In English, the Latin phrase “De Minimis” translates roughly to “about trifle things”. Today, the term can mean different things in different context. In this article, we will look at the meaning of the term when used in the context of Free Trade Agreements.
What is the meaning of De Minimis rule?
Most Free Trade Agreements use similar rules of origin to confer qualification on products for duty waivers on import. These rules are:
- Tariff Shift
- Regional Value Content
The tariff shift rule allows products to qualify for duty waivers if the HS classification codes for foreign raw materials used in the manufacture of the product are different from the HS code of the final product. The legal text of the FTA will define whether the difference in tariff classification has to be at the first 4 (Heading) or 6 (Sub Heading) digits. If the FTA allows a de minimis threshold for the tariff shift rule, then insignificant percentages of raw materials (by value) that have the same HS code as the finished good can be ignored when doing FTA assessment. This allows for some leniency in applying the tariff shift rule. The specific threshold value will be defined differently in different FTAs.
The regional value content rule works by calculating the percentage of raw materials and local value added costs. FOB price of the finished good is usually used as the basis of calculation. If the legal text of the FTA allows it, the product may automatically qualify for local value content if the sum of the value of all the non-originating materials falls below a set threshold. In practice, de minimis is not often allowed to be used with the regional value content rule of origin and even if it allowed, it is not commonly used.
A final note
When using de minimis thresholds in the assessment of origin, traders have to retain good documentation to defend these calculations and conclusions. They can expect Customs authorities to audit these assessments carefully during post clearance audits.