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2018 International Commercial Legal Cooperation Forum: CHINESE TRADE AND INVESTMENT INTO INDONESIA THE IMPACT OF AFTA Michael S. Carl michaelcarl@ssek.com SSEK Legal Consultants November 28, 2018

History of AFTA On January 28, 1992, the six original members of ASEAN entered into Agreement on the Common Effective Preferential Tariff ( CEPT ) Scheme for the ASEAN Free Trade Area The CEPT requires that tariff rates on a wide range of products traded within the region be reduced to 0-5% and that quantitative restrictions and other non-tariff barriers be eliminated The CEPT scheme has since been enhanced and superseded by the ASEAN Trade in Goods Agreement ( ATIGA ), entered into force on May 17, 2010. 1

Overview: CEPT Main Agreements Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA), (January 28, 1992) Protocol to Amend the Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA), (December 15, 1995) Protocol to Amend the Agreement on the Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA) for the Elimination of Import Duties (January 31, 2003) Products All manufactured products, including capital goods and processed agricultural products, and those falling outside the definition of agricultural products Inclusion list (reciprocal) Exception/exclusion Tariffs Reduction Programs Fast Track Normal Track Concessions 2

Overview: CEPT Requirements Rules of Origin Certificate of Origin Non- Tariff Reduction Measures Elimination of quantitative restrictions Elimination of non-tariff barriers Exception to foreign exchange restriction Agreement to explore further measures on border and non-border areas of cooperation Safeguard Provisions Temporary suspension 3

Overview: ATIGA 1. All ASEAN members shall implement the tariff reduction/elimination for 98% of all tariff lines 2. Redefines Rules of Origin to increase trade between ASEAN countries 3. Tariff liberalization and removal of quantitative restrictions on importation 4. Facilitate Trade through the ASEAN Single Window (ASW) and ASEAN Trade Repository 5. Reduce non-tariff barriers through harmonization of standards 6. Special Treatment of Rice and Sugar 7. Standardization of Customs Procedures 4

Discussed Changes to AFTA Rules of Origin (RoO) Simplification Revision to the ATIGA to impart predictability, simplicity and order ; Lowering the Regional Value Content (RVC); Clarifying the text of Product Specific Rules (PSR) by eliminating redundant Rules of Origin. Improvement Expanding the use of self-certification; Moving away from document-based verification; and Shifting to modern postentry audit and trade facilitation approaches. 5

Implementation of AFTA Tariffs in Indonesia ASEAN Harmonized Tariff Nomenclature 2017 - Indonesia Minister of Finance Regulation No. 6/PMK.010/20 17 of 2017 Minister of Finance Regulation No. 25/PMK.010/2 017 of 2017 Minister of Finance Regulation No. 229/PMK.04/ 2017 of 2017 1 2 3 4 Most of the tariffs have been reduced to 0% except for products that are subject to the MFN or included in the non-inclusion List. The ATIGA import duty tariff is imposed to imported goods accompanied with Form D - Certificate of Origin. The Form D - Certificate of Origin must be delivered by the importer, bonded storage area entrepreneur and bonded logistics center entrepreneur. In the event the regular import duty tariff is less than the ATIGA import duty tariff, then, the regular import duty tariff shall prevail. 6

Implementation of AFTA Tariffs in Indonesia Goods Origin Criteria Wholly Obtained and Produced Not Wholly Obtained and Produced RVC of at least 40% out of the FOB value of the goods produced to obtain the preferential tariff. RVC to be computed using the following methods: Direct Method ASEAN raw material costs + direct manpower cost + direct overhead cost + other costs + profit FOB value Indirect Method FOB Value Material value, partial value or non-originating goods FOB value X 100% X 100% 7

ASEAN China Free Trade Agreements ( AC-FTA ) Framework Agreement on Comprehensive Economic Co- Operation Between ASEAN and the People s Republic of China, Phnom Penh, 4 November 2002 Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Cooperation between the Association of Southeast Asian Nations and the People s Republic of China, Vientiane, 29 November 2004 Agreement on Dispute Settlement Mechanism of the Framework Agreement on Comprehensive Economic Co-Operation Between the Association of Southeast Asian Nations and the People s Republic of China, Vientiane, 29 November 2004 Agreement on Investment of the Framework Agreement on Comprehensive Economic Cooperation between the Association of Southeast Asian Nations and the People s Republic of China, Bangkok, 15 August 2009 Agreement on Trade in Services of the Framework Agreement on Comprehensive Economic Cooperation between the Association of Southeast Asian Nations and the People s Republic of China, Cebu, Philippines, 14 January 2007 8

AC-FTA Implementation in Indonesia Key regulation: Minister of Finance Regulation No. 26/PMK.010/2017 dated February 27, 2017 regarding the Stipulation on Import Duty Tariffs for Imported Goods in the Framework of ACFTA. The regulation sets out the list of goods eligible for ACFTA preferential tariffs, which typically range from 0-5%. 9

Key Highlights RULES OF ORIGIN WHAT Rules of Origin (RoO) are guidelines that help importers and manufacturers determine the country of origin of a product. RoO establish the product s eligibility for preferential tariff treatment available under FTA. CRITERIA To determine the country of origin for such goods, 3 methods are generally taken: 1.Regional Value Content (RVC); 2.Change in Tariff Classification (CTC); 3.Specific Process Rule (SPR). 1. RVC RVC requires that a certain percentage of the good s value must originate in an FTA member country for the good to be considered as originating. HOW To qualify as originating goods, imported items must either be: 1. Wholly-obtained or produced entirely in an FTA member country; or 2.Must have undergone a substantial transformation. 2. CTC To qualify as originating under the CTC rule, the non-originating material used in the production of the good must not have the same HS classification as the final good. 3. SPR This is usually applicable for chemical goods. The goods are considered as originating only if they are produced through a specific chemical process occurring in an FTA member country. 10

Implementation of AC-FTA s Tariff in Indonesia ASEAN Harmonized Tariff Nomenclature 2017 - Indonesia Minister of Finance Regulation No. 6/PMK.010/20 17 of 2017 Minister of Finance Regulation No. 229/PMK.04/ 2017 of 2017 Minister of Finance Regulation No. 26/PMK.010/2 017 of 2017 1 2 3 4 5 6 Import duty tariffs are varied ranging from the tariffs applicable to all member states and the ones specifically applicable for imported goods from PRC. Tariffs on a substantial number of products have been reduced to 0%. If there is a discrepancy between the tariffs ASEAN member states impose among themselves and the China specific tariff, the China specific tariff shall prevail. The AC-FTA import duty tariff applies only to imported goods accompanied with Form E - Certificate of Origin. The Form E - Certificate of Origin must be delivered by the importer, bonded storage area entrepreneur and bonded logistics center entrepreneur. In the event the regular import duty tariff is less than the AC-FTA import duty tariff, then the regular import duty tariff shall prevail. Normal Track and Sensitive Track tariffs. 11

Implementation of AC-FTA Tariffs in Indonesia Goods Origin Criteria Wholly Obtained and Produced Not Wholly Obtained and Produced RVC 1. RVC of at least 40% out of the FOB value of the goods produced to obtain the preferential tariff; or 2. The total of Non-Originating Material is not more than 60% out of the FOB value of the product so produced or obtained provided that the final manufacturing process is performed with the territory of such ratifying party. The following formula is used to confirm compliance: Non-AC-FTA Material Value + Undetermined Material Value FOB value X 100% < 60% 12

Implementation of AC-FTA Tariffs in Indonesia Goods Origin Criteria upon the Protocol to Amend the Framework Agreement on Comprehensive Economic Cooperation and Certain Agreements thereunder between ASEAN and the PRC (the Amended Protocol ). Not satisfying the foregoing three requirements. Traders may resort to the de minimis provision under the Amended Protocol. Goods that do not fulfill the foregoing requirements may still be regarded as originating if they fulfill one of the following criteria: 1.Goods other than the ones included in Chapters 50 to 63 of the HS can still be considered as an originating goods provided that the value of all non-originating materials used in the production of goods that did not undergo the required change in tariff classification (CTC) does not exceed 10% of the FOB value of the goods; or 2.Goods provided for in Chapters 50 to 63 of the HS for which the weight of all non-originating materials used in their production that did not undergo the required change in tariff classification does not exceed 10% of the total weight of the good, or the value of all non-originating materials used in the production of the goods that did not undergo the required CTC does not exceed 10% of the FOB value of the goods. 14

Comparison between AFTA and AC-FTA Tariffs for Trade in Goods Category AFTA AC-FTA Product Categories Inclusion List, Temporary Inclusion List, Sensitive and Highly Sensitive List and General Exception List. Normal Track and Sensitive Track. RVC Computation Direct method and indirect method. RVC of at least 40% and the final process of production is conducted within a party or specific HS codes may be regarded as originating if all non-originating materials used in the production of the goods have undergone a change in tariff classification. Exclusion from 0% import duty tariff (in relation to Indonesia) Tariffs Reciprocal principle MFN required products. Non-Inclusion List products (e.g. rice (25%) and sugar (5-10%). 0-5% already, MFN, Non-Inclusion List, general import duty tariffs. Not clearly stated in the attachment to MOF Reg 229. In order for a product to be imposed with the preferential tariff in the export destination country, the same product must have been included in the Inclusion List of the originating country. PMFN required products, excluded products such as: 1.motorcycles including mopeds, and cycles fitted with an auxiliary motor with or without side cars; side cars (20-50%); 2.Motor vehicles principally designed for the transport of persons including station wagons and racing cars (5-50%); 3.Rice (Rp 450/kg); 4.Sugar (Rp 550-790/kg). 0-5% already, MFN, China specific tariffs, general import duty tariffs. Clearly stated in the attachment to MOF Reg 229. Reciprocal principle also applies in AC-FTA so that any importation of certain types of goods originated from China, must be implemented with reciprocal tariff which amount may be the same to the MFN import duty tariff or other amount as set forth in the Attachment to MOF Reg 26. 15

China ASEAN FTA RULES OF ORIGIN ACFTA Originating Criteria The rules of origin under ACFTA demand that goods have ASEAN-China (regional value) content of 40% or more. Non-wholly obtained goods that meet this threshold are deemed to have undergone substantial transformation and qualify to be originating. Wholly-Obtained Goods under ACFTA Certain goods are deemed wholly-obtained goods and they automatically qualify for the preferential tariff under ACFTA. Among others, wholly-obtained goods comprise: live animals, meat, fish, dairy produce, harvested plants, minerals. Certificate of Origin Exporters can obtain a relevant Certificate of Origin for goods that are verified to be originating. In Indonesia, the Directorate General of Foreign Trade under the Ministry of Trade oversees the issuance of Certificate of Origin. 16

Discussed Changes to AC-FTA implementation in Indonesia Protocol to Amend the Framework Agreement on Comprehensive Economic Cooperation and Certain Agreements thereunder between ASEAN and the PRC. President Joko Widodo signed a Presidential Regulation to ratify the Protocol. 2015 2018 17

Discussed Changes to AC-FTA implementation in Indonesia Services Indonesia Goods Simplification of the RoO. Investment Agreement Parties will cooperate to promote and increase awareness of the AC-FTA as an investment area. Beverage serving, portfolio management, investment fund management and lending. China Engineering services, integrated engineering services, construction services, sporting and other recreational services, security services, travel agencies. The amended RoO provides a clear and comprehensive set of standards and criteria that determine whether a product will be given preferential tariff treatment under the AC-FTA Cooperation to facilitate investments in the ACFTA through creating a more favorable environment for all forms of investment, simplifying procedures for investment applications and approvals, disseminating investment information, and providing assistance and advisory services through one-stop investment centers.. 18

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