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Ref: FRCP 1000/2/1

18 December 2018

Dear Sirs,

Certificate of Origin Circular No. 7/2018

Commercial Information Circular No. 1120/2018

Certificate of Preference Circular No. 5/2018

Notice to Exporters :

Series 1 (USA) No. 5/2018

Series 2 (EU) No. 5/2018

Series 3 (Countries other than USA & EU) No. 5/2018

Textiles Trader Registration Circular No. 5/2018

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

Certificate of Hong Kong Origin - CEPA
Requirements for Including the Value of Mainland Origin Goods and Materials (including the Raw Materials and Component Parts) in the "Regional Value Content"

Introduction

This circular outlines the requirements and additional conditions for including the value of Mainland origin goods and/or materials (including the raw materials and component parts) 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.

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 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 instantly¹.  The Agreement will be implemented from 1 January 2019.  According to the Agreement, in calculating the RVC added to the products in Hong Kong, traders are provided with a flexible option to choose between the original build-up method (i.e. the current "value-added content" requirement under CEPA) and the newly introduced build‑down method (see paragraph 3 below).  Regarding the requirements for including Product Development Costs in the RVC, please refer to Certificate of Origin Circular No. 6/2018 issued on 18 December 2018.

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.

Accumulation Rule of the Agreement

4.Under the Agreement, where originating goods or originating materials of one side are incorporated into a good in the other side, such goods or materials shall be considered as originating in the latter side.  In other words, raw materials originating in the Mainland will be considered to originate in Hong Kong if they are incorporated into goods manufactured in Hong Kong and for export to the Mainland under the Agreement.

5.Nonetheless, Article 11 of the Agreement stipulates that, where the good of Hong Kong is subject to the RVC criterion, the RVC without counting the value of originating goods or originating materials of the Mainland shall be greater than or equal to 15% (build-up method) or 20% (build-down method) in accordance with the respective formulae.  In other words, even though a manufacturer includes the Mainland originating goods or materials in the calculation of RVC of the good, the RVC originated from Hong Kong cannot be less than 15% (build-up method) or 20% (build-down method).

Additional Requirements under Factory Registration

6.If manufacturers want to include the value of Mainland origin goods and/or materials (including the raw materials and component parts) when calculating the RVC, in addition to complying with the original Factory Registration requirements under CEPA, they have to submit to the TID the Declaration and Undertaking Form (Form FRVAC1) at Appendix 1 (pdf format).  They must undertake to keep and maintain separate books and records on the purchase and consumption of Mainland origin goods and/or materials (including the raw materials and component parts).  Commercial documents and certificate of origin documents related to the stock as well as the CO(CEPA) number obtained for the consumption of relevant goods and/or materials (including the raw materials and component parts) must be recorded.  Manufacturers must also specify in the Declaration and Undertaking Form the types of Mainland origin goods and/or materials (including the raw materials and component parts) to be used and undertake to store Mainland origin goods and/or materials (including the raw materials and component parts) separately.  They also have to consent to our providing relevant information in the Declaration and Undertaking Form, including those of the manufacturers, the Mainland origin goods and/or materials (the raw materials and component parts) and the reference number assigned by TID etc. to the Mainland Customs.

7.Manufacturers must return the above-mentioned Declaration and Undertaking Form to TID's Factory Registration and Origin Certification Branch at least 7 working days before submitting CO(CEPA) applications. Upon acceptance of the relevant Declaration and Undertaking Form, TID will issue a "reference number" to the manufacturer. If manufacturers have submitted the relevant Declaration and Undertaking Form for including the value of raw materials and component parts of Mainland origin 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 unless there is information update. Nevertheless, manufacturers are still required to understand and comply with the relevant requirements of the Agreement.

Export Declaration Requirements of Mainland Origin Goods and Materials (Including the Raw Materials and Component Parts)

8.Manufacturers are required to provide the reference number issued by TID to their Mainland export enterprises and obtain from them the photocopies of the export declarations or the filed goods lists for export and the original copies of the Mainland Certificates of Origin for CO(CEPA) applications.  The export declarations or the filed goods lists for export must be completed in accordance with the Mainland Customs' requirements.

Special Arrangements for Application for CO(CEPA)

9.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:
   
   M23 - 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 the value of Goods and/or Materials originating in the Mainland is included in the regional value content.
2. submit one of the following Proforma Cost Statements:
   1. a Proforma Cost Statement for CO(CEPA) Application with Mainland Origin Raw Materials and Component Parts Included in the Regional Value Content using Build-Up Method (Form CST 2)(at Appendix 2 (pdf format)); 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 3 (pdf format)).
   3. provide the photocopy of the export declaration or the filed goods list for export of the Mainland origin goods and/or materials (including the raw materials and component parts) exporting from the Mainland to Hong Kong and the original copy of the relevant Mainland Certificate of Origin for verification by TID and Hong Kong Customs & Excise Department (C&ED).

The manufacturer must list out clearly in the proforma cost statement the information about the Mainland origin goods and/or materials (including the raw materials and component parts) (including the names, specifications, model numbers, quantity and value, etc.) used and make declaration to confirm the origin of such goods and/or materials (including the raw materials and component parts) used.

10.The above proforma cost statement should make reference to the CO(CEPA) application and should be submitted to the issuing organisation together with the photocopy of the export declaration or the filed goods list for export and the original copy of the Mainland Certificate of Origin. The application will not be processed until the electronic data interchange (EDI) message, the corresponding cost statement and other necessary documents have been received by the issuing organisation. The "For Internal Use Only" column on the CO(CEPA) issued by the issuing organisation is printed with the word "S8" as a marking. The manufacturer may also be required to have 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.

11.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. 

Verification and Arrangements for Messages Interchange

12.Manufacturers may request suppliers of goods and/or materials (including the raw materials and component parts) to provide the CO issued by the China Council for the Promotion of International Trade or the General Administration of Quality Supervision, Inspection and Quarantine¹⁰ according to their needs and actual situation.

13.After the issuing organizations approve the CO(CEPA)s, relevant information of the approved CO(CEPA)s, including information about whether the value of the Mainland origin goods and/or materials (including the raw materials and component parts) has been included in the RVC (if applicable), will be transmitted to the Mainland General Administration of Customs electronically to facilitate customs clearance and tariff processing of the consignments in the Mainland.

14.In addition, C&ED will, from time to time, conduct a random on-site inspection before or after the issuance of the relevant CO(CEPA), including the checking of the production record and, at the same time, the inspection of the supporting documents of the origin of the Mainland origin goods and/or materials (including the raw materials and component parts).  If the Mainland goods and/or materials (including the raw materials and component parts) involve Hong Kong suppliers, C&ED will make appropriate follow up to ensure that the supporting documents of the CO(CEPA) tally with the relevant goods and/or materials (including the raw materials and component parts).

15.C&ED will visit the manufacturers from time to time to inspect the separate stock/consumption records and actual quantity of stock to ensure the authenticity of the records and that the manufacturers have fulfilled the abovementioned Declaration and Undertaking.

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

16.The application procedures and conditions of issuing CO(CEPA) will be subject to review by the Department at any time.  Traders will be kept informed of any changes.

Important Note

17.The certificate issuing organizations will keep the data provided by traders in strict confidence.  However, TID may under certain circumstances disclose such data to the C&ED 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.

18.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

19.TID and Government Approved Certification Organizations (GACOs) work closely with the C&ED, 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

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

List of Attachments

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.
¹⁰ The website of the China Council for the Promotion of International Trade and the General Administration of Quality Supervision, Inspection and Quarantine is http://www.ccpit.org and http://www.aqsiq.gov.cn/index.html respectively.