Tax & Accounting Blog

The Comprehensive and Progressive Trans-Pacific Partnership Agreement and its Impact on the Automotive Industry

Blog, Global Trade, ONESOURCE March 30, 2018

Amid the vast amount of news generated in the trade and customs scene, The Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”) or TPP11 was finally signed on March 8, 2018. The agreement is expected to come into force near the end of this year or early 2019, after the six or more signatories that are required to complete the domestic ratification process.

As one of the most anticipated mega-FTAs, CPTPP will cover nearly 13% of the global GDP, reducing trade barriers between 11 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Even though there are already existing bilateral or multi-lateral FTAs in place among certain members in this agreement, new FTA relationships between Asia countries and Americas are expected to open new markets.

In comparison to the original TPP, in CPTPP, some provisions are suspended temporarily. However, many of the chapters and annexes remain unchanged. CPTPP still provides various features to lower the barrier and facilitate trade among member countries. Companies will still enjoy the same tariff reduction schedule, trade facilitating features like self-issued certificate of origin, express shipments, and the single rules of origin for unified origin qualification.

The Rules of Origin (“ROO”) and Origin Procedures chapter, and provisions related to the Product-Specific Rules of Origin for certain vehicles and parts of vehicles are intact.

In this article, we will take a look at the key rules and concepts introduced by CPTPP related to origin determination, particularly those requirements for the automotive industry.

1. Additional Regional Value Contents (“RVC”) origin calculation methods

  • Net cost method (for automotive goods only)
    • The agreement clearly defines what should be included in net cost and the methodologies for net cost allocation.
    • Motor vehicle producers and automotive materials producers have different averaging methods allowed by the agreement
  • Focused value method (for certain automotive goods)
    • For certain Product Specific Rules (“PSR”), Focused of Value of Non-originating Material (“FVNM”) is counted instead of full Value of Non-originating Material (“VNM”)
    • Per each PSR, where focused value method is available, materials allowed to use as focused materials are specified by HS codes as well as Regional Value Content (“RVC”) ratio
    • Since FVNM is always smaller than VNM, focused value method is easier to qualify

2. Annex 1 to annex 3-D: provisions related to the PSR of origin for certain vehicles and parts of vehicles

In short, certain vehicles or parts of vehicle producers have two options. They can use PSRs and also manufacturing operations when determining the origin of material, they used for the production of goods.

The type of complex operations is defined in Table B (below). The agreement further clarifies the definition of “complex” operations and in the notes what operations are not considered as complex operations.

  • Certain vehicle (8701.10 through 8701.30 or 87.02 through 87.05) producers
    • When determining the origin of materials defined in Table A (below) which are used in the production of certain vehicles
    • If those materials go through production undertaken one or more operations, defined in Table B, those materials are considered as originating, or
    • PSRs for materials in Table A can still be used as another option

  • Automotive parts producers (producers of goods listed in Table C)
    • When determining the origin of materials which are used in the production of goods listed in Table C
    • If those materials go through production undertaken one or more operations defined in Table B, those materials are considered as originating and the originating content can be counted up to the threshold noted in Table C of the value for Build-Up / Build-Down or cost (Net Cost) of the good. Or,
    • PSRs for materials can still be used as another option

Here’s one example how this will benefit producers to calculate the origin:

  • The producer of 8407.33, a piston engine of chapter 87
  • Sales value = 10,000 USD
  • Threshold in Table C = 10% of Sales Value = 1,000 USD
  • PSR for the product = BD55

Before taking operation in Table B into consideration

  • VNM: 5,100 USD (material a + material b + material c)
  • Product determination: (10,000 – 5,100)/10,000 = 49%
  • Origin determination results: Non-originating

After taking operation in Table B into consideration

  • VNM: 4,100*USD
  • *the VNM for material b+ material C is 1,100 however only up to the threshold can be used as originating, thus 4,000USD + 100 USD
  • Product determination before operation: (10,000 – 4,100)/10,000 = 59%
  • Origin determination results: Originating

Conclusion

CPTPP, as expected of a modern FTA, provides additional tools to make a good produced in the member countries qualified as originating good. With the automotive specific provisions, the agreement also facilitates sourcing key automotive parts from member countries, which will result in bringing value chain into the regional trade regime, backed up by advanced dispute settlement, investment and intellectual protection, among other benefits.

One caveat is that CPTPP also introduces the direct verification as one of the verification methods. To prevent any unforeseen surprises, companies should start streamlining their FTA compliance operations to:

  1. Ensure fundamentals such as classification of goods and materials,
  2. Engage suppliers early enough to prepare origin evidence in advance, and
  3. Record and maintain all values used for the calculation of RVC in conformity with the Generally Accepted Accounting Principles (GAAP) applicable in the territory of a country where the good is produced.

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