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

(Article 5.9)

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

Australia - US Free Trade Agreement home page