5 minute read 11 Aug 2021
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What opportunities do the revised Pan-Euro-Med (PEM) rules offer Swiss companies?

Jonathan Baumeler
By Jonathan Baumeler

Senior Manager, Indirect Tax/Global Trade | EY Switzerland

Technology enthusiast. Helps clients realise the benefits of Trade automation and analytics. Supporter of sustainability and conservation of natural heritage. Loves spending time in the mountains.

5 minute read 11 Aug 2021
Related topics Global trade Tax Indirect Tax in Motion
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Changes to the PEM Convention aim to facilitate and simplify trade between countries in the PEM (Pan-Euro-Mediterranean) zone. But how can Swiss production companies benefit from the new rules and cumulation with EU and Turkish input materials for the UK/Switzerland Trade Agreement (UK-CH FTA)? 

In brief
  • The transitional phase of the changes to the PEM Convention starts in September 2021.
  • During the transition period, companies in countries where the new PEM rules are ratified can choose to apply either the new or the old PEM rules.
  • The UK-Switzerland joint committee agreed in its first meeting to adopt the new PEM rules for the UK-CH FTA, which enables cumulation with input materials originating in the EU and Turkey.
  • Thanks to the decision of the joint committee established under the UK/Switzerland Trade Agreement, Swiss companies will benefit from more modern and flexible rules of origin, not only for trade between Switzerland and the UK, but also for the wider Pan-Euro-Med zone as well. 

What opportunities do the revised Pan-Euro-Med (PEM) rules offer Swiss companies?

Changes to the PEM Convention aim to facilitate and simplify trade between countries in the PEM (Pan-Euro-Mediterranean) zone. But how can Swiss production companies benefit from the new rules and cumulation with EU and Turkish input materials for the UK/Switzerland Trade Agreement (UK-CH FTA)? 

  • Free trade agreements and cumulation

    As one of the aims of free trade agreements (FTA) is to reduce tariff barriers, the heart of most agreements are rules of origin, which contain regulations on the requirements that a product must meet in order to acquire originating status and be subject to preferential tariff treatment. The term “preferential origin” in this regard refers to the “economic nationality” of the traded goods. FTAs between two parties are considered “bilateral” (e.g. EU-CH or CN-CH) and therefore “bilateral cumulation” is applied. If an FTA is concluded between more than two parties, this can lead to “diagonal cumulation” being applied, e.g. if raw materials from Israel are processed in the EU to create semi-finished products that are then assembled in Switzerland. Diagonal cumulation requires harmonised rules of origin and agreements between all of the parties involved.

  • Pan-Euro-Mediterranean cumulation and the PEM Convention

    Such diagonal cumulation can be applied within the Pan-Euro-Med zone, which includes the contracting states of the Regional Convention on Pan-Euro-Mediterranean preferential rules of origin (PEM Convention), i.e. the EU, EFTA States[1], Turkey, the countries which signed the Barcelona Declaration[2], the Western Balkans[3] and the Faroe Islands. This means that materials originating in one of the contracting states can be incorporated in products manufactured in a second contracting state without losing their originating status when exported to a third contracting state.

    The PEM Convention unifies the protocols of origin of the countries and FTAs in scope by reference in the protocols to the Convention.

New rules of origin for PEM countries

In December 2020, the EU Council adopted a package of proposals to enhance and simplify (preferential) trade between the EU and the other PEM countries. As a reminder, after years of negotiations and review of the PEM Convention, the package of new rules was presented in November 2019. However, some contracting states, especially the North African states, have not yet agreed to the revised rules.

The update of the FTAs between the EU and 20 trading partners in the Pan-Euro-Med zone with regard to the (bilateral) rules of origin aims to make them more flexible and business-friendly. During a transition period, companies in countries where the new PEM rules have been ratified can choose to apply either the new or the old PEM rules.

The transition period will start on 1 September 2021 and end when all PEM countries have agreed to the convention.

Among the new provisions, we see the biggest opportunities as follows: 

  • Introduction of full cumulation for most products: The “value-added” or operations which allow goods to acquire preferential originating status can now be split among several countries.
  • Application of the rules in general will be more flexible and the requirements will be easier to meet: The threshold for the use of non-originating materials or components increased (mostly from 40% to 50%).
  • The General Tolerance Rule for third-country input materials will be increased from 10% to 15%.
  • The prohibition of duty drawbacks is being lifted for most tariff chapters (e.g. inward processing relief with a suspension or refund will be permissible).
  • Logistics advantages: The “direct transport” rule will be replaced by the “non-manipulation” rule, which allows the supply chain set-up to be more flexible and, in customs procedures, for the proof of origin, the exporter’s statement of origin or the electronic issuance and presentation of origin proofs to be accepted.
  • The EUR-MED movement certificate with a complex cumulation field will be replaced by EUR.
  • The simplified rules of origin will be easier to automate and could lead to significant administrative cost savings.

The new rules apply optionally alongside the existing PEM Convention as the review of the revised PEM Convention is still pending. For this “transition period”, the parties can therefore decide which rules should apply. The parties interested in the new rules are: Bosnia and Herzegovina, the EU, Georgia, Iceland, Israel, Jordan, Kosovo, Lebanon, Moldova, Montenegro, North Macedonia, Norway, Switzerland, Serbia, Turkey and Ukraine, plus the Secretariat of the European Free Trade Association (EFTA) and the Secretariat of the Central European Free Trade Agreement (CEFTA).

Switzerland – where do we stand?

Switzerland was one of the contracting states in favour of the revised PEM rules of origin and the Swiss Federal Council approved the provisional bilateral application of the revised rules in June 2020.

In January 2021, the Federal Council submitted the Report on Foreign Economic Policy 2020 to Parliament. Among other things, the report contains the dispatch on the amendment of the PEM Convention and its transitional bilateral application.

Cumulation of EU and Turkish raw materials after Brexit

The UK-Switzerland joint committee agreed during its first meeting on 8 June 2021 that the new PEM rules will also apply for the UK-CH FTA from September 2021 onwards. In addition, the joint committee also agreed that cumulation with EU and Turkish inputs materials is possible effective immediately (starting 9 June 2021). Previously, a cumulation with raw materials originating in the EU or Turkey was not possible under the UK-CH FTA.

The outlook for and impact of the new rules is clear. Thanks to the amendment to the UK-CH FTA and the PEM Convention, Swiss companies will benefit from more modern and flexible rules of origin in trade, not only for trade between Switzerland and the UK, but also for the wider Pan-Euro-Med zone as well.

By eliminating the duty drawback clause from the PEM rules of origin, economic customs procedures (e.g. inward processing relief) could become more relevant for Swiss productions companies. 

The new PEM rules result in major simplifications for manufacturers as well as trading companies that want to benefit from preferential duty rates within the Pan-Euro-Med zone. With the help of Data Analytics, companies can efficiently review their current FTA usage to identify potential risks and opportunities, including cash savings.
Jonathan Baumeler
Senior Manager Indirect Tax, Green Taxes, Global Trade | Switzerland

Recommended actions

We recommend the following actions to implement and benefit from the new PEM rules:

  • Determination of whether the new or the old PEM rules should be applied during the transition period
  • Ensure that input materials that acquired origin under the new rules are not incorporated into finished or semi-finished products that obtain preferential origin under the old rules, i.e. a consistent approach has to be followed
  • Review of current FTA usage to identify risks and opportunities (e.g. cash savings), ideally with the use of data analytics
  • Analysis and adjustment of current preferential origin determination process
  • Leveraging the simplified rules by automating origin determination
  • Amendments of preferential origin clauses in supplier and customer contracts

EY supports businesses in assessing the impact of the new PEM rules and helps them to identify potential savings through efficient FTA usage and processes. With Global Trade Analytics solutions (data analytics, landed cost and bill of material analysis), we are able to analyse the FTA usage as well as perform a general health check and scenario planning of imports and exports. 

Summary

The new PEM rules result in major simplifications for manufacturers as well as trading companies that want to benefit from preferential duty rates within the Pan-Euro-Med zone. During the transition period, companies in countries where the new PEM rules have been ratified can choose to apply either the new or the old PEM rules, but they have to ensure that the rules are followed consistently. The long-awaited simplifications will facilitate the automation of the determination of origin and enable companies to benefit from the PEM agreement with significantly less administrative effort.

Acknowledgements

We thank Katharina Köngistädt for her valuable contribution to this article. 

 

About this article

Jonathan Baumeler
By Jonathan Baumeler

Senior Manager, Indirect Tax/Global Trade | EY Switzerland

Technology enthusiast. Helps clients realise the benefits of Trade automation and analytics. Supporter of sustainability and conservation of natural heritage. Loves spending time in the mountains.

Related topics Global trade Tax Indirect Tax in Motion
Upvote