Annex 2

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Annex 2

Rules of Origin for Trade in Goods

1. Pursuant to the Mainland and Hong Kong Closer Economic


Partnership Arrangement (hereinafter referred to as the “CEPA”), the
Mainland and the Hong Kong Special Administrative Region have
concluded this Annex on the rules of origin for trade in goods.

2. Goods which are entitled to zero tariff under the “CEPA” and
directly imported by one side from the other side will have the origin
determined in accordance with the principles set out below:

(1) goods wholly obtained in one side are regarded as


originating in that side; or

(2) goods not wholly obtained in one side are considered as


originating in that side only if they have undergone
substantial transformation in that side.

3. The term “goods wholly obtained in one side" as set out in Article
2(1) of this Annex refers to:

(1) mineral products mined or extracted in that side;

(2) plants or vegetable products harvested or collected in that


side;

(3) live animals born and raised in that side;

(4) products obtained in that side from live animals specified in


paragraph (3) of this Article;

(5) products obtained from hunting or fishing in that side;


(6) fish and other marine products obtained by fishing conducted
in the high seas by vessels holding a licence issued by that
side and flying the national flag (for Mainland vessels) or the
Hong Kong Special Administrative Region flag (for Hong
Kong vessels);

(7) products obtained from the processing of products set out in


paragraph (6) of this Article aboard vessels holding a licence
issued by that side and flying the national flag (for Mainland
vessels) or the Hong Kong Special Administrative Region
flag (for Hong Kong vessels);

(8) waste and scrap articles collected in that side which are
produced from consumption in that side and are fit only for
the recovery of raw materials;

(9) waste and scrap which are produced from processing or


manufacturing operations in that side and are fit only for the
recovery of raw materials;

(10) goods obtained through processing in that side of products


set out in paragraphs (1) to (9) of this Article.

4. Processes or treatment for the following specified purposes,


whether undertaken individually or collectively, is regarded as minor
processing treatment. Such treatment will not be taken into account in
determining whether the goods are wholly obtained or not:

(1) processing or treatment for transportation or storage of


goods;

(2) processing or treatment to facilitate packaging and delivery


of goods;

(3) processing or treatment such as packaging or display for


distribution and sale of goods.

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5. On the criteria for “substantial transformation” set out in Article 2
(2) of this Annex, the two sides agree on the following:

(1) the criteria for determining “substantial transformation” may


include “manufacturing or processing operations”, “change in
tariff heading”, “value-added content", “other criteria” or
“mixed criteria”;

(2) “manufacturing or processing operations” refers to the


principal manufacturing or processing operations carried out
in the area of one side which confer essential characteristics
to the goods derived after the operations;

(3) “change in tariff heading” refers to the processing and


manufacturing operations of non-originating materials carried
out in the area of one side and resulting in a product of a
different four-digit tariff heading under the “Product
Description and Harmonized System Codes”. Moreover, no
production, processing or manufacturing operations will be
carried out in countries or territories other than that side
which will result in a change in the four-digit tariff heading;

(4) “value-added content” refers to the total value of raw


materials, component parts, labour costs and product
development costs exclusively incurred in one side being
greater than or equal to 30% of the FOB value of the
exporting goods, and that the final manufacturing or
processing operations should be completed in the area of
that side. The formula for calculation is as follows:

value of raw materials + value of component parts +


labour costs + product development costs
------------------------------------------------------- x 100% ≥ 30%
FOB value of the exporting goods

(i) “product development” refers to product development


carried out in the area of one side for the purposes of
producing or processing the exporting goods.

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Development expenses incurred should be related to the
exporting goods. These expenses include fees payable
for the development of designs, patents, patented
technologies, trademarks or copyrights (collectively
"these rights") carried out by the manufacturer himself,
fees payable to a natural or legal person in the area of
one side for undertaking development of these rights,
and fees payable for purchasing these rights owned by a
natural or legal person in the area of one side. The
fees payable should be clearly identifiable under
generally accepted accounting principles and the
requirements of “Agreement on Implementation of
Article VII of the General Agreement on Tariffs and Trade
1994”;

(ii) calculation of the above “value-added content” will be


consistent with generally accepted accounting principles
and the “Agreement on Implementation of Article VII of
the General Agreement on Tariffs and Trade 1994”;

(5) “other criteria” refers to methods agreed by both sides in


determining origin, other than “manufacturing or processing
operations”, “change in tariff heading” and “value-added
content” as set out above;

(6) “mixed criteria” refers to the use of two or more of the above
criteria in determining origin.

6. Simple diluting, mixing, packaging, bottling, drying, assembling,


sorting or decorating will not be regarded as substantial transformation.
Enterprises adopting production or pricing practices with the purpose of
circumventing provisions in this Annex will also not be regarded as
substantial transformation.

7. In determining the origin of goods, the origin of energy, factory


premises, facilities, machinery and equipment, and tools for production
of the goods will not be taken into account; origin of the materials used in
the production process but not constituting the composition or the

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component parts of the goods will also not be taken into account.

8. The following factors will not be taken into account in


determining origin:

(1) package, packaging materials and repository accompanying


the goods for import customs declaration and classified as
the same item with the goods in the “Customs Import and
Export Tariff of the People’s Republic of China”;

(2) parts, spare parts, tools and explanatory materials


accompanying the goods for import customs declaration
classified as the same item with the goods in the “Customs
Import and Export Tariff of the People’s Republic of China”.

9. The two sides have drawn up the “Schedule on Rules of Origin


for Hong Kong Goods Benefiting from Tariff Preference for Trade in
Goods” (Table 1 of this Annex) in accordance with the eight-digit tariff
headings of the “Customs Import and Export Tariff of the People’s
Republic of China” and the criteria prescribed in this Annex. Table 1
forms an integral part of this Annex. Under the “CEPA”, goods which
meet the origin requirements of Table 1 of this Annex are regarded as
having undergone substantial transformation in Hong Kong.

For goods of Hong Kong origin and goods proposed to be produced in


Hong Kong which are entitled to zero tariff under Article 5 of Annex 1,
their rules of origin will be supplemented in Table 1 of this Annex.

10. Goods seeking zero tariff under the “CEPA” should be directly
transported from the port of one side to the port of the other side.

11. Upon implementation of this Annex, if one side considers


necessary to amend the content of this Annex or the rules of origin of the
goods listed in the Table 1 of this Annex due to the advancement of
production technologies or other reasons, it may request the other side
to enter into consultations and submit a written explanation with
supporting data and information. Resolution will be made through
consultations conducted by the Joint Steering Committee established

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under Article 19 of the “ CEPA”.

12. This Annex will come into effect on the day of signature by the
representatives of the two sides.

Signed in duplicate in Hong Kong, this 29th day of September


2003 in the Chinese language.

Vice Minister of Commerce Financial Secretary


People's Republic of China Hong Kong Special
Administrative Region of the
People’s Republic of China

(signature) (signature)

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