Understanding rules of origin under the Developing Countries Trading Scheme
This guidance explains what rules of origin (RoOs) are and the changes under the Developing Countries Trading Scheme (DCTS).
The changes include simpler product specific rules (PSRs) and more generous cumulation options for exporters in Least Developed Countries (LDCs).
1. Overview of rules of origin and how to interpret where products originate
Rules of origin determine where goods are ‘from’, for example, where goods have been produced or had substantial work done to them. They provide the criteria for determining whether goods originate from a particular country. RoO are important in identifying which preferential tariffs apply under the DCTS.
Criteria for determining where goods originate
The 2 broad criteria for determining the country of origin for goods are:
-
Wholly obtained rule (WO): for goods to originate from a country, they must be produced entirely within the country, without incorporating materials from any other country.
-
Sufficient working or processing rule: goods may also originate from a country if they are processed in line with relevant product specific rules.
There are 3 broad categories of product specific rules:
1. Value-added rule – final goods must have limited value of non-originating materials to qualify as originating from a DCTS country.
This value is typically a defined percentage of the ‘ex-works’ price of the finished good. The ex-works price of finished goods is the production cost of the finished goods, minus internal taxes, insurance and freight costs.
2. Change of tariff classification – final goods cannot have the same classification as any of the non-originating materials used to make them.
Customs tariffs are based on the Harmonised System (HS). There are 3 HS levels used in the DCTS:
- HS2 (HS chapter level represented by 2-digit codes)
- HS4 (tariff heading level represented by 4-digit codes)
- HS6 (tariff sub-heading level represented by 6-digit codes)
There are 3 types of changes in tariff classification that could qualify goods as originating:
a. Change of Chapter (CC) – this means the final good cannot be classified under the same HS chapter as the non-originating materials for it to qualify as originating.
Illustration 1: Change of HS chapter case study for rubberised fabric
The Change of Chapter rule is the Product Specific Rule (PSR) for rubberised fabric under the Schedule for LDCs. This PSR requires that the HS chapter for rubberised fabric differs from the HS chapter of the raw materials used to manufacture it.
As illustrated below, the HS Chapter for rubberised fabric is 59, while those for rubber and fabric are 40 and 53 respectively.
| Category | Raw material source 1 | Raw material source 2 | Production | Export |
|---|---|---|---|---|
| Materials | Rubber | Fabric | Rubberised fabric | |
| Country | South Korea | India | Laos | United Kingdom |
| HS Chapter | 40 | 53 | 59 |
b. Change of Tariff Heading (CTH) – this means that, to qualify as originating, the final goods cannot have the same tariff heading as any of the non-originating materials.
c. Change of Tariff Sub-heading (CTSH) – this means that, to qualify as originating, the final goods cannot have the same tariff sub-heading as any of the non-originating materials.
3. Specific operations (Processing rule) – the production of the goods from non-originating elements must follow a set processing procedure. This type of rule specifies processes which need to have taken place to get originating status.
Illustration 2: Manufacturing processing rules for some products under the DCTS
Silk: spinning of natural fibres or extrusion of man-made fibres accompanied by spinning or twisting.
Flax yarn: spinning of natural fibres or extrusion of man-made fibres accompanied by spinning.
Glass or glassware: cutting of glassware or hand decorations (except silk-screen printing).
You should read the guidance on how to claim preferences on the trading with developing countries page to understand what documents you need to prove rules of origin.
2. Understanding product specific rules (PSRs)
Product specific rules (PSRs) are the processing rules that products or goods must meet to be considered as originating from a DCTS country. The PSRs that apply differ by HS chapter or product.
The DCTS introduced less restrictive PSRs for Least Developed Countries (LDCs), countries with Comprehensive Preferences.
These simplified PSRs make it easier for businesses to understand and use the rules of origin. You can use the DCTS Visualisation Tool to view the PSRs for LDCs.
The 4 changes to PSRs for LDCs under the DCTS are:
- 54 chapters allow 75% non-originating content at the chapter level (HS2).
Illustration 3: An Ethiopian leather shoe manufacturer sourcing 75% non-originating materials from China, Germany, and Austria
| Category | Raw Material Source 1 | Raw Material Source 2 | Raw Material Source 3 | Raw Material Source 4 | Raw Material Source 5 | Production | Export |
|---|---|---|---|---|---|---|---|
| Materials | Synthetic fibres | Dyes | Adhesives | Wood | Leather | Leather shoes | [intentionally blank] |
| Country | China | China | Germany | Austria | Ethiopia | Ethiopia | United Kingdom |
| % of ex-works price | 25% | 10% | 25% | 15% | 20% | 5% | [intentionally blank] |
2. 69% of PSRs (117 out of 169) allow for alternative ‘or’ rules. This allows businesses to meet at least one PSR if the other is difficult to meet.
For example, leather shoes under Chapter 42 have alternative PSRs. LDCs could either meet a Change of Tariff Heading or satisfy the 75% non-originating material maximum rule.
3. 76 chapters have a single set of rules that apply to the whole chapter. This means there are fewer exceptions, rules and variations at the tariff heading or sub-heading level.
This means it is easier for businesses to meet the Rules of Origin and qualify for preferential tariffs.
For example, all products classified under Chapter 10 (Cereals) are subject to the Change of Chapter (CC) PSR.
4. 20 chapters have some rules at the more detailed tariff heading level, that is, at HS4 rather than the HS2 chapter level. This occurs when the chapter rule is either unsuitable for all goods, or too restrictive for certain goods in the chapter.
For example, Chapter 6 has 2 detailed PSRs at the tariff heading level. The PSR for Chapter 6 generally is CC, while that of tariff heading 0603 is CTSH.
Product specific rules for Enhanced and Standard Preference countries
A specific set of rules of origin and product specific rules apply to countries eligible for Enhanced and Standard Preferences.
For example, the value of non-originating materials ranges from 20% to 70%, depending on the product being exported to the UK.
Illustration 4: A Pakistani rug manufacturer can source wool from Australia, constituting 40% of the total ex-works price of the final goods.
| Category | Raw Material Source 1 | Raw Material Source 2 | Raw Material Source 3 | Production | Export |
|---|---|---|---|---|---|
| Materials | Wool | Dye | Wool | Rugs | [Intentionally blank] |
| Country | Australia | Bangladesh | India | Pakistan | United Kingdom |
| % of ex-works price | 40% | 10% | 25% | 25% | [Intentionally blank] |
3. Understanding cumulation
Cumulation is when materials originating from specific countries can be incorporated in the products from a DCTS country and then considered as originating in that DCTS country. This can occur as long as the processing done in the DCTS country goes beyond minimal levels.
There are 6 types of cumulation under the DCTS:
- Bilateral cumulation: Businesses in DCTS countries under all preference tiers can cumulate with the following countries:
- UK
- British Overseas Territories
- EU
- Norway
- Switzerland
Cumulation relating to products classified under Chapters 1 to 24 of the Harmonised System is excluded from this rule for Norway and Switzerland.
Illustration 5: An integrated circuits manufacturer in the Philippines using bilateral cumulation to source raw materials from Germany and France
All countries under the DCTS are allowed to use bilateral cumulation and source raw materials from the United Kingdom, British Overseas Territories, European Union, Norway and Switzerland (excluding Chapters 1-24 for Norway and Switzerland).
Cumulated materials count as originating if the processing in the DCTS country meets minimal processing rules. In this example, the materials from France and Germany are considered as Filipino as the inputs are processed beyond minimal levels in the Philippines.
| Category | Raw Material Source 1 | Raw Material Source 2 | Raw Material Source 3 | Raw Material Source 4 | Production | Export |
|---|---|---|---|---|---|---|
| Materials | Resistors | Diodes | Transistors | Capacitors | Integrated circuits | [intentionally blank] |
| Country | China | France | Germany | Philippines | Philippines | United Kingdom |
|---|---|---|---|---|---|---|
| % of ex-works price | 25% (non-originating) | 15% (bilateral cumulation / counts as originating) | 10% (bilateral cumulation / counts as originating) | 20% | 30% | [Intentionally blank] |
2. Intra-regional cumulation: businesses in DCTS countries within designated regional groups can cumulate with other members. The two groups to which intra-regional cumulation applies are:
- group 1: Cambodia, Indonesia, Laos, Myanmar, Philippines, (Vietnam)*
- group 2: Bangladesh, Bhutan, India, Nepal, Pakistan, Sri Lanka
*By signing a Free Trade Agreement (FTA) with the UK, Vietnam has transitioned out of the DCTS effective January 2023. Therefore, there can only be one-way cumulation between members of Group 1 and Vietnam.
When intra-regional cumulation occurs, the tariff rate of the cumulating country, that is the country where the final processing takes place, will apply. For example, if the cumulating country is an Enhanced Preference Country, Enhanced Preference tariffs will apply.
Illustration 6: A Sri Lankan brassiere manufacturer using intra-regional cumulation to source raw materials from countries in group 2
The manufacturer can source raw materials like cotton, metal straps and foam from other countries in group 2. However, they must meet minimal processing rules for the goods to qualify as originating.
| Category | Raw Material Source 1 | Raw Material Source 2 | Raw Material Source 3 | Production | Export |
|---|---|---|---|---|---|
| Materials | Cotton | Metal straps | Foam | Brassieres | [Intentionally blank] |
| Country | India | Pakistan | Bangladesh | Sri Lanka | United Kingdom |
3. Inter-regional cumulation: this type of cumulation allows businesses in the 2 regional groups under the DCTS to cumulate between themselves. Businesses seeking to use this cumulation must make a case-by-case application. Like intra-regional cumulation, the tariff rate of the cumulating country, that is, the country where the final processing takes place, will apply.
4. Extended cumulation for Least Developed Countries (LDCs): Businesses in LDCs eligible for Comprehensive Preferences can cumulate with businesses in other DCTS countries and UK Economic Partnership Agreement (EPA) countries. This type of cumulation is only possible if goods are duty-free and quota-free when exported directly from the cumulating partner to the UK.
You can read the list of cumulating countries in Annex 2 of the Developing Countries Trading Scheme Policy Response.
Illustration 7: An Ethiopian soap manufacturer using extended cumulation to source raw materials from Nigeria and South Africa.
The manufacturer can source duty-free, quota-free raw materials, like coconut oil from Nigeria, a DCTS country, and alkaline salt from South Africa, an UK-EPA country.
However, if raw materials sourced are subject to tariffs when exported directly to the UK, the manufacturer cannot automatically use extended cumulation. This is because the 0% import tariff rule has yet to be satisfied.
The EU Generalised Scheme of Preferences (GSP) and USA GSP only allow extended cumulation on a case-by-case basis. However, the DCTS automatically allows extended cumulation for LDCs.
5. Case-by-Case Extended cumulation: the DCTS also allows businesses and governments from non-LDCs to make case-by-case applications for extended cumulation when exporting to the UK. This type of cumulation does not apply to products classified under HS Chapters 1 to 24.
6. Regional cumulation with a UK-FTA Partner: this allows LDCs to cumulate with Enhanced Preference (EP) countries in their regional group who have signed a Free Trade Agreement (FTA) with the UK.
This cumulation only applies if the final goods produced by the LDC or EP country would be eligible for 0% tariffs if they were exported directly from the FTA partner to the UK under the terms of the FTA.
This cumulation currently applies to those countries in the same regional group as Vietnam.
Illustration 8: A Cambodian bicycle manufacturer using regional cumulation to source bicycle parts from Vietnam.
Vietnam is an Enhanced Preference country that has transitioned out of the DCTS by signing an FTA with the UK.
Businesses in Cambodia (and group 1 members) can source bicycle parts from Vietnam and claim originating status when exporting the final product (bicycles) to the UK. However, the bicycle parts must be duty-free and quota-free in the UK-Vietnam FTA.
Cambodia must also meet minimal processing rules to claim originating status and preferential tariffs.
On the other hand, businesses in Vietnam cannot claim originating status and preferential tariffs under the DCTS for goods sourced from any group 1 member. The terms of the UK-Vietnam FTA will govern Vietnam’s direct trade with the UK.
Under the EU GSP, group 1 members cannot cumulate with an EU-FTA partner.
Enhanced or Standard Preference countries that move from low-income or lower-middle-income to upper-middle-income status can no longer cumulate under the DCTS.
This guidance is also available as a PDF:
