On 15 February 2017, the European Parliament voted to ratify the EU – Canada Trade Agreement (CETA). This means that, once Canada has also ratified the Agreement, CETA will enter into force provisionally. The provisional application includes most chapters of the Agreement, except for:
- investment protection
- investment market access for portfolio investment (but market access for foreign direct investment is an exclusive EU competence)
- the Investment Court System.
To be fully applied, the Agreement still needs to be ratified by the national Parliaments in each individual Member State.
What does CETA mean for trade
Whilst certain chapters of the Agreement are controversial, the trade provisions will deliver a reduction of costs of trade between the two territories. Tariffs will be phased out on a schedule starting with 87.5% of the full duty in year 1, and completing in year 8 with 0% duty. The EU Commission estimates over €500 million a year in savings related to customs duties paid in Canada on exported goods. Whilst similar numbers are not available for EU imports, the savings are also likely to be significant.
How to prepare
To benefit from the duty rate reductions, goods must:
- originate in Canada or in the EU in accordance to the Protocol on Rules of Origin and Origin Procedures attached to this Agreement;
- be accompanied by an origin declaration issued by the exporter; and
- remain under customs control while outside the territories of the two parties.
The origin declaration can be provided on an invoice or any other commercial document that describes the originating product in sufficient detail to enable its identification. Changes may need to be made to IT systems to allow these documents to be issued for each order.
More importantly, both exporters and importers need to ensure that the goods they trade in originate in one of the two territories by following our best practice recommendations below.
For certain Agricultural Products, Fish and Seafood, Textile and Apparel and Vehicles, the Agreement allows quotas for imports which satisfy a more relaxed rule of origin. Businesses in these areas should consider whether they need to apply for quotas.
Exporters – best practice
Exporters which complete origin declarations must be able to provide to the customs authority of the Party of export:
- copies of the origin declaration;
- all appropriate documents proving the originating status of the products concerned, including supporting documents or written statements from the producers or suppliers; and
- fulfil the other requirements of the Protocol on Rules of Origin and Origin Procedures attached to this Agreement.
Failure to produce the correct documentation would lead to the origin declarations being invalidated. As a result, the importer would have to pay the difference between the reduced duty paid and the full duty payable for the goods.
Therefore, we recommend that exporters put in place robust origin assurance procedures, to include:
- Identifying the correct tariff classification and rule of origin for the exported goods;
- Identifying the correct tariff classification and rule of origin of parts and/or materials used in the manufacture of the exported goods;
- Where applicable, obtaining suppliers’ declaration for any originating parts and/or materials;
- Confirming, in writing, with suppliers of parts and/or materials that they understand the relevant rule of origin and that their products satisfy this rule of origin;
- Calculation of the origin content of the exported goods, where required;
- Ensuring that origin declarations are consistently issued and accompany originating goods;
- Setting up procedures so that the above steps are followed in respect of all goods exported under preferential duty rates;
- Documenting all the above.
Importers – best practice
Under CETA, exporters can issue their own origin declarations with customs authorities checking their supporting documentation at a later date. This increases the risk that some exporters may not correctly determine the origin of the goods and therefore expose the importers to retrospective duty demands.
If they have reason to believe that imported goods did not originate, EU customs authorities can challenge the use of preferential duty rates for up to three years from the date of import. To ensure compliance and protect from unexpected duty demands, we recommend that importers carry out origin due diligence and adopt documentation and procedures, which include:
- Identifying the correct tariff classification and rule of origin for the goods;
- Confirming, in writing, with suppliers the correct classification and rule of origin and that their products satisfy this rule of origin;
- Put rules of origin on the agenda for supplier visits and seek reassurance that the processing carried out fulfils the relevant rules of origin;
- Checking that the supplier issues the correct certificate of origin with the correct information;
- Ensuring that the third-party freight agents use the certificates of origin and consistently claim the preferential duty rate for originating goods;
- Setting up procedures so that the above steps are followed in respect of all goods imported under preferential duty rates;
- Document all the above;
- Consider a supplier contract clause which would allow them to seek an indemnity in the situation where customs authorities successfully challenge origin declarations and issue a retrospective duty demand.
If you are involved in trade with Canada, contact Rob Jenkins (+44(0) 7970 464325, email@example.com) to discuss how these arrangements will impact your business.