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1 practical information hermes cover special Inclusion of foreign content in Hermes Cover march 2012

2 practical information hermes cover special Inclusion of foreign content in Hermes Cover Basically, the current rules governing the inclusion of foreign content and local costs can be traced back to decisions taken in early 2008 in the Interministerial Committee. Back then these decisions were occasioned by a revision of the OECD rules for cover of local costs. In December 2011 the rules governing the inclusion of foreign content and local costs were amended taking into account the experience gained in the meantime. With this the Federal Government aims to further strength en the competitiveness of German exporters. This document describes the conditions for including foreign content in Hermes Cover. i. prerequisites for including foreign content in hermes cover The question as to whether foreign goods and deliveries may be included arises only if they are of a foreign origin in accordance with the German Federal Government s definition. what is the definition of foreign content? Goods produced in ather country which are processed or modified within the Federal Republic of Germany and integrated in a product for which a German certificate of origin has been or could be issued are t classified as foreign content. This is because in accordance with the Federal Government s definition a product for which a German certificate of origin has been issued is deemed to constitute German goods in whole regardless of whether and to what extent it contains foreign goods and services. what contractual payment claims must be agreed upon? The basic prerequisite for including foreign content in Hermes Cover is the existence of a direct claim for payment held by the subcontractor towards the German exporter (principal supplier). ii. permissible foreign content Pursuant to the rules applicable since 2008, foreign content and local costs related to medium and long- term business are subject to a uniform base amount, which may be exceeded in certain circumstances. In prac tice a three-tier approach is applied 1. what must generally be considered in connection with local costs? It should be ted that the local costs (in the case of transactions coming within the Consensus) may only be included in cover at a rate of up to 23 % of the (total) order value in each of the three tiers. in what amount can foreign content be included in the first tier? In the first tier, goods and services can be included in the cover regardless of their origin up to an amount of 30% of the (total) order value ( uniform base amount ) without any obligation to provide further reasons. Alternatively, the base amount is available for local costs (these however only up to a maximum of 23 % due to the OECD rules) and/or the inclusion of foreign goods/services. 1 Obviously, this rule relating to the inclusion of foreign content and local costs only applies if the buyer s country is t subject to any restrictions under the specific cover policy. 2 Export Credit Guarantees of the Federal Republic of Germany

3 the three-tier system for the inclusion of permissible foreign content for medium and long-term transactions (in percent of the order value) more than 49 Tier 3 Tier 2 Tier 1 local cost 23 % max. 30 up to 49 Tier 1 Tier 2 Tier 3 in what amount can foreign content be included in the second tier? The second tier entails rules for transactions for which the total amount of the foreign content to be included is between 30 % and 49 % of the (total) order value. In this tier, a distinction is initially drawn between countries with which an agreement on subcontracted supplies is in force ( parties to the agreement : EU, Switzerland, Japan, Norway) and other countries with respect to local costs (on credit terms) and subcontracted foreign supplies. If the subcontracted supplies come both from parties to the agreement and other countries, they can be in - cluded in this tier (up to 49 %) without any detailed explanation provided that the foreign content per country group does t exceed a proportion of 30 % 2. Subcontracted supplies from subsidiaries may also result in the base amount of 30 % being exceeded (up to a maximum of 49 %) if the subsidiary in question is t domiciled in the buyer s country (in that case the costs will be regarded as local costs in respect of which the restriction described above applies). Foreign content can always be included in Tier 2 (up to 49 %) without any detailed explanation if the foreign supplier in question is a direct foreign subsidiary of the German exporter. No further differentiations are made with regard to the country (e. g. according to parties to the agreement, other countries) in connection with supplies from subsidiaries. In the second tier, it is also possible to include further foreign content without any detailed explanation in cases in which an advance or interim payment in excess of the standard rate of 15% has been agreed upon. In this case, the amount of the advance or interim payment exceeding this standard rate can be covered regardless of the origin of the subcontracted supplies (with the exception of the buyer s country) 3. Along these lines foreign supplies from subsidiaries of a subcontractor of the German exporter, who receives Hermes Cover, can be included too. Besides, it may be permissible for the base amount to be exceeded up to 49 % in individual cases provided that the applicant is able to prove the necessity of this for its business (price, technical or customer-related reasons, 2 In the case of small order values, subcontracted supplies from within the EU may comprise up to 40 % of the order value. 3 Deliveries from the buyer s country are excluded as these by definition are local costs coming within the scope of the OECD Consensus. Export Credit Guarantees of the Federal Republic of Germany 3

4 practical information hermes cover special Inclusion of foreign content in Hermes Cover definitions Transit goods The foreign content of transit goods, i.e. goods in transit customarily traded on short-term payment terms, can (still) be up to 100 %. Transit goods primarily comprise raw and basic ma - terials, agricultural produce, fertilizers, commodities and consumer goods. The credit period is rmally a maximum of 180 days or, in exceptional cases, up to 360 days. Subcontracted supplies from the EU Depending on the (total) order value, up to 40 % of the subcontracted supplies from EU member states can be included in the cover. The following options are possible in this 40 % in the case of contracts with a value of less than EUR 7.5 EUR 3.0 million in the case of contracts with a value between EUR 7.5 million and EUR % in the case of contracts with a value of more than EUR 10 million Subcontracted supplies from Japan, Switzerland or Norway In accordance with the bilateral agreements in force with Japan, Switzerland and Norway, deliveries of up to 30 % are permissible from these countries. Subcontracted supplies from other countries Up to 30 % of the subcontracted supplies from other countries can also be included in the cover. Supplies and foreign goods provided by the foreign subsidiaries of German companies Deliveries from the foreign subsidiaries of German ex - porters enjoy con siderable privileges over the subcontracted supplies sourced from other companies. In this case, the Federal Government accepts foreign content of up to 49 % regardless of the country of origin (exception: buyer s country). Supplies and foreign goods provided by foreign companies affiliated with the exporter While supplies from direct foreign subsidiaries of German exporters can be included in the cover up to 49 % of the order value without detailed explanations, valid reasons substantiating the ecomic necessity are required for supplies from foreign company affiliated with the exporter. If the arguments are accepted by the Federal Government, a share of up to 49 % in the order value can also be included in the cover irrespec - tive of the country of origin (exception: buyer's country). Increased advance payment If an advance/interim payment in excess of the standard rate (15%) is agreed upon, further foreign content can be included in the cover as part of Tier 2 (up to 49 %) regardless of the country of origin (exception: buyer s country) up to an amount equaling the amount by which the advance/interim payment exceeds the standard rate. Local costs Goods and deliveries from the buyer s country are gen - erally referred to as local costs. As a rule, local costs qualify for cover provided that they are directly related to the German exporter s export transaction and form part of the receivable due from the buyer. In accordance with the OECD Arrangement (Chapter II, Article 10d), credit terms may be applied to up to 23 % of the (total) order value (30 % of the value of the export order) of such local costs. If the local costs required for executing the order exceed this percentage, they can only be covered if payment in cash is agreed upon. Additional restrictions concerning the eligibility of local costs for inclusion in cover may arise from the specific cover policy for the specific buyer's country. 4 Export Credit Guarantees of the Federal Republic of Germany

5 reasons related to supplies from an affiliated company) or provides some other type of justification. In cases where the exporter claims that supplies from an affiliated foreign company, i.e. t a direct subsidiary as stated above, are ecomically necessary, the reasons put forward as justification must be duly explained. Affiliated companies in this context are consolidated group companies. This is especially the case when the parent company holds a majority stake or can exert a controlling influence. In addition to the direct parent-subsidiary relationship, which is privileged anyway, allowance is made for nu - merous other conceivable supply relationships within a group of companies when the base amount is to be exceeded up to 49 %. However, they will always require a justification in each individual case. Included are, for example, supplies from a foreign subsidiary of a sister company of the exporter or supplies from the direct foreign parent company of the exporter who applies for Hermes Cover. in what amount can foreign content be included in the third tier? In the third tier it is possible on a case-by-case basis to cover transactions which exhibit foreign content in excess of 49%. In this case, the exporter must explain in detail why such supplies are crucial. This re quires an individual decision by the Interministerial Committee on whether a transaction qualifies for cover in the light of the reasons submitted. The aspects which are relevant in Tier 3 rmally focus on the importance of the transaction for the exporter s international competitiveness. This may be proven, for example, by demonstrating that the transaction in re - spect of which cover is applied for helps to secure jobs at the German exporter, that a high amount of strategic kw-how from Germany is provided, the overall project management is in German hands and/or the project is to serve as reference abroad for invative techlogies. Since the introduction of the three-tier model the Inter - ministerial Committee has agreed to accept foreign content exceeding the 49 % limit in a number of cases be - cause sufficient reasons for the necessity were given and the overall circumstances of the transaction rendered it possible (see example. 3). In cases where an exporter needs an early indication from the Federal Government as to whether and to what extent foreign content of more than 49% can be included in cover, he can submit an initial enquiry. Such an en - quiry should include an informal project plan consisting in particular of a description of the project, the planned supply structure and reasons for the necessity of the foreign content as well as the importance of the project for the exporter s company and his German operations. If the preliminary assessment is positive, the exporter will receive a n-binding letter of indication, which informs him of the maximum percentage up to which an inclu - sion of foreign content for the project presented will be possible. The processing of the initial enquiry is free of charge and t a mandatory step in the application procedure. Details of the procedure and possible contents of a project plan can be found in the brochure Praktische Informationen voranfrage zur einbeziehbarkeit ausländischer zulieferungen. Export Credit Guarantees of the Federal Republic of Germany 5

6 practical information hermes cover special Inclusion of foreign content in Hermes Cover iii. examples example % of a German exporter s export transaction with e.g. Russia comprises French As a matter of principle, there will be problems in including the French content in the cover granted in favor of the German exporter (Tier 1). example. 2 30% of the content of a German company s export transaction with e.g. Russia comprises de liveries from the EU and a further 15% of the content deliveries from Japan/Norway/Switzerland. In addition, an advance payment of 15% and an interim payment of 15% have been agreed Although the quotas for these countries of 30% each are t applied cumulatively, further subcontracted supplies are included without any additional expla - nation as the advance and interim payments exceed the standard rate (15%). In this case, the foreign content may account for up to 45% and is covered under Tier 2 (up to 49 %). example. 3 The content of a German company s export transaction with e.g. Russia comprises 23 % local costs, 7 % supplies from an EU country and further supplies amounting to 10 % from a third country (outside the EU/Japan/Norway/Switzerland) plus 9 % from a subsidiary in a third country. For the construction of a plant, which is to serve as reference for an invative production process, it is necessary for technical reasons to include additional supplies from a subsidiary in a third country amounting to 10 % of the order value. These components can only be produced at that site within the worldwide organiza - tion of the exporter s group. There are production alternatives in In Tier 2 foreign content amounting to 49 % of the order value is always permissible. In this example this amount is reached by the combination of local costs, supplies from EU and third countries and from foreign subsidiaries. In individual cases this limit of 49 % can be exceeded provided that valid reasons can be given as justification. An Excel tool for calculating the permissible foreign content is available on our website: German version only. iv. further cover options If the foreign content does t come within the scope of the national rules, it may still be possible for the German exporter to obtain cover. In this case, cover may be provided in favor of the Ger - man exporter if and when the national credit agency in the country from which the subcontracted supplies originate as sumes a re insurance commitment. If a for - eign government-sponsored export credit agency agrees to assume a reinsurance commitment, the Federal Gov - ernment will only cover the credit risk for the German part, while the foreign export credit agency covers the corresponding foreign content. Generally speaking, the collaboration between the Fed - eral Government and the foreign export credit agency is invisible to the German exporter, who receives the 6 Export Credit Guarantees of the Federal Republic of Germany

7 cover from a single source. This is because the allo cation of risk is solely a matter for the export credit agencies concerned. The reinsurance commitment is provided on the basis of corresponding reinsurance agreements. 4 If the Federal Government is unable to provide cover for foreign content and reinsurance is also t an option, the German exporter can still obtain cover by placing the payment terms agreed upon with its sub contractors on an if-and-when basis. In this case, cover can take the form of co-insurance. Detailed information on these additional forms of cover can be found in the brochure Hermes Cover Special multi-sourcing projects. v. permissible foreign content in connection with short-term business In connection with transactions on short credit terms foreign content can be included in the cover up to 100% of the order value without closer examination and irrespective of the type of goods provided that cover is granted under a Wholeturver Policy or Wholeturver Policy Light. In particular goods in transit are generally regarded as foreign content. These are products which are rmally traded in transit at short credit terms (primarily raw and basic materials, agricultural produce, fertilizers, commodities and consumer goods). As a rule, the permissible maximum credit periods for the respec - tive type of goods must be taken into account (rmally 180 days, 360 days for specific types of goods). Under supplier credit cover and revolving supplier credit cover, too, foreign content may be included up to 100 % of the order value provided that the goods supplied are t capital goods. If, however, capital goods are to be covered under a supplier credit guarantee or a revolving supplier credit guarantee, a model is used which is derived from the three-tier-model applicable to medium/long-term business. Since the first two tiers and local costs are com - bined in this model, it has two tiers with the first tier up to 49 % of the order value and the second tier exceeding the 49 % limit. In these cases, as rule, supplies and services can be included in the cover up to 49 % of the order value irrespective of their origin and without the necessity to give detailed reasons. This base amount also includes local costs because the regulations of the OECD Consensus do t apply to transactions with credit terms of up to two years. Should it be necessary in exceptional cases to exceed the 49% limit, an approval will be possible if sufficient cause is shown and the overall circumstances of the transaction in question justify an exemption. As is the case for medium and long-term business, here, too, it is possible to submit an initial enquiry regarding a possible inclusion of foreign content free of charge if an early in dication from the Federal Government as to whether and to what extent the limit of 49% may be exceeded is re quired. Ute Cordes, Andreas Gehring 4 A list of existing agreements can be found on our website: Export Credit Guarantees of the Federal Republic of Germany 7

8 practical information hermes cover special Inclusion of foreign content in Hermes Cover permissible foreign content in short-term business (up to 24 months) APG/APG-light All types of goods Inclusion of foreign content up to 100% Supplier credit cover/revolving supplier credit cover Other than capital goods Inclusion of foreign content up to 100% Capital goods Inclusion of foreign content within the frame-work of a two-tier model For comparison: Three-tier model for medium/long-term business Local Supplies originating in the buyer s country Local Supplies originating in the buyer s country up to 23%; exceeding t per - missible Tier Foreign content Tier Foreign content Base amount up to 30% Base amount up to 49% Tier Supplies from parties to the Increased advanced Ecomic necessity (price, technical or customer-related reasons, affiliated Other justification up to 49% Tier Case-by-case decision on the basis of sufficient due cause more than 49% Tier Case-by-case decision on the basis of sufficient due cause more than 49% 8 Export Credit Guarantees of the Federal Republic of Germany

9 checklist of criteria for determining whether foreign content is eligible for inclusion in cover Are the goods manufactured by the German exporter eligible for a German certificate of origin? According to the definition of the Federal Government, such goods are deemed to be of German origin in whole, meaning that additional restrictions apply to the foreign content of the German product. Must the exporter pay his foreign subcontractors only on an if-and-when basis Co-insurance Are the goods in question rmally traded in transit? As a rule, transit goods * can be covered without any restrictions even in the event of 100 % foreign content. Does the transaction s credit period t exceed 2 years? The rules for inclusion for short-term business on page 8 apply. Does the foreign content in question originate from the buyer s country Local costs. In accordance with the OECD Consensus, credit terms are permissible for up to 23 % of the (total) order value (30 % of the value of the export order) of such local costs. The three-tier model for inclusion (see page 10) applies. * The credit period is rmally a maximum of 180 days or, in exceptional cases, up to 360 days Export Credit Guarantees of the Federal Republic of Germany 9

10 practical information hermes cover special Inclusion of foreign content in Hermes Cover three-tier model for medium/long-term business minimum 2 years Does the foreign content account for a maximum of 30 % (of which local costs on credit terms max. 23 %) of the (total) order value? Tier 1 Does the foreign content account for more than 30% but t more than 49 % (of which local costs on credit terms max. 23 %) of the (total) order value? Tier 2 (For details see the chart entitled Checking procedure for Tier 2 on page 11) Does the foreign content account for more than 49 % of the (total) order value? Tier 3 Review of the merits of individual cases Interministerial Committee (proof of the necessity of the foreign supplies in the form of a detailed submission of the reasons by the exporter) If the foreign content does t come within the scope of the national rules: Reinsurance 10 Export Credit Guarantees of the Federal Republic of Germany

11 tier 2 of checking process for medium/long-term business minimum 2 years foreign content % of (total) order 1. Initially: Definition of country groups based on buyer s country/country of origin The share of local costs (max. 23 % of (total) order value on credit terms) and foreign content must be allocated to the individual country groups: a) EU and Japan/Norway/Switzerland b) Other countries 2. Initially: Do the local costs on credit terms t exceed 23 % of the (total) order value? Local costs cant be covered in accordance with the OECD Consensus 3. Initially: Are the goods/services from direct (t: affilited companies) subsidiaries included? The goods and services sourced from sub sidiaries can be included in an amount of up to 49% of the (total) order value regardless of the country of origin (with the exception of the buyer s country). Does the foreign content by country group equal up to 30% and does t exceed a total (plus any supplies from foreign subsidiaries) of more than 49 %? Tier 2/inclusion in cover possible without any further reasons given Does the foreign content attribut - able to a country group exceed 30% but t more than 49% of the (total) order value? Has a higher advance/interim payment been agreed upon? The foreign content can be increased by an amount equaling the additional amount of the advance/interim payment regardless of the country group** Tier 2/additional reasons must be given for the business necessity (price, technical or customer-related) or any other reasons or other factors * In the case of supplies from within the EU, the foreign content may comprise up to 40% of the (total) order value ** Maximum of up to 49% of the (total) order value Export Credit Guarantees of the Federal Republic of Germany 11

12 Euler Hermes Aktiengesellschaft Export Credit Guarantees of the Federal Republic of Germany e 0115 Postal address Hamburg, Germany Office address Gasstraße Hamburg, Germany Phone: +49 (0)40/ Fax: +49 (0)40/ Branch offices: Berlin, Frankfurt, Hamburg, Cologne, Munich, Stuttgart

practical information

practical information july 2017 hermes cover special Inclusion of foreign content in Hermes Cover practical information hermes cover special Inclusion of foreign content in Hermes Cover a. basic principles