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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: FRCP 1000/2/1

18 December 2018

Dear Sirs,

Certificate of Origin Circular No. 6/2018

Commercial Information Circular No. 1119/2018

Certificate of Preference Circular No. 4/2018

Notice to Exporters :

Series 1 (USA) No. 4/2018

Series 2 (EU) No. 4/2018

Series 3 (Countries other than USA & EU) No. 4/2018

Textiles Trader Registration Circular No. 4/2018

The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA)
Agreement on Trade in Goods (The Agreement)

Certificate of Hong Kong Origin - CEPA ("CO(CEPA)")
Requirements for Including Product Development Costs in the "Regional Value Content"

Introduction

This circular outlines the requirements and additional conditions for including product development costs in the "regional value content" in the applications for Certificate of Hong Kong Origin - CEPA (CO(CEPA)) under the Agreement on Trade in Goods (the Agreement) of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). Traders are advised to read the relevant provisions of CEPA, the Agreement and its Annex, as well as other relevant Certificate of Origin Circulars issued by the Trade and Industry Department (TID) from time to time. The full text and other details of the CEPA and the Agreement are available from the webpage of the TID at: https://www.tid.gov.hk/english/cepa/index.html.

The Details

"Regional Value Content" (RVC) of the Agreement

2.As stipulated in Certificate of Origin Circular No. 5/2018 issued on 14 December 2018, the Agreement reaffirms that under CEPA, all goods of Hong Kong origin can enjoy zero tariff preference when importing into the Mainland1. The Agreement enhances the arrangements for CEPA Rules of Origin (ROOs), with a view to fully implement zero tariff on all imported goods of Hong Kong origin instantly. The Agreement will be implemented from 1 January 2019. According to the Agreement, when calculating the RVC to a product, traders can flexibly choose the original build-up method (i.e. the current "value-added content" requirement under CEPA) or the newly introduced build down method (see paragraph 3 below).

3.The calculation of RVC shall be consistent with generally accepted accounting principles2, and calculated in accordance with the following formula:

  1. Build-up method3
    RVC = value of originating materials4 + labour costs +
    product development costs
    ×100%
    FOB5 value
    The value of originating materials shall include the value of originating raw materials and component parts.

    Or
  2. Build-down method
    RVC = FOB value - value of non-originating materials6 ×100%
    FOB value
    For the build-down method, the value of non-originating materials shall be determined according to one of the following circumstances:
    1. in case of the imported non-originating materials, the value of non-originating materials shall be the CIF7 value of the materials at the time of importation;
    2. in case of the non-originating materials obtained in Hong Kong, it shall be the earliest ascertainable price paid or payable for the non-originating materials. The value of such non-originating materials shall not include freight, insurance, packing costs and any other costs incurred in transporting the materials from the supplier's warehouse to the producer/manufacturer's location.

Additional Requirements under Factory Registration

4.Regarding the above-mentioned build-up method for the calculation of the RVC, "product development" refers to product development carried out in Hong Kong for the purposes of producing or processing the exporting goods. Expenses included in product development shall be related to the exporting goods. Product development expenses include:

  1. fees payable for the development of designs, patents, patented technologies, trademarks or copyrights (collectively "these rights") carried out by the manufacturer himself;
  2. fees payable to a natural or legal person in Hong Kong for undertaking development of these rights; and
  3. fees payable for purchasing these rights owned by a natural or legal person in Hong Kong.

The expenses incurred shall be identifiable under generally accepted accounting principles.

5.If manufacturers want to include product development costs when calculating the RVC, in addition to complying with the original Factory Registration requirements under CEPA, they have to submit to the Trade and Industry Department (TID) the Declaration and Undertaking Form (Form FRD1) at Appendix 1 (pdf format). If the product development is performed by or purchased from a third party, the manufacturer is also required to furnish details of that third party and to request the third party to complete a separate Declaration and Undertaking Form (Form FRD2) at Appendix 2 (pdf format) certifying that the product development is performed in Hong Kong. The relevant Declaration and Undertaking Form(s) should be returned to the Factory Registration and Origin Certification Branch of TID at least 7 working days before the submission of the CO(CEPA) applications. If manufacturers have submitted the relevant Declaration and Undertaking Form(s) for including product development costs in the "value-added content" under CEPA before the implementation of the Agreement (i.e. before 1 January 2019), they are not required to re-submit the above Declaration and Undertaking Form(s) unless there is information update. Nevertheless, manufacturers are still required to understand and comply with the relevant requirements of the Agreement.

6.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).

Special Arrangements for Application for CO(CEPA)

7.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:

    M22 - I declare that the goods described in this manufacturer declaration have fulfilled the regional value content requirement under CEPA and the Agreement on Trade in Goods; and that product development costs are included in the regional value content.

    And
  2. submit one of the following Proforma Cost Statements:
    1. a Proforma Cost Statement for CO(CEPA) Application with Product Development Cost Included in the Regional Value Content using Build-Up Method (Form CST 1) (at Appendix 3 (pdf format) ) showing how the regional value content requirement has been met; or
    2. a Proforma Cost Statement for CO(CEPA) Application with Mainland Origin Goods and/or Materials (including the Raw Materials and Component Parts) Included in the Regional Value Content using Build-Down Method (Form CST 3) (at Appendix 4 (pdf format) ).

The cost statement should make reference to the CO(CEPA) application. The application will not be processed until both the EDI message and the cost statement have been received by the issuing organization.

8.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 accountant8 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.

9.In addition, manufacturers should note that in accordance with Article 13 of the Agreement, where fungible materials9 are used in the production of a good, the following methods shall be adopted in determining whether the materials used qualify as originating:

  1. physical separation of the materials;
  2. an inventory management method recognised in the generally accepted accounting principles of the exporting side. Such inventory management method should have been used continuously for at least 12 months from the date of commencement.

Hence, manufacturers may require to separately store and maintain separate inventory/consumption records for the originating materials and non-originating materials, and keep the related books and records such as commercial documents and proofs of origin for their inventories.

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

10.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

11.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

12.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

13.TID and 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/individuals may be liable to criminal prosecution for circumventing the conditions of CO(CEPA). A company/registered business/individual which commits an offence under the above Ordinances is liable to a maximum penalty of a fine of HK$500,000 and 2 years' imprisonment. Moreover, TID 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 CO including CO(CEPA) ; suspension of all kinds of certification facilities; suspension/cancellation of FR of the company/registered business/individual concerned.

Enquiries

14.For enquires on the content of this circular, please contact us through the following channels -

Address: Factory Registration and Origin Certification Branch
14/F, Trade and Industry Tower
3 Concorde Road, Kowloon City
Hong Kong
Telephone No.: 3403 6432
Fax No.: 2787 6048
E-mail 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 Regional Value Content using Build-Up Method (CST 1)
Appendix 4 (pdf format) Proforma Cost Statement for CO(CEPA) Application with Mainland Origin Goods and/or Materials (including the Raw Materials and Component Parts) Included in the Regional Value Content using Build-Down Method (CST 3)

Yours faithfully,




(Miss Relena KONG)
for Director-General of Trade and Industry

1 Imported goods do not include those prohibited by the Mainland's rules and regulations and those prohibited as a result of the implementation of international treaties by the Mainland, as well as products that the Mainland has made special commitments in relevant international agreements.
2 Generally accepted accounting principles means the recognised accounting standards of one side with respect to the recording of revenues, expenses, costs, assets and liabilities, the disclosure of information and the preparation of financial statements. Those standards may encompass broad guidelines of general applications as well as detailed standards, practices and procedures.
3 The formula for calculating the RVC using build-up method under the Agreement and value-added content under CEPA is the same.
4 Originating material means material that qualifies as originating in accordance with the provisions of Chapter 4 of the Agreement.
5 FOB means the free-on-board value of the good, inclusive of the cost of transport to the port or site of final shipment abroad.
6 Non-originating material means material that does not qualify as originating in accordance with the provisions of Chapter 4 of the Agreement, and material of undetermined origin.
7 CIF means the value of the good imported, inclusive of the cost of insurance and freight up to the port or place of entry into the importing side.
8 Hong 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 Institute of Certified Public Accountants at 37/F, Wu Chung House, 213 Queen's Road East, Wanchai, Hong Kong. Website: www.hkicpa.org.hk/.
9 Fungible materials mean materials which are interchangeable for commercial purposes, whose properties are essentially identical, and between which it is impractical to differentiate by a mere visual examination.