Interpretation of substantial transformation

The basic criteria for determining the country of origin from the perspective of the country of origin marking are prescribed in Article 61 (1) of the ENFORCEMENT DECREE OF THE FOREIGN TRADE ACT (대외무역법시행령) as follows:

-        If the whole imported goods are those gathered or produced entirely in one particular country ("wholly obtained goods"), such country shall be the origin of the goods.

-        If two or more countries are involved in the production, manufacturing, or processing of imported goods, the country in which activities to finally and substantially transform the goods and give essential characteristics to the goods ("substantial transformation") have been performed, shall be the origin of the goods.

-        If two or more countries are involved in the production, manufacturing, or processing of certain goods imported, the country in which simple processing works have been carried out shall not be the origin.

 

As the interpretation of substantial transformation can be subjective, an objective rule of determining substantial transformation - change in tariff classification on the basis of 6-digit customs code is subscribed in its sub-statute, FOREIGN TRADE MANAGEMENT REGULATION (대외무역관리규정).

 

Country of origin of most industrial products can be non-controversially decided by applying this 6-digit change rule because their manufacturing processes are generally beyond the simple processing works. But what if the 6-digit HS Code of a raw material is the same as the final product’s 6-digit HS Code? Should we consider the raw material’s country of origin as the final product’s country of origin? In this case, case by case approach is required and it is highly recommended to file an inquiry with the Korea Customs Service (KCS).

 

Here are some examples.

If a manufacturer imported lithium-ion battery cells from Country A and manufactured lithium-ion battery pack out of the battery cells in Country B, what country should be the country of origin of the battery pack? Both lithium-ion battery cell and lithium-ion battery pack are classified in 8507.60. 



It is tricky to determine the country of origin of the battery pack because it doesn’t satisfy the 6-digit change rule and the battery cells are the core parts of the battery pack. The KCS deemed that the process of welding and assembling battery protection circuits was beyond the simple processing works and substantial transformation occurred in Country B so the country of origin of the battery pack shall be Country B.

 

 

If a manufacturer imported pipes of cupro-nickel (7411.22) from Country A and manufactured seamless pipes of cupro-nickel (7411.22) in Country B through drawing, heat-treatment, expanding, etc., what country should be the country of origin of the seamless pipes? The KCS determined that substantial transformation didn’t occur in Country B so the country of origin of the seamless pipes shall be Country A.

 

Just as the examples above, when the 6-digit change rule is not satisfied, manufacturing processes shall be reviewed case by case to determine the country of origin. As there is no explicit stipulation of manufacturing processes that can be recognized as beyond simple processing works, in order to prevent any issues from being raised, it is necessary to file an inquiry with the KCS in advance.

 

County of origin marking is strictly regulated in Korea under the FOREIGN TRADE ACT (대외무역법). It doesn’t matter whether the incorrect country of origin is intentionally marked or not. So, we shall be careful in determining and marking the country of origin.


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