Navigating Flexibility and Ensuring Compliance: Rules of Origin under the AfCFTA

What are the risk in adopting a flexible approach and what are the legal implications?

The World Customs Organization (WCO) has published a Guide for Rules of Origin under the African Continental Free Trade Area (AfCFTA) agreement.

The main objectives of the African Continental Free Trade Area (AfCFTA) agreement are to create a single continental market for goods and services with free movement of business persons and investments, and thus to pave the way to accelerate the establishment of a customs union in the future.

The AfCFTA agreement has the ultimate goal of increasing the ease of trade and investment across African borders as well as eliminating tariffs on intra-African trade, reducing unemployment, increasing infrastructure development and creating a more competitive and sustainable environment for cross-border trade.

The AfCFTA entered into force on 30 May 2019, and trade under the AfCFTA started on 1 January 2021.

Rules of Origin

In order for goods to benefit from the AfCFTA agreement and be imported with no or lower customs duties within the AfCFTA trade area, they will need to comply with the AfCFTA rules of origin as provided by Annex 2 on Rules of Origin (Annex 2) and its Appendix IV (Appendix IV) of the AfCFTA Protocol on Trade in Goods.

What are rules of origin and why are they needed?

Rules of origin regulate and determine the “economic nationality” of a product. They specify the conditions that a product needs to fulfill to be considered to originate in the free trade area. This may include using documentary proof of origin issued by a designated competent authority or by satisfying other various criteria for the tariff codes of the Harmonized System.

Products that fulfill AfCFTA rule of origin criteria will benefit from preferential treatment within the AfCFTA area, primarily importation at a free or lower import duty rate.

How do products attain AfCFTA origin?

There are two main criteria for AfCFTA origin:

Wholly Obtained

These goods occur naturally in the free trade area, i.e., a farmer in an AfCFTA State produces tomatoes from seeds imported from a non-AfCFTA State, and the grown tomatoes are then supplied to another AfCFTA State. The tomatoes are regarded as originating in the AfCFTA as they are grown or harvested there.

Substantial Transformation

These goods are manufactured in an AfCFTA State from raw materials or semi-finished materials (inputs) imported from countries that are not party to the AfCFTA agreement.

Substantial transformation can be accomplished through:

• A change in tariff classification / tariff-shift

This condition is fulfilled when imported inputs and the final product are not classified in the same tariff code and the manufacture of the inputs in an AfCTFA State causes them to change classification to that of the final product, as specified in the relevant rule of origin. For example, imported inputs such as animal fat (HS 15.06), perfume (HS 33.02), and disodium (HS 38.24) manufactured into soap bars (HS 34.01) in an AfCFTA State would satisfy the applicable rule of origin.

2.Specific Processes

A product will be considered to originate in the AfCFTA State where the manufacturing operation described for the particular product in Annex 2 is completed. For example, the rule of origin for diamonds of heading 71.02 is “Manufacture from unworked, precious or semi-precious stones”. If raw diamonds are imported from outside the AfCFTA area and further processed (i.e., polished) in an AfCFTA State, then the polished diamonds would fulfill the AfCFTA rules of origin.

Value added

The product-specific rules of origin in Appendix IV provide that a product will be considered to originate in the AfCFTA State where the value of manufacturing increases the value of the final product to the specified minimum level of domestic content required (expressed as an ad valorem percentage).

Non-originating content limits

The product-specific thresholds in Appendix IV provides limits on the amount of non-originating raw materials allowed to be used in the production of an AfCFTA-originating product. For example, catalytic converters (8421.39) for motor vehicle mufflers are produced in an AfCFTA State using parts (8421.39) from a non-AfCFTA State. The value of these non-originating parts is 30% of the ex-works price of the mufflers. According to Appendix IV rule for HS 8421.39, the “value of non-originating materials should not exceed 60% of the Ex-Works Price.” Since the value of the non-originating converters is below the limit, the mufflers will be considered to originate in the AfCFTA area.

Minimal operations do not cause a substantial transformation

Some manufacturing processes that only have minor effects on the final goods do not confer origin. These processes are reflected in Annex 2 as minimal operations/processes and include:

simple packaging operations, such as placing in bottles, cans, flasks, bags, cases, boxes, or fixing on cards or boards, sharpening, simple grinding, or simple cutting, simple ironing or pressing operations,simple painting or polishing operations, slaughtering of animals.

Products subjected to only these processes are considered insufficiently processed and therefore would not be considered as originating in the AfCFTA area.

Flexibility of AfCFTA rules of origin

The AfCFTA allows for the following flexibilities in its rules of origin:

Tolerance

The tolerance rule allows non-originating materials that are normally prohibited by the product-specific rule of origin up to a certain percentage. The AfCFTA Agreement sets the tolerance rate at 15% of the final product’s ex-works price.

Cumulation

When determining the origin of the final product, cumulation allows a manufacturer in an AfCFTA State to consider any AfCFTA-originating materials and processing done in another AfCFTA State as originating or as processed in their own country.

Other rule of origin requirements

Product must also meet all other applicable rule of origin requirements in Annex 2, such as the principle of territoriality and the rules on direct transport.

Proving the origin of AfCFTA products

There are different types of proof of origin that can be used when exporting to other AfCFTA States:

An official AfCFTA Certificate of Origin issued by the exporting country’s customs authorities; or

A self-declaration by an approved exporter using an “origin declaration” or an “invoice declaration”; or

A self-declaration by an exporter who is not approved on a limited invoice amount of 5,000 USD.

The proof of origin is valid for 12 months from the date of issue and must be submitted to the customs authorities of the importing country within this period.

Companies importing products into the AfCFTA area should consider the possible benefits of the AfCFTA rules of origin, which provide preferential treatment and allow products to be imported duty free or at lower duty rates.

The adoption of a flexible approach in implementing the rules of origin under the African Continental Free Trade Area (AfCFTA) agreement comes with certain risks and legal implications.

Risk of non-compliance

A flexible approach may increase the risk of non-compliance with the rules of origin requirements. If companies fail to properly determine and document the origin of their products, they may face penalties, loss of preferential treatment, or disruption of trade.

Verification challenges

The flexibility in the rules of origin may pose challenges in verifying the origin of products. Customs authorities may face difficulties in confirming the accuracy of origin claims, leading to potential disputes and delays in customs clearance.

Market distortions

The flexibility provided by the rules of origin may result in market distortions, as companies may strategically source inputs from non-AfCFTA countries to take advantage of lower tariffs or easier origin requirements. This could undermine the objectives of the AfCFTA and create uneven competition among member states.

A flexible approach can increase the administrative burden for both exporters and customs authorities. Determining the origin of products may require complex calculations, documentation, and cooperation between multiple stakeholders, leading to increased costs and administrative complexities.

Potential for fraud and abuse

The flexibility in the rules of origin may create opportunities for fraud and abuse. Dishonest actors may attempt to manipulate origin claims to gain unwarranted preferential treatment, leading to unfair competition and loss of revenue for legitimate traders.

From a legal perspective, non-compliance with the rules of origin may result in disputes and potential legal consequences. Disputes between trading partners may arise if there are disagreements over the origin of products or if one party suspects fraudulent practices. Legal frameworks and mechanisms, such as dispute resolution procedures, may be required to address these issues and enforce compliance with the rules.

While a flexible approach in the rules of origin under the AfCFTA can provide certain advantages, it also carries risks related to compliance, verification, market distortions, administrative burden, and potential fraud. It is crucial for businesses to understand and adhere to the rules of origin requirements to fully benefit from the preferential treatment offered by the AfCFTA.

Adopting a flexible approach in implementing the rules of origin under the African Continental Free Trade Area (AfCFTA) agreement poses various risks and legal implications.Enhanced verification mechanisms, transparent guidelines, and collaboration with non-AfCFTA countries are also essential to ensure fair trade and minimize the potential for abuse.