The EU – Vietnam Free Trade Agreement: Making the Benefits Count in Practice
The EU – Vietnam free trade agreement offers exporters an enticing instrument to explore new markets or production locations. For the customs benefits to count in practice, however, careful planning is required. Exporters must integrate a system of very complex rules of origin in their internal processes in order to establish preferential origin. One tried and tested method is to initiate a “preferential trade project” under the umbrella of an inter-departmental project team using an IT-based workflow. This team will be responsible for managing the procurement of input materials whilst simultaneously calculating preferences.
Since economic liberalisation in the 1990s, Vietnam has attracted great interest as a potential location for production and export as well as a sales market. In particular, the free trade agreement (FTA) between the EU and Vietnam can increase the attractiveness of Vietnam as a production location for subsidiaries of companies based in the EU. Companies could therefore produce goods in Vietnam for the EU market, importing them to the EU under preferential tariff rates.
However, before importers can utilise such preferential tariff rates, the products themselves have to originate in Vietnam or the EU. The exporter is usually responsible for proving this is the case.
Goods produced in Vietnam or the EU are likely to contain a certain amount of non-originating input materials. Accordingly, the exporter will have to prove that the manufactured products originate in the EU or Vietnam by showing they have been sufficiently worked and processed within the agreement’s geographic scope (Art. 5 Prot. No. 1).
Legal certainty and planning security regarding rules of origin
In order to ensure legal certainty and create a firm foundation for business planning, exporters need to know the specific conditions for acquiring origin – in particular, which rules of origin apply. Identifying the relevant rules of origin depends on correctly classifying the manufactured product under the Harmonised System (HS). The exporter should clear up any uncertainties immediately (e.g. by obtaining binding tariff information), to ensure that origin is not based on incorrect assumptions.
If origin is established by the application of the cumulation rule, the relevant intermediate products will also have to be accurately classified in order to deduce the correct rules of origin.
To ensure the greatest degree of certainty, you should also check the tariff classification of the procured input materials. Simply accepting the supplier’s classification could result in an incorrect determination of origin.
Ensuring acquisition of origin
Often, the exporter is confronted with “de minimis rules”, which stipulate the maximum permissible non-originating content by referring to the ex-works price of the end-product. For example, the EU-Vietnam FTA provides in relation to passenger cars under HS heading 8703 (ex Chapter 87) “manufacture in which the value of all the input materials used does not exceed 45 % of the ex-works price of the product.”
In view of these rules of origin, the exporter should develop an approach based on the bill of materials (BOM) for the car produced, which ensures that:
- sourcing decisions regarding non-originating input materials adhere to the threshold of 45% of the ex-works price of the car to be exported;
- during the entire procurement process, the origin of the end-product is estimated by calculating preferences in advance;
- it is monitored within the framework of project controlling that the costs for localising input materials within the geographic scope of the FTA do not exceed the envisaged cost savings.
Organisation and infrastructure of the project
The first step is to decide which internal departments or external offices are to perform the various roles of the project. The first question is: who should be responsible for the project’s budget and the provision of financial resources and staff? These responsibilities often fall within the remit of the senior project manager. On the other hand, the choice of project management will largely be determined by technical aspects. The customs and purchasing departments will also perform important roles:
- The customs department will establish the legal framework determining the criteria for acquiring origin and establish the organisational requirements for calculating preferences in company operations.
- The purchasing department will manage the procurement of input materials, choose the supplier and negotiate the related conditions and contractual framework.
In practice, a tried and tested method has been to make these two departments responsible for the management of a preferential trade project. If internal resources are inadequate, you should consider outsourcing (either entirely or partly by a Project Management Office/PMO, for example). If possible, other company departments should also be considered (e.g. Taxation, Finance, Production, Development and Logistics).
Integrated approach to targeted management of the procurement process
The next step is to develop an integrated approach for the targeted management of decisions on input material procurement, having regard to the continuous projection of origin status, up to the conclusion of the awards process and to incorporate it into the project plan.
In accordance with the criteria of the rules of origin applicable to the product, Purchasing and the Customs Department must decide on what approach to adopt (i.e. top-down or accumulated acquisition of origin) in their estimated preferential calculation. It is essential to make this decision as early as possible because it heavily influences sourcing decisions.
The distribution of the individual BOM-items to workflows between Project Management and the functions in the company responsible for sourcing the individual items represents the core collaboration in the project. In this respect, the project management should be given all procurement alternatives including parameters relevant for calculating preferences with the aim of reaching a joint decision. Within a dynamic and interactive process, the procurement alternatives should be arranged in relation to the rules of origin applicable to the intermediates or end-products. Targeted sourcing decisions can be made on this basis.
Specifically, the Customs Department and Purchasing will select a supplier for each input material from the procurement alternatives. Here, the fundamental question is whether the BOM-input materials have to make a positive contribution to the origin status of the end-product. If the estimated preference calculation shows that the input material concerned does not have to be originating, there will be potential for delocalisation and cost savings.
The projected origin status within the framework of the estimated preference calculation must be continuous and specifically relate to the intermediates or end-product. Accordingly, the workflow management depicting the procurement alternatives must be linked systematically or otherwise to the solution used for the estimated preference calculation. In the interests of certainty and efficiency, manual workflows should be excluded owing to the complexity of calculating preferences.
Putting the strategy into practice
During the project, you must ensure that the necessary conditions exist which enable the strategy to deliver the desired results after production commences. This relates to both external and internal factors.
Purchasing must obtain a binding statement on the origin of the input materials from the suppliers. If a supplier is chosen because he guaranteed the supply of originating input materials in his offer, these “product characteristics” must be contractually agreed. It is advisable to contact the customs authorities early on if an authorisation is needed for the simplified issue of proof of origin which may not yet be available. An IT-solution specifically relating to preferences should be implemented as early as possible to ensure it is ready before production or exportation commences. Overall, the scope of the project consists of selecting and implementing a suitable software solution and ensuring its integration with existing ERP systems.
The implementation of the strategy is rounded off by creating a structure of the processes and organisation appropriate for continuously ensuring origin status in company operations on the one hand and performing the required preferential calculation and issuing/applying for proof of origin on the other. In this context, the main focus should be on the process-related interfaces to the relevant internal departments and externally on the management of suppliers/supplier’s declarations.
The full version of this contribution will appear in the AW-Prax, issue 09/2020.
Services of the AWB in connection with the internal implementation of preferential agreements
We have extensive experience in utilising the benefits of preferential agreements and their internal implementation. In this respect, our consultancy services range from efficient workflow-based management/coordination of your preferential trade project to the implementation of a preference-related IT, procedural and organisational structure including the integration of legal advice. In this respect, we are not restricted to Germany or the EU since our specialised network of partners enables us to implement projects within a global context. Please contact us for further details.