RULES OF ORIGIN TRAINING MODULES

PART A. TUTORIAL

Module 5 - General Rule – Change in Tariff Classification ROO

Table of Contents

Module 5 - General Rule – Change in Tariff Classification ROO

• Topic 5 -1: What is Change in Tariff Classification?

• Topic 5 -2: Change in Heading – General Rule
• Topic 5 -3: De Minimis
• Topic 5 -4: Indirect Materials

This module comprises four topics which explain the principles of the Change in Tariff Classification
(CTC) ROO. This ROO is used within the Agreement Establishing the ASEAN-Australia-New
Zealand Free Trade Area (AANZFTA) Rules of Origin (ROO) as one of the co-equal rules known as
the “General Rule” and within the Product Specific Rule (PSR) Annex.

• Topic 1 explains what is meant by the CTC principle.

• Topic 2 explains the General Rule called Change in Tariff Heading (CTH), which is based on
the CTC principle.
• Topic 3 explains the tolerance that is allowed under the CTC principle; such tolerance being
called De Minimis.
• Topic 4 explains how the CTC principle deals with items such as electricity used to
manufacture a good. These items are called Indirect Materials

• Topic 5 -1: What is Change in Tariff Classification?

ANNZFTA contains a “General Rule” which has two equal and alternative rules, the RVC(40) and
the CTH ROO.

When the CTC is used in the PSR it may be set at the Chapter, Heading or Subheading level. The
use at the CTH level is explained in this Module. The Change in Tariff Chapter (CC) and Change in
Tariff Subheading (CTSH) ROO are explained in Module 7.

As CTC is based on the Harmonized Commodity Description and Coding System (HS) it is
recommended that you examine or re-examine the material discussing the structure of the HS in
Topic 2 of Module 2.

What is CTC?

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To meet the CTC ROO, a non-originating material used to produce a good must not have the same
classification under the HS as the final good into which it isincorporated. The CTC rules are written
in such a way as to ensure that the required substantial transformation of non-originating materials
occurs within an AANZFTAParty.

The concept of non-originating materials is particularly important in determining origin because it is

the non-originating materials that must be transformed and that have to satisfy the requirements of
the CTC ROO.

The CTC ROO applies only to non-originating materials used to produce the traded good.

The basic notion underlying this approach is that, for most goods, a reasonable way to measure the
degree to which a non-originating material is transformed within a Party is to compare the tariff
classification of the non-originating material used in production with the tariff classification of the
final good which is exported. If these two HS codes are sufficiently “distant” (as determined by the
ROO), in the sense that they apply to substantially different goods, origin can be attributed to the
good resulting from this production process.

There is no hierarchy that says that these level of changes represent a lesser or greater degree of
substantial transformation than each other. The level of change required is determined by how a
good and its contributing inputs are classified in the HS. Therefore a CC rule may correspond to a
similar level of transformation as a CTSH depending on where the goods fall within the HS.

Change in Tariff Classification

The concept of CTC applies to the last stage of the manufacture of a good that incorporates non-
originating materials.

The CTC rule requires that all non-originating materials used in the production of a good have a
different classification under the HS than the final good into which they are incorporated.

Therefore the CTC ROO is only relevant or applied when the good contains non-originating
materials.

What are originating and non-originating materials?

In Module 2 you were introduced to terminology used in these modules. In this module the following
terminologies are repeated as it is fundamental to the concept of CTC that you understand the
difference between each term.

Originating material

An originating material is a material that qualifies as originating in AANZFTA and is used in the
production of a good.

Non-originating material

A non-originating material is a material that in its own right does not qualify as originating under
AANZFTA. It is a material or component imported from a country outside the AANZFTA territory or
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materials produced in the AANZFTA territory that, because of the low level of transformation does
not meet the ROO.

The concept of non-originating materials is important in determining origin because it is the non-
originating materials that have to satisfy the requirements of the CTC ROO.

Material

A material is any matter or substance:

• used or consumed in the production of a good;

• physically incorporated into a good; or
• subjected to a process in the production of a good.

A material is therefore a good in its own right which can be traded, but when it is used in the
production of another good it is a material.

Good

A good is the product that is produced or manufactured from materials and may either be a good for
final sale to consumers or itself an input (material) for use in production of another good.

Differentiating between a material and a good

A printed circuit board is produced from sub-assemblies.

The sub-assemblies are materials used to produce the good, which is the printed circuit board.
If the printed circuit board is subsequently used in the production of a television receiver, then the
printed circuit board becomes the material used to produce the good, namely the television receiver.

• Topic 5 -2: Change in Heading – General Rule

Under the AANZFTA ROO, if the HS of the good is not listed in the PSR Annex then 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:

• RVC of 40 per cent; (this was explained in detail in Module 4)

or

• Change in Tariff Classification (CTC) at the heading level, i.e., a Change in Tariff Heading
(CTH).

The PSR Annex also uses the CTC rule at various levels of the HS including the CTH level.
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This topic explains the use of CTH in relation to the ‘General Rule’. The use of “CTH”, along with the
other variations of CTC, such as Change in Tariff Chapter (CC) and Change in Tariff Subheading
(CTSH) as used in the PRS, is explained in detail in Module 7.

The CTC at the heading level rule requires that all non-originating materials used in the production
of a good have a different classification under the HS at the heading level to the final good into
which they are incorporated.

What Does It Mean?

As discussed in Topic 2 of Module 2, when introducing the HS, a heading is at the four-digit level
(e.g., 0101). The first two digits of this code represent the chapter and the second two represent the
split of goods within that chapter at the heading level.

Non-originating materials can potentially come from the same chapter as the final good using a CTH
ROO, but not from the same heading.

CTC- Change in Tariff Heading

The CTC at the heading level rule requires that all non-originating materials used in the production
of a good have a different classification under the HS at the heading level to the final good into
which they are incorporated.

Example
1. Question:

A telephone answering machine (HS 8519.50) is produced in Singapore using telephone base
stations (HS 8517.63) imported from China and originating materials from Singapore.

The ROO for goods of 8519.50 is “CTH”.

Is the answering machine originating?

Answer:

The non-originating materials are from a different heading (HS 8117) compared to the final good
(HS 8119). Therefore the rule of change of heading has been met and the telephone answering
machines are originating goods.

Telephone
Originating
base stations
materials from
from China
Singapore
(HS 8517.63

Telephone
answering
machine (HS
8519.50

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CTH means that if a manufacturer in a Party makes a good using non-originating materials, that
good will be originating if there is a change in the HS code at the heading level of the finished good
compared to the materials used to make it i.e., if the HS heading of the finished good is different to
the HS heading of the component materials.

Example

2. Question:

A Thai manufacturer of leather handbags (HS 4202) imports leather (HS 4107) from Argentina to
manufacture handbags.

The ROO for goods of 4202 is “CTH”.

Is the handbag originating?

Answer:

The handbag is originating because it meets the CTH ROO of a change from leather of heading
4107 to handbags of heading 4202.

Leather from Originating

Argentina materials from
(HS 4107) Thailand

Leather
handbags
(HS 4202)

3. Question:

A Cambodian manufacturer imports chocolate (HS 1806.32), and sugar (HS 1701.11) from India
and originating milk extract from Australia. Using these imported materials he manufactures ice
cream (HS 2105).

The ROO for goods of 2105 is “RVC(40) or CTH”.

Is the ice cream originating?

Answer:

The ice cream is originating because it meets the CTH ROO of a change from headings 1701 and
1806 to heading 2105.

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 Sugar from
India (HS
Chocolate
1701.11) Milk extract
from India (HS
(originating)
1806.32)

Ice cream
(HS 2105

4. Question:

A manufacturer in Brunei makes porcelain tableware, decorated in several colours, of tariff heading
6911, using the following materials from countries outside the AANZFTA:
• Kaolin (HS 2507)
• Pigments (HS 3207)
• Decorative designs (HS 4911)

The ROO for heading 6911 is “RVC(40) or CTH”.

The manufacturer has elected to apply the CTC ROO to confer origin.

Is the tableware originating?

Answer:

Inputs from outside AANZFTA Final good

- Heading 2507 - Heading 4911
- Heading 6911
- Heading 3207

Kaolin (HS 2507)

Porcelain tableware
Pigment (HS 3207) (HS 6911)

Decorative design
(HS 4911)

The input materials originating from outside the AANZFTA are all classified in four-digit tariff
headings which are different from that of the final product.

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Thus, the requirement based on a change in tariff heading has been met and the final product is
considered to be originating.

5. Question:

The manufacturer in Brunei of porcelain tableware changes some of the materials and now uses
plain porcelain tableware instead of kaolin clay.

The non-originating materials from countries outside the AANZFTA are:

• Plain porcelain tableware (HS 6911)
• Pigments (HS 3207)
• Decorative designs (HS 4911)

The ROO for heading 6911 is “RVC(40) or CTH”.

The manufacturer has elected to apply the CTC ROO to confer origin.

Is the tableware originating?

Answer:

Inputs from outside AANZFTA Final good

• Heading 6911 Heading 6911
• Heading 3207
• Heading 4911

Porcelain tableware
(HS 6911)

Porcelain tableware
Pigment (HS 3207) (HS 6911)

Decorative design
(HS 4911)

With the use of plain tableware (HS 6911), which is classified in the same tariff heading as the final
decorated tableware (HS 6911), the work carried out in Brunei does not meet the requirements of
the CTH ROO and the decorated tableware therefore cannot be considered as AANZFTA
originating.

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Since we are discussing the ‘General Rule,’ which allows users to choose between an RVC 40 per
cent ROO and the CTH ROO, let’s go back and look at the examples and exercises from Module 4
(General Rule - RVC). When we examined these in Module 4 we only looked at whether they met
the origin requirement using RVC. Now let’s see how these goods fare under the other ‘General
Rule’, the CTH ROO.

Example
6. Question:

A wrist watch (HS 9102.11) is made using a non-originating watch mechanism (HS 9103.10).

The ROO for subheading 9102.11 is “CTH” – which means a change in HS classification is required
at the heading level. Is the watch originating under the CTH ROO?

Answer:

The non-originating parts are classified to heading 9103 and the final good is classified to heading
9102.

As these are different headings, the CTH ROO has been met and the watch is considered an
originating good under this method.

7. Question:

Table tennis bats (HS 9506.40) are produced in Cambodia using non-originating materials rubber
grips (HS 4016.99) which are imported from China.

The ROO for subheading 9506.40 is “CTH” – which means a change in HS classification is required
at the heading level.

Are the table tennis bats originating under the CTH rule?

Answer:

The non-originating parts are classified to heading 4016 and the final good is classified to heading
9506.

As these are different headings, the CTH ROO has been met and the watch is considered an
originating good under this method.

• Topic 5 -3: De Minimis

Although the CTC requirement is a very simple principle, it means that all nonoriginating materials
must undergo the required HS change. However, sometimes a low percentage of non-originating
materials used to produce a good may not undergo the required HS change, thus preventing the
good from becoming an originating good. For example, a good worth $10,000 that contains $5

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worth of nonoriginating materials that do not meet the CTC ROO would mean that the finished good
does not qualify as originating. Is this fair?

It is not considered fair, and to correct this, Free Trade Agreements (FTAs) often incorporate a de
minimis provision that allows a good to qualify as an originating good provided the total value of all
non-originating materials which do not satisfy the CTC ROO used to produce the good does not
exceed a certain percentage of the final good.

AANZFTA CTC Flexibility: the de minimis Provision

If exporters wish to use the CTC approach, the AANZFTA ROO provides additional flexibility
through a de minimis provision. The de minimis provision does not apply to the Regional Value
Content (RVC) ROO.

Under the de minimis provision, goods that do not completely satisfy the CTC ROO, can
nevertheless qualify as originating goods if the requirements of Article 8 (De Minimis) of Chapter 3
(Rules of Origin) are met.

Article 8
De Minimis

1. A good that does not satisfy a change in tariff classification requirement pursuant to Article 4
(Goods Not Wholly Produced or Obtained) will nonetheless be an originating good if:
(a) (i) for a good, other than that provided for in Chapters 50 to 63 of the HS Code, the value of all
non-originating materials used in the production of the good that did not undergo the required
change in tariff classification does not exceed 10 per cent of the FOB value of the good;

(ii) for a good provided for in Chapters 50 to 63 of the HS Code, the weight of all non-originating
materials used in its production that did not undergo the required change in tariff classification does
not exceed 10 per cent of the total weight of the good, or the value of all non-originating materials
used in the production of the good that did not undergo the required change in tariff classification
does not exceed 10 per cent of the FOB value of the good; and
(b) the good meets all other applicable criteria of this Chapter.

2. The value of such materials shall, however, be included in the value of non-originating materials
for any applicable regional value content requirement.

Under AANZFTA, if the Free on Board (FOB) value of all the non-originating materials that fail to
meet the CTC rule is less than 10 per cent of the FOB value of the final good then the good will still
qualify as originating.

The FOB value is the value 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.

For textiles and clothing of Chapters 50 to 63, the AANZFTA contains an additional provision on de
minimis. Textiles and clothing can qualify under the de minimis if the use of non-originating
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materials that do not meet the required CTC ROO is limited to 10 per cent of the total weight of the
good.

The de minimis principle is applied regardless of the CTC level (CC, CTH or CTSH) that is required
by the ROO.

While the value of non-originating material that fails to meet the CTC ROO is excluded up to the de
minimis value, the cost of all non-originating material is included in calculations of the RVC.

The de minimis Provision in CTC

Textiles and Apparel Products Other CTC-Eligible Products

A FOB Value of Final Product = $1,000 A FOB Value of Final Product = $1,000
Value of inputs not Undergoing CTC Value of inputs not Undergoing CTC
=< $100 =< $100

Or

B Weight of Final Product = 1,500 kilograms

Weight of inputs not Undergoing CTC
= < 150 kilograms

Example

1. Question:

A sword (HS 9307.00) is made using non-originating parts for a sword (HS 9307.00).

The FOB value of the sword is $100 and the value of the non-originating materials is $8.00.

The ROO for heading 9307 is “CTH” – which means a change in tariff classification is required at
the heading level.

Is the sword originating?

Answer:

The non-originating parts are classified to heading 9307 and the final good is also classified to
9307.

As these are within the same heading, the CTH ROO has not been met and the sword is not
considered to be an originating good under this method.

However, since the value of the non-originating materials is less than 10 per cent of the FOB value
of the sword, it meets the de minimis requirement and the sword is considered as originating.

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 Non-originating parts
(HS 9307)
value $8.00

Sword
(HS 9307)
FOB $100

2. Question:

A blanket (HS 6301.30) is produced by sewing together a fancy non-originating blanket (HS
6301.30) and a plain originating blanket.

The weight of the finished blanket is one kilogram and the weight of the nonoriginating blanket is 79
grams.

The ROO for goods of 6301.30 is “CTH” – which means a change in tariff classification is required
at the heading level. Is the blanket originating?

Answer:

The non-originating materials are classified to heading 6301 and the final good is also classified to
6301.

As these are the same heading, the CTH ROO has not been met and the blanket is not considered
to be an originating good under this method.

But since the weight of the nonoriginating components is less than 10 per cent of the weight of the
final good, it meets the de minimis requirement and the blanket is considered as originating.

Fancy non-originating Originating

blanket (HS 6301) blanket
weight 79 g (HS 6301)

Blanket
(HS 6301)
weight 1000 g

• Topic 5 -4: Indirect Materials

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The AANZFTA defines a indirect material as a good :

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

Under the AANZFTA, indirect materials are always treated as originating materials without regard to
where they are produced. Therefore indirect materials are not taken into account when determining
if a good meets a CTC ROO

Article 1(h)

Indirect Materials

Indirect material means 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, 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.

Electricity form China

Vietnam
(considered to be originating)

Brakes Australia

Machine tools made in USA

(considered to be originating)

Parts from Korea

(non-originating)

All indirect materials are considered originating.

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