials(8516.90) Net-cost Non-Originating 1.2
Cost of production Net-cost 2.45
Profit Cost 0.5
Transport Cost 0.25
FOB Price 4.4

Case study of Value Added method(VA)

 

An electric hair curling iron (subheading 8516.32) is made in Mexico from
Japanese hair curler parts (8516.90). Selling price value 4.40; the value of
the non-originating hair curler parts is 1.20.

 

Product-specific rule (European model) for headings 8516.32 is

A change to subheading 8516.32 from subheading 8516.80 or any other
heading; or
A change to subheading 8516.32 from subheading 8516.90,
whether or not there is also a change from subheading 8516.80 or
any other heading,
provided there is a regional value content of not less than:
a. 60 percent where the transaction value method is used, or
b. 50 percent where the net cost method is used.

The first tariff shift rule requirement(a) is not met, meaning that the second rule(b)
combines a tariff shift rule with a regional value content requirement.
In our example, both the transaction value method and the net cost method are fulfilled:

Case study of Value Added method(VA)

Note1: In this situation “Net cost” is the total sum of a “Non-originating materials” and
“Cost of production”

Note2:Net cost represents all of the costs incurred by the producer minus expenses for
sales promotion (including marketing and after-sales service), royalties, shipping
and packing costs and non-allowable interest costs.

Filed Under: Case Study

Wholly obtained goods from territorial sea

2019-09-22 By Taichi Kawazoe

The criterion “wholly obtained or produced” is one of the two basic types of
origin criteria which have to be fulfilled for the purpose of determining the
country of origin of a commodity in preferential trade relations.

It is mainly used for natural products and for goods made from natural products
which are obtained entirely in one country or area, comprising products extracted or
harvested in a country and live animals born, raised or hunted there.

The scope of wholly obtained or produced products is normally interpreted in a very
strict way, insofar as the addition of imported parts or materials excludes such products
from being wholly obtained or produced.

For the sea fishing industry, the wholly obtained or produced criterion is very important.
The sea beyond territorial waters (the open sea) is not considered to belong to the
national territory of a country.

The (Revised) Kyoto Convention requires that fish caught outside the territorial sea and
other products extracted from marine soil or subsoil outside a country’s territorial
waters have to be taken by vessels of that country in order to fulfill the criterion of
wholly obtained.

The Territorial Sea

The Territorial Sea is an area of water not exceeding 12 nautical miles (22,2 km)
in width which is measured seaward from the territorial sea baseline.
The territorial sea is regarded as the sovereign territory of the coastal state.
If this zone overlaps with another state’s territorial sea, the border is taken as the
median point between the states’ baselines, unless otherwise agreed.

The contiguous Zone

The contiguous Zone is a belt of water adjacent to the territorial sea with its outer
limits not exceeding 24 nautical miles (44,4 km).
This zone must be claimed and does not exist automatically. It allows coastal states
to exercise the control necessary to prevent and punish infringements of Customs,
sanitary, fiscal and immigration regulations.

The Exclusive Economic Zone

The Exclusive Economic Zone is the area of sea beyond and adjacent to the territorial sea.
Its outer limit cannot exceed 200 nautical miles (370 km) from the territorial sea baseline.
A coastal state has control of all economic resources within its Exclusive Economic Zone,
including fishing, mining and oil exploitation.

Wholly obtained goods from territorial sea

Retrieved from:WCO ORIGIN COMPENDIUM

With regard to goods of the sea fishing industry, the provisions on wholly obtained
or produced goods might also be supplemented by definitions of what constitutes a
vessel of a contracting party.

Filed Under: General

Case study of Value Added method(VA) e.g.”Hair curling iron”

2019-09-21 By Taichi Kawazoe

In cases where a product-specific rule(PSR) provides a choice of rules based
on a value added criterion(VA), change in tariff classification criterion(CTC),
specific manufacturing or processing operation criterion, or a combination of
any of these, the exporter can decide which rule to use.

Where product-specific rules require a change in tariff classification criterion or
specific manufacturing or processing operation criterion, it is required that each
of the non-originating materials used in the production fulfills the applicable rules
set out in Annex 3.

If a value-added criterion(VA) is applied, the regional value content (RVC) of
a good is calculated using the formula set out in Article 29.

Example: Hair curling iron of subheading 8516.32
An electric hair curling iron (subheading 8516.32) is made in Malaysia
from Mexican parts (8516.90).
FOB price US$ 4.40; the value of the non-originating parts is US$ 1.20.
The breakdown of the value of the good is shown in the table below:

Retrieved from:WCO ORIGIN COMPENDIUM

Here is a product-specific rules for “Hair curling iron”(HS8516.32)

Retrieved from:Comparative Study on Preferential Rules of Origin

 

In subheading 8516.32, there are three alternative rules and the producer can choose
a rule. The first rule requires a RVC of not less than 40 percent. This rule is fulfilled
since the RVC is 76 %. For the calculation of the RVC (Regional Value Content),
see Article 29 or Regional Value Content / Value Added Rules.

Therefore, the good at issue is considered originating under the ATIGA.

Filed Under: Case Study

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