Have you been asked for a Certificate of Origin? Do you know what it is?
International Trade Specialist, Frances Fawcett explains what they are, when you need them and how to get one.
What is a Certificate of Origin?
A Certificate of Origin is an official document that states the origin of goods that are being traded internationally. It shows where the goods were manufactured, produced, or processed.
Why isn’t the origin of the goods the same as the country supplying the goods?
It’s important to understand that the document is showing the origin of the goods, and that may be different from the country supplying the goods. For example, if you have imported goods manufactured in, say, China, and you export them to another country without making any changes to them, they will still be of Chinese origin. This is even though you are supplying them from the UK. If, however, you have manufactured, produced, or processed the goods in the UK, their origin will likely be UK.
Why is the origin of goods important?
All exports and imports require an export or import declaration, and the origin of the goods is needed for the declaration. This is because origin is one of the factors that determines whether taxes are payable on the goods as they cross international borders.
When we talk about taxes in international trade, we are referring to multiple fees that may be payable. Taxes include duties (also referred to as tariffs) and, for many goods, VAT (or the equivalent local sales tax). Whether taxes are due on goods is determined by three factors. The first is the type of goods and that is indicated by the commodity code (also sometimes referred to as the HS code, or tariff code). The second is the country of origin. Both determine whether any taxes are due, and the third factor is the value of the goods, which determines how much tax is due.
Can origin reduce duties?
Yes. Goods could have a preferential origin which means that less duties are owed and often the duties are zero. When two countries have a trade agreement in place, the agreement frequently provides for zero duty for goods produced by each country. In other words, the goods are of preferential origin. This is what gives rise to the term “free trade”. Trade is not entirely free – as any importer or exporter will know! VAT/local sales tax is not reduced/removed by trade agreements – but duties are. Here is an example:
Let’s imagine I import leather gloves for golfers (commodity code 4203210000). By default, these goods attract 8% duty when imported into the UK. So, I will pay 8% of the value of the goods to HMRC on import. (Generally, along with 20% import VAT as well, but that is recoverable for VAT registered businesses.)
However, if I buy them from a manufacturer in France and their Country of Origin is France, then they attract zero duty. This is because there is a trade agreement between the UK and the EU (of which France is a member) that provides for zero duty. So, the gloves have preferential origin when their Country of Origin is France.
This applies to all the member states of the EU because our trade agreement is with the whole of the EU. There will also be preferential rates of duty with all the other 60+ areas in the world with which the UK has a trade agreement.
So being able to demonstrate preferential origin saves money!
Is a Certificate of Origin required for every export and import?
No. A Certificate of Origin is the most formal way to demonstrate the origin of your goods, but there are other ways. The most basic is to include the origin of the goods as part of the product information on documentation. For example:
All goods imported or exported need to show both the commodity code and country of origin so the example above is the minimum information that should be included on documents such as Commercial Invoices.
If you want to claim preferential origin for your goods, you will also need records to substantiate the claim and include wording on documents.
In addition, specific entries are needed on import and export declarations to claim preferential origin. If these are completed on your behalf – for example, by your transporter – make sure they are aware that you are claiming preferential origin. You risk avoidable duty charges if these processes aren’t completed correctly.
When would a Certificate of Origin be needed?
As can be seen above, it’s possible to claim preferential origin without the cost and time required for a formal Certificate of Origin. However, some countries require Certificates of Origin to prove origin, and some of your customers may request them.
There is a cost for a Certificate of Origin and while they are fast to obtain, they are not instant. They can be created online but you have to be set up to do so. Therefore, it is important to find out in advance whether you are likely to need a Certificate of Origin.
If you need a Certificate of Origin for an export – perhaps because your customer insists on one – you should contact your local Chamber of Commerce.
I have customers that want a Certificate of Origin every time – that really needed?
Often it isn’t. Sometimes if the customer is used to receiving a Certificate of Origin for each shipment, they may ask for one because they consider it essential. However, it often isn’t essential for every shipment and there are many scenarios in which a Long Term Supplier Declaration can meet their needs. You can produce these internally free of charge so ask us if you need advice on how to save time and cost by using these instead.
So, is this just an export issue?
Absolutely not! This impacts importers and exporters alike and it impacts the individual departments of companies that are both importing (purchasing) and exporting (selling). Let me share a typical scenario that we see. The sales team are pricing an order and realise that goods attract duty. The cost to the customer is higher if duty must be paid so it will be beneficial to show preferential origin and reduce (or remove) the duties. However, sales don’t obtain the goods they sell – that’s the job of the purchasing team. Therefore, sales are dependent on purchasing to be able to demonstrate preferential origin. Purchasing will need to obtain information about the origin of the goods they buy so that information can ripple through from purchasing/importing to sales/exporting.
Is that all there is to it?
Unfortunately, it isn’t! Global Rules of Origin exist but there are also Rules of Origin for specific trade agreements. Therefore, it is important to take advice to ensure that, when you declare origin, you are following the rules relevant to a specific import or export. If the rules are broken, importers/exporters will have to pay missed duties and may also face fines and penalties.
The rules are complex, so we work with numerous companies to help them meet their compliance obligations and ensure they have all the appropriate records in place. This has become particularly important recently due to the large volume of trade between the UK and the EU. There are Rules of Origin for the trade agreement that must be understood to ensure compliance and reduce the duties you and your trading partners are paying.
Further, when you are buying goods from suppliers in the EU, there are also rules on declaring origin. This can be done by the supplier below certain financial thresholds, but shipments above set thresholds need additional measures in place. Otherwise, avoidable duties can be charged. When you understand the thresholds and measures, you can make considerable duty savings.
How can we help?
Your Chamber of Commerce can provide Certificates of Origin for you. However, we can help you meet your compliance obligations, reduce the duties you pay, and save you time and money. We frequently help businesses considerably streamline their processes by looking at their imports and exports. Amongst other things, we can assess the impact of origin and determine the most cost-effective way to manage imports and exports. Please get in touch to find out how we can help you.