RULES OF ORIGIN TRAINING MODULES

PART A. TUTORIAL

Module 4 - General Rule – Regional Value Content

Table of Contents

• Topic 4 -1: What is Regional Value Content (RVC)?

• Topic 4 -2: PTA RVC ROO
• Topic 4 -3: Application of the formula
• Topic 4 -4: Indirect Materials
• Topic 4 -5: Minimal Operations and Processes

Module 4, General Rule - Regional Value Content (RVC), comprises five topics.

• Topic 1 explains the concept of a RVC Rule of Origin (ROO). This topic also explains why a
manufacturer/exporter may choose to use the RVC method.
• Topic 2 provides details of the Agreement Establishing the ASEAN-Australia-New Zealand
Free Trade Area (AANZFTA) RVC ROO and explains that AANZFTA contains two formulas
which the manufacturer/exporter may choose from when determining the RVC. The two
formulas, namely Indirect/Build-Down Method and the Direct Method, are also explained.
Both formulas use the concept of the Free on Board (BOB) value and this is also explained.
• Topic 3 provides a working explanation of both formulas.
• Topic 4 explains the concept of Indirect Materials and how they relate to the formulas.
• Topic 5 explains that the RVC ROO is not to be used when certain Minimal Operations and
Processes are the only process that the good has been subjected to.

• Topic 4 -1: What is Regional Value Content (RVC)?

Regional Value Content

The RVC ROO is a threshold which must be met for the good to be considered originating. The
threshold corresponds to a specified percentage of content of the FOB value of the exported good.
The RVC is sometimes referred to as a valueadded rule as it refers to the percentage of local value-
added.

Application of this type of rule requires an analysis of production costs. This requires effective
accounting and record-keeping procedures and assumes standard accounting practices to ensure
different cost items are treated similarly in different countries.

RVC is used where it has been decided that the ROO should require that a specified proportion of
the final value of the good must come from the AANZFTA Parties. Using this method of ROO, a
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certain percentage of value is required to be added during the production process. The criterion
itself is expressed in AANZFTA in two forms:

• non-originating content test, that requires less than a maximum allowable percentage of non-
originating materials be used to produce the good; and
• domestic content test, that requires a minimum percentage of value-added in the territory
where the good was produced; and

(General costs are those costs associated with running the business).

Maximum Allowance for Non-Originating Minimum Requirement of Domestic

Material Content
The manufacturing or processing operation
The use of non-originating input materials or
carried out in an AANZFTA Party must equal
components in the manufacturing or processing
or exceed a given percentage of the final value
operation carried out in an AANZFTA Party is
of the good in order to confer originating status
limited to a maximum amount.
to the final good.
This method requires a comparison between the This method required a comparison between
value of the non-originating inputs or components the value added in an AANZFTA Party and the
with the value of the final good. value of the final good.
Once this certain amount of local content is measured, it can be compared with a specific
percentage parameter (i.e., the bench-mark regional content dictated by the ROO). If the measured
content of the product meets this parameter, it is considered to be originating in the FTA region and
therefore eligible for the preferential treatment.

In practice, the RVC method most often involves comparison of the value of the non-originating
materials used in the production of a good with the value of the finished product. The value of non-
originating materials is generally the cost to get the materials to the point of importation. The value
of the good as exported is normally calculated using the selling price of the goods (the FOB price or
the price at exportation).

In FTAs there are many different approaches RVC calculations but in AANZFTA two methods are
used:

• Direct
• Indirect/Build-Down

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Why would a manufacturer/exporter choose to use the RVC ROO?

The RVC ROO provides a precise and uniform method of determining origin that is relatively easily
understood.

The value of non-originating materials is available from the commercial records relating to their
importation. Also, the FOB value of the exported goods can easily be obtained from the export
invoice. Therefore the manufacturer/exporter can readily obtain the information needed to calculate
the RVC and the values can be supported by the commercial invoices and commercial records of
the trader.

The manufacturer/exporter may find using the RVC ROO to be troublesome when the RVC
percentage that has been determined is very close to the required threshold percentage set out in
the ROO, for example RVC 40%.

The trouble can be caused by slight rises in the cost of materials which may cause a product that
was originating with one importation of non-originating materials to be non-originating with the next
importation of non-originating materials.

Similarly, the origin attributed to goods manufactured may be influenced by fluctuations in world
market prices for raw materials and also currency fluctuations. These fluctuations may at times be
so marked that the application of the RVC can provide different answers for each importation of
non-originating materials.

An indication of the potential importance of this factor can be seen in the fact that the United States
Dollar has fluctuated greatly against many other currencies in the last decade. This affects not only
international competitiveness but also the capacity for exported goods to meet the percentage
threshold ratio used in the RVC ROO. This can mean that a good that qualifies under the value-
added approach at a particular time may not qualify in the future even though the same production
process and input materials are used.

A manufacturer/exporter can also be disadvantaged if production is expanded (say for export to

other markets). It can mean that the average per unit costs may fall, reducing the final value (and
proportion) of local content for the purpose of the RVC. The expansion of production and lowering of
unit costs would generally be seen as an improvement in economic efficiency and yet it can have
the perverse effect of disqualifying a product from preference in the importer’s market. This may
have the effect of constraining production efficiencies. If a business wants to improve its production
efficiencies they will generally be reducing costs – this means they achieve lower local content
value even though they are improving performance and making a more competitive product.

A low-cost manufacturer/exporter may find that it cannot meet the RVC ROO while a competitor
who has a higher cost of production (and uses the same non-originating materials) may qualify as
originating.

• Topic 4 -2: AANZFTA RVC ROO

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The AANZFTA sets out the RVC calculation method for the RVC ROO to determine origin in Article
5 (Calculation of Regional Value Content) of Chapter 3 (Rules of Origin).

Article 5

Calculation of Regional Value Content

1. For the purposes of Article 4 (Goods Not Wholly Produced or Obtained), the formula for
calculating the regional value content will be either:

(a) The Direct Formula – Build-Up Formula:

AANZFTA
Material Labor Overhead Other
+ + + Profit +
Cost Cost Cost Cost
RVC= x 100%
FOB
or

(b) The Indirect/ Build-Down Formula:

FOB – Value of Non-Originating Materials

x 100 %
FOB
Where:

• AANZFTA Material Cost is the value of originating materials, parts or produce that
are acquired or self-produced by the producer in the production of the good;
• Labour Cost is wages, remuneration and other employee benefits;
• Overhead Cost is the producer’s total overhead expense;
• Other Costs is costs incurred in placing the good in the ship or other means of
transport for export, including, but not limited to, domestic transport costs, storage
and warehousing, port handling, brokerage fees and service charges;
• FOB is the free-on-board value of the goods, inclusive of the cost of transport to the
port or site of final shipment abroad. This value is to be arrived at in accordance with
the GATT rules on customs valuation;
• Value of non-originating materials is the cost-insurance-freight (CIF) value at the
time of importation or the earliest ascertained price paid for all non-originating
materials parts or produce that are acquired by the producer in the production of the
good. Non-originating materials include materials of undetermined origin but do not
include a material that is self-produced;
2. The value of goods under this Chapter shall be determined in accordance with Article VII of
GATT 1994 and the Agreement on Customs Valuation.

Originating goods status can be determined in the case of 84 per cent of all AANZFTA tariff lines
through an RVC calculation, either by use of the RVC(40) ‘General Rule’ or a PSR.

There are two approaches that can be used to calculate RVC, the “Direct Formula” calculation and
the “Indirect/Build-Down Formula” calculation. In nearly all cases, the RVC must equal at least 40

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per cent of the Free on Board (FOB) value of the good and the final process of production must be
performed within an AANZFTA Party the good can be considered as an originating good.

The AANZFTA provides the choice of two formulas

The AANZFTA allows the manufacturer/exporter to choose the RVC formula (Direct or
Indirect/Build-Down) that is most suited to their business. The AANZFTA allows a
manufacturer/exporter to change from one formula to the other as their business operations change,
provided that generally accepted accounting principles are used. Having two RVC calculation
methods gives producers more than one way to demonstrate that the RVC requirement has been
satisfied. The benefit of providing a choice of formulas is that it gives flexibility to the
manufacturer/exporter to determine what is most appropriate for their particular good or business
model.

The Indirect/Build-Down method is generally simpler to use, but a manufacturer/exporter can

choose whichever method is most suitable to its production processes.

The Formulas

Each formula involves a numerator and a denominator.

Numerator and Denominator

3 + 4 In this simple formula, 3 + 4 is the numerator and 5 is the denominator.

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Both RVC calculation methods involve the same denominator but differ in the numerator.

Indirect/Build-Down method

The Indirect/Build-Down method uses as the numerator the difference between the FOB value and
the value of non-originating materials used to produce the good. This approach has the advantage
of simplicity inasmuch as the manufacturer need only identify the non-originating materials used in
the production of the good.

Direct method

The Direct method uses, as numerator, the sum of the value of originating inputs, either bought in or
made in-house. This approach can be administratively simple for producers that buy components of
significant value that are known to have originating status. Such a manufacturer needs only to
enumerate sufficient originating material to pass the threshold hurdle and then go no further. This
method does not necessarily require a full inventory of purchased inputs and a full determination of
their originating or non-originating status. However, it can be much more onerous if a full accounting
of many inputs and processes is required to determine origin.

Free on Board value

The FOB value is used in both formulas.

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Contracts involving international transportation often contain abbreviated trade terms that describe
matters such as the time and place of delivery and payment, when the risk of loss shifts from the
seller to the buyer, as well as who pays the costs of freight and insurance. The most commonly
known trade terms are INCOTERMS, which are published by the International Chamber of
Commerce.

FOB is the INCOTERMS term requiring the seller to deliver goods on board a vessel designated by
the buyer. The seller fulfils its obligations to deliver when the goods have passed over the ship’s rail.
FOB value represents the cost of the good and transport to the said vessel.

The FOB value is determined under Articles 1 to 8, Article 15 and the corresponding Interpretative
Notes of the WTO Valuation Agreement, as adjusted to exclude any costs, charges, or expenses
incurred for transportation, insurance, and related services incidental to the international shipment
of the merchandise from the country of exportation to the port or place of importation.

• Topic 4 -3: Application of the formula

Article 4 (Goods Not Wholly Produced or Obtained) of Chapter 3 (Rules of Origin) directs that the
‘General Rule’ applies to the goods. This was previously explained in Module 2 (How do Rules of
Origin work). The ‘General Rule’ provides a choice of either:

• a RVC of 40 per cent;

or

• a Change in Tariff Classification (CTC) at the heading level (this is explained in detail in
Module 5).

We will now examine the application of both AANZFTA formulas in relation to meeting the
requirement of a RVC of 40 per cent in the ‘General Rule’ and the PSR. Note that the PSR also
uses the RVC rule in other ways (this is explained in detail in Module 7).

AANZFTA - Indirect/Build-Down Method

Under the Indirect/Build-Down Method, the RVC calculation examines the amount of non-originating
materials used in the production of a good.

FOB – Value of Non-Originating Materials

RVC = x 100 %
FOB
where

RVC is the Regional Value Content, expressed as a percentage

FOB is the Free on Board value of the goods, inclusive of the cost of transport to the port or
site of final shipment abroad

Value of Non-Originating Materials (VNM) is the Cost Insurance Freight (CIF) value at the
time of importation or the earliest ascertained price paid for all nonoriginating materials, parts
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 or produce that are acquired by the producer in the production of the good. Non-originating
materials include materials of undetermined origin but do not include a material that is self-
produced.

Indirect/Build-Down Method

A manufacturer sells a good for $200 FOB. The value of non-originating materials used in the good
is $60. Using the Indirect/Build-Down method, the manufacturer calculates the RVC as follows:

FOB – Value of Non-Originating Materials

RVC = x 100 %
FOB

$200 – $60
RVC = x 100 % = 70%
$200

Therefore, using the Indirect/Build-Down method, the RVC of the good is 70 per cent

As 70 per cent is greater than the required 40 per cent (under the ‘General Rule’) the good is an
originating good.

The Indirect/Build-Down method calculates the value of the non-originating materials as a

percentage of the FOB value of the good.

Example
1. Question: A wrist watch (HS 9102.11) is made using a non-originating watch mechanism
imported from China. Each watch is sold for $50 FOB. The value of the non-originating materials
is $18. The ROO for subheading 9102.11 is “RVC (40)” – i.e. the good has a RVC of not less
than 40 per cent based on the Direct or Indirect/Build-Down formula. Is the watch originating?

Answer: The RVC under the Indirect/Build-Down method is:

RVC = FOB – value of non-originating materials x 100%

FOB
RVC = (50 – 18) / 50 x 100 = 64%

The watch is considered an originating good under this method, since the required RVC of 40 per
cent has been met.

Direct Method for AANZFTA

Under the Direct Method, the RVC calculation determines the RVC of goods using the value of
originating materials used in the production of the good as the basis for the calculation.

AANZFTA
Material Labor Overhead Other
+ + + Profit +
Cost Cost Cost Cost
RVC= x 100%
FOB

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where:

RVC is the Regional Value Content, expressed as a percentage

FOB is the Free on Board value of the goods, inclusive of the cost of
transport to the port or site of final shipment abroad
AANZFTA Material Cost is the value of originating materials, parts or produce that are
acquired or self-produced by the producer in the production of the
good
Labour Cost includes wages, remuneration and other employee benefits
Overhead Cost is the total overhead expense. In business, overhead or overhead
expense refer to an ongoing expense of operating a business; it is
also known as an "operating expense". Examples include rent, gas
and electricity.
Other Costs are the costs incurred in placing the good in the ship or other means
of transport for export including, but not limited to, domestic transport
costs, storage and warehousing, port handling, brokerage fees and
service charges.

Direct Method

A producer sells a good for FOB $200.

The AANZFTA Material Cost = $50, Labour Cost = $30, Overhead Cost = $20, Profit = $15 and
other Costs = $5 for a total cost of $120.

Using the Direct method, the producer calculates the RVC as follows:

AANZFTA
Material Labor Overhead Other
+ + + Profit +
Cost Cost Cost Cost
RVC= x 100%
FOB

$50 + $30 + $20 + $15 + $5

RVC = x 100%
$200

$120
RVC = x 100% = 60%
$200

Therefore, using the Direct Method, the RVC of the good is 60 per cent

Example
2. Question: Table tennis bats (HS 9609.10) are produced in Cambodia and sold for $10. Non-
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originating materials used to produce the bats are the rubber grips which are imported from China
valued at $3.

The AANZFTA originating materials are $4, labour costs are $1, overheads are $0.50, profit is $1
and other costs are $0.50. The ROO for subheading 9609.10 is “RVC (40)” – i.e. the good has a
RVC of not less than 40 per cent based on the Direct or Indirect/Build-Down formula.

Are the table tennis bats originating?

Answer:

The RVC under the Direct method is:

AANZFTA
Material Labor Overhead Other
+ + + Profit +
Cost Cost Cost Cost
RVC= x 100%
FOB

$4 + $1 + $0,50 + $1 + $0,50
RVC = x 100% = 70%
$10

The table tennis bats are considered an originating good under this method, since the required RVC
of 40 per cent has been met.

• Topic 4 -4: Indirect Materials

The AANZFTA defines an indirect material as “a good

• used in the production, testing, or inspection of a good but not physically incorporated into
the good,
• or a good used in the maintenance of buildings
• or the operation of equipment associated with the production of a good”.

Under the AANZFTA there is a Direct RVC formula. This formula uses among other things the value
of overheads. If you examine the list of indirect materials in Article 1(h) (Indirect Materials) below
you will see that for the majority of these they are in fact overheads.

AANZFTA
Material + Labor + Overhead + Profit + Other
RVC = Cost Cost Cost Cost x 100%
FOB

Article 1 (h)
Indirect Materials
Indirect material means a good used in the production, testing, or inspection of a good but not
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physically incorporated into the good, or a good used in the maintenance of buildings or the
operation of equipment associated with the production of a good, including:

i. fuel and energy;

ii. tools, dies and moulds;
iii. spare parts and materials used in the maintenance of equipment and buildings;
iv. lubricants, greases, compounding materials and other materials used in production or used
to operate equipment and buildings;
v. gloves, glasses, footwear, clothing, safety equipment and supplies;
vi. equipment, devices and supplies used for testing or inspecting goods;
vii. catalysts and solvents; and
viii. any other goods that are not incorporated into the good but whose use in the production of
the good can reasonably be demonstrated to be a part of that production.

• Topic 4 -5: Minimal Operations and Processes

In order to assure that only manufacturing processes that meet the requirements of substantial
transformation count as origin conferring processes, the AANZFTA contains provisions which
identify operations that are considered to have only minor effect on the characteristics of the final
goods with the result that such “minimal operations” do not confer originating status.

The legal text addressing Minimal Operations and Processes is found in Article 7 (Minimal
Operations and Processes) of Chapter 3 (Rules of Origin).

Article 7
Minimal Operations and Processes
Where a claim for origin is based solely on a regional value content, the operations or processes
listed below, undertaken by themselves or in combination with each other, are considered to be
minimal and shall not be taken into account in determining whether or not a good is originating:

a) ensuring preservation of goods in good condition for the purposes of transport or storage;
b) facilitating shipment or transportation;
c) packaging or presenting goods for transportation or sale;
d) simple processes, consisting of sifting, classifying, washing, cutting, slitting, bending, coiling
and uncoiling and other similar operations;
e) affixing of marks, labels or other like distinguishing signs on products or their packaging; and
f) mere dilution with water or another substance that does not materially alter the
characteristics of the goods.

In the AANZFTA, the provision on minimal operations and processes only apply to the RVC ROO.

Provisions on minimal operations and processes are required when a RVC ROO is applied as there
is potential for costs to be manipulated with little manufacturing actually occurring.

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Minimal operations and processes are activities, which, when these are the only activities that
occur, are not sufficient to represent a substantial transformation. The value of such operations
cannot be counted on their own toward satisfying the RVC ROO.

Minimal operations and processes carried out individually or even in combination will never confer
originating status to a final good. The minimal operations and processes are allowable when
conducted in association with other manufacturing activities which are more substantial than those
listed in the article on minimal operations.

Example
3. Question: An exporter of fruit juice imports bottles filled with fruit juice from India for $1 FOB.

The bottles are imported into Myanmar where an originating label is attached to each bottle.

The labels cost $0.50 each.

Is the fruit juice originating?

Answer: The RVC ROO cannot be used because the attaching of labels is defined as a minimal
operation. As a consequence, the fruit juice is nonoriginating.

Bottled fruit juice,

FOB $ 1,- (non- Fruit juice
originating) (non-
originating)

Label, FOB $
0,50 (originating)

The fruits juice is non-originating.

Example
2. Question: An exporter of fruit juice imports fruit from India for $0.50 FOB.

The fruit is squeezed to create fruit juice which is then bottled in Myanmar where an originating label
is attached to each bottle.

The FOB value of the exported fruit juice is $2.

Is the fruit juice originating?

Answer: The RVC ROO can be used because the attaching of labels (which is a minimal operation)
is allowed in this scenario because it has now been conducted in association with a manufacturing
activity (juicing the fruit).

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 Labels
Indian fruit, FOB $ 0,50
(originating)
(non-originating)

Fruit juice
Squeezed fruit
FOB $2
juice (originating)
(originating)

RVC = FOB – value of non-originating materials x 100%

FOB

RVC = (2 – 0.50) / 2 x 100 = 75%.

The fruit juice is originating.

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