[Tax Story] RCEP and Certificate of Origin

Last November, South Korea finally signed the Regional Comprehensive Economic Partnership (RCEP) after eight years of negotiations. RCEP is the world's largest free trade agreement (FTA), involving a total of 15 countries including Japan, China, Australia, New Zealand, and the 10 member countries of the Association of Southeast Asian Nations (ASEAN).

As of 2019, RCEP member countries accounted for $5.4 trillion in merchandise trade, representing 28.7% of the global share, making it an economic bloc comparable to the European Union (EU) and a next-generation growth market. However, it is important to note that if the rules of origin are not met, the preferential benefits cannot be enjoyed.

The criteria for determining origin include wholly obtained criteria, substantial transformation criteria, and supplementary determination criteria. Even for the same product, the origin may differ depending on the trade rules such as FTAs. RCEP allows for the cumulation of origin. The cumulation rule is a special provision whereby goods and materials originating from other member countries used in the production of goods or materials within a member country are considered as originating from the member country where the final processing or working occurs.

While cumulation is also applied in the Korea-ASEAN and Korea-China FTAs, RCEP has the advantage of expanding the scope of preferential tariff benefits due to the large number of contracting parties. Accordingly, domestic companies can secure export competitiveness by utilizing a business model where parts are produced in RCEP member countries and the final product is manufactured domestically before exporting to RCEP member countries with preferential treatment applied.

There are two main methods for issuing certificates of origin: issuance by an authority and self-issuance. The authority issuance method involves a specific institution authorized by the customs authorities of the country of origin verifying and issuing the certificate, as seen in FTAs with China, India, and ASEAN. In South Korea, customs and chambers of commerce issue certificates of origin.

Authority issuance has the advantage of high credibility but involves complex procedures, time, and cost. Self-issuance is basically done by exporters, and depending on the agreement, producers, importers, or certified exporters autonomously verify, prepare, and sign the certificate of origin. This method is adopted in FTAs with the United States, the EU, and Canada.

In South Korea, the utilization rate of FTAs with RCEP countries in imports in 2019 was very high: China 80.1%, ASEAN 79.2%, Australia 85.7%, and in exports: China 57.2%, ASEAN 51.3%, Australia 82.8%. It is essential for exporters, importers, and other related parties to efficiently manage certificates of origin to facilitate the application of preferential tariffs. Additionally, when trading with countries such as China, Vietnam, and Singapore that have separate FTAs outside of RCEP, it is necessary to consider which agreement is more advantageous to apply.

As the world's sixth-largest export powerhouse, with trade as the foundation of economic growth, South Korea's signing of RCEP is expected to enhance predictability for export-import companies and ultimately provide an opportunity to further activate international exchanges.

Baek Jeheum, Lawyer at Kim & Chang