PEM Convention revision accepted

Rules of origin determine the conditions under which a product can benefit from preferential tariff treatment under a free trade agreement. They’re essential for making sure that the advantages of the agreement benefit the contracting parties.

The revision of the PEM Convention introduces several important and favourable changes for businesses, including (non-exhaustive list):

• The elimination of the EUR-MED proof of origin, which was used for trade between countries that apply diagonal cumulation. From now on, only one type of proof of origin will be required: the movement certificate EUR.1 or the declaration of origin.
  
• The possibility to calculate the ex-works price and the value of non-originating materials based on average values during a fiscal year, reducing administrative burden for businesses.
• The increase in the tolerances for non-originating materials that can be incorporated into the production of a product, from 10% to 15% of the ex-works price for industrial products and from 10% to 15% of the net weight for agricultural products.
• The replacement of the direct transport rule with the non-manipulation rule, which is more suitable for international logistics chains.
• The simplification of the rules of the list for industrial products, with an increase in the allowed share of non-originating inputs from 40% to 50% of the ex-works value of the product.

The revision of the PEM Convention applies to Switzerland’s trade with the other 23 contracting parties, which represent approximately 49% of Switzerland’s total trade volume. These countries include the European Union, Iceland, Norway, Turkey, Morocco, Tunisia, Egypt, Israel, Jordan, Lebanon, Georgia, Moldova, Ukraine, Albania, Bosnia and Herzegovina, North Macedonia, Montenegro, Serbia and Kosovo, among others.

Before the revised rules come into effect on 1 January 2025, there will be a transitional period (which began in September 2021 for certain countries) during which two sets of rules of origin will coexist in the PEM zone: those of the current PEM Convention and those of the transitional rules, which are to a large extent identical to the revised rules. The transitional rules are applicable on a bilateral basis with certain PEM partners, while the rules of the current PEM Convention remain applicable with others. Exporting companies can choose to apply the set of rules that is most suitable for them.

However, this coexistence of two sets of rules of origin poses an issue of interaction between the two systems for cumulation of origin, which allow the use of materials or operations originating from other PEM contracting parties to confer origin to a product. To resolve this issue, the parties to the PEM Convention have agreed to introduce automatic permeability within the framework of the transitional rules. This involves accepting a proof of origin established according to the rules of the current PEM Convention as a valid proof of origin under the transitional rules, under certain conditions. Automatic permeability will be gradually implemented with different PEM partners as of February 2024.

Finally, the Joint Committee of the PEM Convention has also adopted a recommendation to accept, within the framework of the current PEM Convention, electronically issued proofs of origin. This is in line with current practice in Switzerland (in the context of the DaziT programme). Corresponding provisions are also included in the revised rules of the PEM Convention.

The revision of the PEM Convention represents a significant step forward for regional trade and Swiss businesses, who will benefit from more flexible and tailored rules of origin that align with economic realities. Switzerland is committed to adapting its free trade agreements with PEM partners that don’t yet include a dynamic link to the PEM Convention, to ensure harmonised implementation of the revised rules from 1 January 2025.

How can PwC support you?

To prepare for the implementation of these new rules, PwC can support you with the following activities:

• Reviewing the current origin status of your products under the existing preferential trade agreements and protocols in the pan-Euro-Mediterranean region and identifying any potential changes or risks under the new rules of origin and cumulation.
• Assessing the impact of the new rules on your sourcing strategies, production processes and market access opportunities, and considering whether any adjustments or diversification are needed to maintain or enhance competitiveness and compliance.
• Updating the documentation and conducting training that reflects the new rules and procedures.
• Monitoring the developments and guidance from the relevant authorities and institutions on the application and interpretation of the new rules and seeking clarification or assistance if needed.