Value-added calculation |
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Also known as regional Value content, value added Rule, and ad valorem rule.
Value added (VA) calculation is one of the two main types of substantial transformation (the other being change in tariff classification, CTC).
It refers to the value added in the territory of FTA countries expressed as a percentage of the pre-defined value of the final product (see below). The criterion can be expressed in two different ways:
• A maximum allowance for non-originating inputs also known as the build-down method.
• A minimum requirement for local content (e.g. a regional value content) also known as the build-up method.
The various costs that need be included / excluded from the calculations on either originating or non-originating side are often listed in the text of the agreement. The methods for calculating the above two types of value added rule can differ across FTAs. In addition, under some FTAs both types of methods are allowed. As a result it is possible to see two or more value added thresholds for the same product depending on the calculation method used.
Agreements also differ when it comes to establishing the total value of the final product. This can be based on the transaction value, ex-works price, net cost method, free on-board (FOB) incoterm or any other method. Explanation which method is used and what principles need to be followed is usually included in the text of the agreement (e.g. whether transport and insurance costs are included).
If the explanations of how to calculate the value added are not clearly listed in the agreement, they follow local customs legislation, the general valuation principles included in the Customs Valuation Agreement as well as the general accounting practices.
The value added rule can be used as a stand-alone rule of origin or in conjunction with the CTC rule. Some agreements also include an across-the-board requirement for all goods to have a certain value added threshold.
Example:
The rule of origin requires the regional value content to be at least 60% of the ex-works price of the good. The originating inputs and parts come up to 25% of the total ex-works price. However, labour and overheads constitute 40% of the value. As the combined value exceeds 60%, the good is considered originating.
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