Rules of Origin as they pertain to the Panama Trade Promotion Agreement (TPA).
Last Published: 11/2/2016
Rules of origin (ROOs) are used to define which products may qualify for preferential tariff rates under a trade agreement, even though they may contain non-originating inputs. These rules vary by trade agreement and product. Special rules apply for textile and apparel products and certain agricultural and industrial products. 

A product is considered originating under the U.S.-Panama TPA if it is:
a) wholly obtained or produced entirely in the United States or Panama,
b) produced entirely in the U.S. and/or Panama of non-originating materials, or a mix of originating and non-originating materials, but where the non-originating materials (inputs) that are part of the good (product) being exported have met the relevant product-specific rule of origin;
c) produced entirely in the U.S. or Panama from originating materials (inputs). A simplistic illustration of this might be a wooden bowl, which to be originating could be a) made in the U.S. from U.S. wood; b) made in the U.S. from Argentine wood, but because the wood has been transformed into a bowl, it now meets the rule of origin for a bowl; or c) made in the U.S. from Panama wood.
Product specific rules are listed by HS Code in Annex 4.1 of the Agreement. Additional information on Rules of Origin and Rules of Origin Procedures are listed in Chapter four of the agreement.   If your product is produced in the U.S. or Panama and contains non-originating inputs (non-U.S. and non-Panamanian content, including content from an unknown origin), you will need to look at the specific rule of origin for your product to determine whether it is originating under the U.S.-Panama TPA.

There is a limited de minimis exception, i.e. you may not need to look up product specific rule of origin even if your product contains some amount of non-originating inputs.  These exceptions are available for most products where the non-originating inputs do not exceed 10 percent of the adjusted value of the product.  You may learn more by reading Chapter 4, Article 4.6 for more information on de minimis restrictions on this exception for various products including agricultural products (Chapter 3, Section F) and textiles and apparel.

Types of Rules of Origin:
Although rules of origin under the U.S.-Panama TPA differ by product, they typically fall within three general categories, consisting of change in tariff classification, regional value content of combination of the two.  

A Change in Tariff Classification (Tariff-Shift) Rule
A Tariff-Shift rule is one type of rule of origin used in Article 4.1 of Chapter 4 of the U.S.- Panama TPA. If the product specific rule listed in Annex 4.1 for your product is a tariff shift type rule, then to qualify for the FTA-negotiated preferential tariff rate, the non-originating inputs of the product must be substantially transformed in Panama or the United States.

This transformation is defined by the tariff-shift rule in terms of a change in the HS Code of the input to the HS code of the final product (e.g., processing wood into furniture). This type of tariff shift test shows that non-originating inputs have been sufficiently changed in either the United States or Panama to allow them to qualify for a preferential tariff.

An example of tariff shifty type rule of origin (listed in chapter four above) for qualifying chest for shipment to Panama. The rule reads:   “A change to heading 9403 from any other heading
HS code for Wooden Furniture Chest is 9403.30 (where first two digits—94—are referred to as chapter, 9403 as heading and 940330 as subheading of the HS code number).  This is important to know, as the rules of origin may refer to the need to change from chapter, heading or subheading level).  
So this is how we would read the rule:  The heading for the chest is 9403.  Non-originating wood (e.g. from Brazil), classified as HS 4407.99, is substantially transformed during the manufacturing process in the U.S. to result in a new product, HS 9403.30, a wooden chest of drawers.  The non-originating input's classification (wood - 4407.99) is changed at the heading level when compared to the finished product, 9403.30.  Therefore, the product complies with the tariff rule and will qualify for preferential tariff rate.

Tip: If only a tariff-shift rule applies to your product, you cannot use a regional value content rule.

Regional Value Content Rule
A Regional Value Content rule (RVC) is a type of rule of origin is another type of a rule used in Chapter Four, Article 4.w of the U.S.-Panama TPA. RVC rules require that a product include a certain percentage of originating content. There are two ways RVC’s may be calculated, which may vary by product. Regional value content is only applicable when specifically provided in the relevant product specific rule of origin.

A typical RVC rule may look like this:

“No change in tariff classification is required, provided that there is regional value content of not less than:
(a) 35 percent under the build-up method, or
(b) 45 percent under the build-down method.”
Note: There is an additional method to calculate regional value content—the “net cost” this method is applicable to autos and most auto parts. Net cost is defined as total cost minus sales promotion, marketing, and after-sales service costs, royalties, shipping and packing costs, and non-allowable interest costs that are included in the total cost.

For RVC-based methods, Adjusted Value is defined as the value of the product for customs purposes, usually the arms-length transaction value, adjusted, if necessary, to exclude any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation. However, the actual determination of the appropriate adjusted value can only be definitively determined by the Panama Customs Service.

The Build-Up Method to calculate RVC- minimum percentage of U.S. or Panama content

RVC = (VOM/AV)*100

RVC is the regional value content, expressed as a percentage;
AV is the adjusted value of the product; and
VOM is the value of originating materials, other than acquired or self-produced and used by the producer in the production of the product.

The Build-Down Method to calculate RVC– maximum percentage of material not from either the U.S. or Panama

RVC = ((AV-VNM)/AV)*100

RVC is the regional value content, expressed as a percentage;
AV is the adjusted value of the product; and
VNM is the value of non-originating materials that are acquired and used by the producer in the production of the product; VNM does not include the value of a material that is self-produced.

The Net Cost Method for automotive goods – maximum percentage of material not from either U.S. or Panama.

RVC = ((NC-VNM)/NC)*100

RVC is the regional value content, expressed as a percentage;
NC is the net cost of the good; and
VNM is the value of non-originating materials acquired and used by the producer in the production of the good; VNM does not include the value of a material that is self-produced.

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Panama Rules of Origin