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Trade and Industry Department The Government of the Hong Kong Special Administrative Region
Brand Hong Kong - Asia world city

24-hour hotline : 23 922 922

e-mail address : enquiry@tid.gov.hk

Ref : TRA CR 1327/1/4

14 November 2003

Dear Sirs,

Certificate of Origin Circular No. 24/2003

Certificate of Preference Circular No. 21/2003

Commercial Information Circular No. 280/2003

The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)

Certificate of Hong Kong Origin - CEPA

Additional Conditions for Including Product Development Cost in
CO(CEPA) Applications

Introduction

This circular sets out the additional conditions for traders who wish to include product development cost in their CO(CEPA) applications for meeting the "value-added content" origin rule for certain products. Applicants are advised to read the relevant provisions of CEPA and its Annexes in conjunction with this Circular.

Details

  1. To facilitate the consideration of CO(CEPA) applications seeking to include product development cost to meet the requirements under the "value-added content" origin rule, the applicants must comply with the conditions set out in paragraphs 5-8 below, in addition to the conditions of issuing CO(CEPA) as stipulated in the circular on "Certificate of Hong Kong Origin - CEPA" issued on 14 November 2003.1
  2. The "value-added content" origin rule under CEPA refers to the total value of raw materials, component parts, labour costs and product development costs exclusively incurred in Hong Kong being greater than or equal to 30% of the FOB value of the goods claiming zero tariff under CEPA. Moreover, the final manufacturing or processing operations should be completed in Hong Kong. The formula for calculation of the value-added content is as follows:
    value of raw materials + value of component parts +
    labour costs + product development costs
    x 100% ≥30%
    FOB value of the goods claiming zero tariff under CEPA

    The calculation should be consistent with generally accepted accounting principles.

  3. The "product development" referred to in the value-added content formula must be carried out in Hong Kong for the purposes of producing or processing the goods claiming zero tariff under CEPA. Product development expenses include:
    1. fees payable for the development of designs, patents, patented technologies, trademarks or copyrights (referred to as "rights" collectively) carried out by the manufacturer himself;
    2. fees payable to a natural or legal person in Hong Kong for undertaking development of those rights; and
    3. fees payable for purchasing those rights owned by a natural or legal person in Hong Kong.

    The expenses should be related to these goods and clearly identifiable under generally accepted accounting principles.

Additional Requirements under Factory Registration

  1. Manufacturers who wish to include product development cost in the value-added content formula for their CO(CEPA) applications must complete the Declaration and Undertaking Form (FRD1) at Appendix 1.(pdf format) If the product development is performed by or purchased from a third party, the manufacturer is required to furnish details of that third party and to request the third party to complete a separate Declaration and Undertaking Form (FRD2, at Appendix 2 (pdf format)) certifying that the product development is performed in Hong Kong. The Declaration and Undertaking forms should be returned to the Certification Branch's Customer Service Centre at least one week before the manufacturer can seek to include product development cost in submitting CO(CEPA) applications for the relevant product.
  2. Furthermore, the manufacturer is required to submit an annual cost accounts showing the costs incurred by the manufacturer in the conduct of business as extracted from its annual financial statement. Newly-established companies which do not have annual financial statements available should submit the annual cost accounts one year after operation. For other companies, they should submit the cost accounts, extracted from the latest annual financial statement, when filing the Declaration and Undertaking form(s).

Additional Requirements for Application for CO(CEPA)

  1. The manufacturer should comply with the following additional requirements when applying for CO(CEPA):
    1. make the following special declaration in the CO(CEPA) application:

      M16 - I declare that the goods described in this manufacturer declaration have fulfilled the 30% Hong Kong value-added content requirement under CEPA and that product development costs are included in the Hong Kong value-added content

      and

    2. submit a proforma cost statement (at Appendix 3 (pdf format)) showing how the 30% Hong Kong value-added content requirement has been met. The cost statement should make reference to the CO(CEPA) application and should be submitted either in person or by fax to the issuing organization. The application will not be processed until both the EDI message and the cost statement have been received by the issuing organization.
  2. The manufacturer may also be required to have the annual cost accounts referred to in paragraph 6 above and the proforma cost statements audited by a Hong Kong certified public accountant2 at its expense and submit them to any officer authorized by the Director-General of Trade and Industry and/or the Commissioner of Customs and Excise within 30 days upon request.

Review of the Conditions of Issuing CO(CEPA) and Application Procedures

  1. The application procedures and conditions of issuing CO(CEPA) will be subject to review after implementation. Traders will be kept informed of any changes.

Handling of Information

  1. The certificate issuing organizations will keep the data provided by traders in strict confidence. However, the Trade and Industry Department may under certain circumstances disclose such data to the Customs and Excise Department or other government departments, or to third parties within or outside Hong Kong. These circumstances include the following: the disclosure is necessary to facilitate the consideration or verification of the CO(CEPA) in question; the disclosure is authorized or required by the laws; or an explicit consent to the disclosure is given by the traders concerned.

Important Note

  1. It is the responsibility of traders to complete the application for CO(CEPA) fully and truthfully, and provide the supporting documents as required under the conditions of CO(CEPA). Failure to provide accurate and complete information may affect the consideration and processing of the application, and may result in the application being deferred or rejected.

Warning

  1. The Trade and Industry Department and the Government Approved Certification Organizations (GACOs) work closely with the Customs and Excise Department, through checks and inspections, to ensure compliance with the provisions of Import and Export Ordinance, Cap. 60 and its subsidiary legislations as well as the Protection of Non-Government Certificates of Origin Ordinance, Cap.324. Companies/registered businesses may be liable to criminal prosecution for circumventing the conditions of issuing CO(CEPA). A company/registered business which commits an offence under the Ordinances is liable to a maximum penalty of a fine of HK$500,000 and 2 years' imprisonment. Moreover, the Trade and Industry Department and GACOs may take administrative actions against the traders concerned irrespective of whether they have been prosecuted. Such administrative actions may involve, but shall not necessarily be confined to, any or all of the following: refusal to issue a certificate including CO(CEPA); suspension of all kinds of certification facilities; cancellation of Factory Registration of the company/registered business concerned.

Enquiries

  1. For further information on application for CO(CEPA) and CEPA rules of origin, please contact us at :
Address : Customer Service Centre of the Certification Branch
3/F, Trade and Industry Department Tower
700 Nathan Road, Kowloon
Telephone No. : 2398 5525/3403 6432
Fax No. : 2787 6048
Email address : cepaco@tid.gov.hk

List of Attachments

Appendix 1 
(pdf format)
Factories Seeking to Include Product Development Cost in Applications for CO(CEPA) - Declaration and Undertaking (FRD1)
Appendix 2 
(pdf format)
Companies Supplying Product Development Service to Factories Seeking to Include Product Development Cost in Applications for CO(CEPA) - Declaration and Undertaking (FRD2)
Appendix 3
(pdf format)
Proforma Cost Statement for CO(CEPA) Application with Product Development Cost Included in the Hong Kong Value-added Content



Yours faithfully,

 

(Steven M L MA)

for Director-General of Trade and Industry

1The circular can also be downloaded from the Trade and Industry Department's webpage www.tid.gov.hk/english/aboutus/tradecircular/tradecircular_maincontent.html.

2Hong Kong certified public accountants are professional accountants registered under the Professional Accountants Ordinance (Cap. 50) and holding a practising certificate. A list of the registered professional accountants is available for perusal by the public at the office of the Hong Kong Society of Accountants at 4/F, Lippo Centre, Tower Two, 89 Queensway, Hong Kong. Website: www.hksa.org.hk/.