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Customs Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018 [and] Customs Tariff Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018



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ISSN 1328-8091

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BILLS DIGEST NO. 64, 2018-19 20 FEBRUARY 2019

Customs Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018 [and] Customs Tariff Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018 Juli Tomaras Law and Bills Digest Section Michael Robinson Economics Section

Contents

Purpose of the Bill ........................................................... 3

Customs Amendment Bill ............................................ 3

Tariff Bill ...................................................................... 3

Structure of the Bill ......................................................... 4

Background ..................................................................... 4

Committee consideration ................................................ 5

Senate Standing Committee on the Selection of Bills .............................................................................. 5

Joint Standing Committee on Treaties ........................ 5

First report ................................................................. 5

Second report ............................................................ 6

Senate Standing Committee for the Scrutiny of Bills .............................................................................. 6

Policy position of non-government parties/independents...................................................... 6

Australian Labor Party ................................................. 6

Australian Greens ........................................................ 7

Position of major interest groups..................................... 8

Financial implications ...................................................... 9

Statement of Compatibility with Human Rights................ 9

Date introduced: 19 September 2018

House: House of Representatives

Portfolio: Home Affairs

Commencement: Schedule 1 of both Bills commence on the later of Royal Assent and the day PAFTA enters into force for Australia. However, if PAFTA does not enter into force, these provisions do not commence at all. Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the Bills’ home pages for the for the Customs Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018 and the Customs Tariff Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at February 2019.

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Parliamentary Joint Committee on Human Rights ... 10 Key issues and provisions .............................................. 10

Rules of origin and their significance ........................ 10

Part 1—Peruvian originating goods ........................ 10

Rule 1—goods wholly obtained or produced entirely in Peru, or in Peru and Australia (proposed Subdivision B) ....................................... 12

Rule 2—Goods produced in Peru, or in Peru and Australia, from originating materials (proposed Subdivision C) ....................................... 13

Rule 3—goods produced in Peru, or in Peru and Australia, from non-originating materials (proposed Subdivision D) ...................................... 13

Change in tariff classification ................................ 14

Regional value content (RVC) ................................ 15

Accessories, Spare Parts, Tools and Instructional or Other Information Materials ....... 15 Goods put up in a set for retail sale ...................... 15

Packaging materials and containers ...................... 15 Rule 4—goods that are accessories, spare parts, tools or instructional or other information materials (proposed Subdivision E)... 16 Rule 5—Consignment (Subdivision F) ................... 16 Subdivision G—Regulations .................................. 17

Part 2—Verification powers .................................... 17

Definitions ............................................................. 17

Record keeping obligations ................................... 17

Power to require records ...................................... 17

Power to ask questions ......................................... 18

Part 3—Application provisions ................................ 18

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Purpose of the Bill The Customs Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018 (the Customs Amendment Bill) and the Customs Tariff Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018 (the Tariff Bill) are implementing legislation for the Peru-Australia Free Trade Agreement (PAFTA).1 Their passage is required before PAFTA can come into effect.

The basic purpose of the Bills is to implement the customs dimensions of PAFTA by making relevant amendments to the Customs Act 1901 and the Customs Tariff Act 1995.2

Customs Amendment Bill The Customs Amendment Bill amends the Customs Act to implement Australia's obligations under Chapter 3 of the PAFTA which sets out rules of origin criteria and related documentary requirements for claiming preferential tariff entry for goods imported from the territory of Peru.3 The key amendments in the Bill insert:

• a new Division 1EA into Part VIII4 of the Customs Act providing for:

- new rules of origin for goods imported into Australia from the territory of Peru: imported goods that satisfy the rules as 'Peruvian originating goods' will be eligible for preferential rates of customs duty • a new Division 4DA into Part VI5 of the Customs Act providing for:

- rules relating to the export of goods to Peru: rules regarding record keeping and other obligations, which will apply to persons exporting goods that are Australian originating goods to Peru (and on that basis wanting to obtain preferential treatment for such goods in Peru) and on producers of such goods and

- verification powers relating to the exportation of goods to the territory of Peru, such as the power of authorised officers to require particular records and/or to ask questions in order to verify the origin of the goods.

Tariff Bill The Tariff Bill contains amendments to the Customs Tariff Act to implement PAFTA by:

• giving free rates of customs duty for most goods that are ‘Peruvian originating goods’ in accordance with new Division 1EA of Part VIII of the Customs Act

• inserting a new Schedule 6A to the Customs Tariff Act to provide for excise-equivalent rates of duty on certain alcohol, tobacco and petroleum products and for phasing rates of customs duty

1. Free Trade Agreement between Australia and the Republic of Peru, done at Canberra 12 February 2018. 2. The Customs Tariff Act sets out in law the International Convention on the Harmonized Commodity Description and Coding System [1988] ATS 30 (entered into force for Australia and generally 1 January 1988) (HS) and provides for general and concessional customs duty rates. The HS is the international system for classifying goods, allowing participating countries to

classify traded goods on a common basis for customs purposes. A concession is a grant of a right, in this case a right to a certain customs duty rates for particular goods based on the terms of PAFTA. Typically, a tariff concession removes the duty for certain goods that an importer would otherwise pay under the tariff. A tariff concession assists in reducing costs for imported goods. 3. All preferential and free trade agreements contain rules of origin. These rules govern whether or not a product is eligible for

the tariff preferences that are provided in a given trade agreement. The principal official objective of rules of origin is to ensure that the economic benefits from trade preferences are granted only to the countries that signed the trade agreement. 4. Part VIII of the Customs Act is concerned with customs duties, including their payment and computation. Although subject to qualification, the general position is that ‘the rate of any import duty payable on goods is the rate of the duty in force when

the goods are entered for home consumption’ (subsection 132(1)). 5. Part VI of the Customs Act provides the legislative basis for Customs control over the exportation of goods. The exportation of goods may be prohibited absolutely, prohibited in specified circumstances, prohibited to specified places, or prohibited unless

prescribed conditions are complied with.

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in accordance with PAFTA. This is done to achieve parity with rates of duty that would be payable if those particular products were manufactured in Australia and

• amending Schedule 4 to the Customs Tariff Act to maintain customs duty rates for certain Peruvian originating goods in line with the applicable concessional item and consistent with the terms in PAFTA.6

Structure of the Bill The Customs Amendment Bill comprises one Schedule with three Parts:

• Part 1 deals with Peruvian originating goods or rules of origin

• Part 2 deals with record keeping obligations and powers to conduct a verification of any claim for preferential tariff treatment in relation to certain trade items (implementing Articles 3.22-3.23. of PAFTA)7 and

• Part 3 contains application provisions which set out the situations or timeframes in which the proposed amendments will apply.

The Tariff Bill has one Schedule, which makes various consequential amendments to the Customs Tariff Act, including inserting proposed Schedule 6A into that Act, which specifies the preferential tariff rates available to Peruvian originating goods under PAFTA. It also amends Schedule 4 of the Act to maintain customs duty rates in accordance with the applicable concessional item and in accordance with PAFTA.

Background Peru is known as one of the four ‘Pacific Pumas’, being one of the fastest growing economies in Latin America, with a population of over 30 million, and is currently Australia’s fifth-largest commercial partner in Latin America.8 Exports to Peru in 2018 were worth $54 million.9 Key export products largely relate to mining, however, some commentators consider that it is the potential to provide education services to Peruvians that encouraged Australia to negotiate PAFTA.10 South America is seen as the next market for international students after the surge in students from Asia over the past decade.11

Australia’s keenness to further cement its economic ties with Peru may be seen in the context of Australia being one of the four countries currently negotiating to become an associate member of the Pacific Alliance, a four-country Latin American trading coalition that includes Peru as one of its full members.12

Negotiations regarding PAFTA were concluded in a comparatively short period of time (negotiations commenced on 27 May 2017).13 While these negotiations can be viewed as being the result of effective ongoing trade negotiations that started with the original (failed) Trans-Pacific Partnership (TPP) negotiations, such speedy negotiations have also been viewed less

6. Customs duty rates are required to be maintained as the basis for customs value calculation. 7. Significantly, section B, chapter 3 of the Peru-Australia Free Trade Agreement also sets out the methods by which exporters are to claim their tariff concession from foreign Customs. 8. N Cloutman 'Free trade agreements may boost the higher education sector', IBISWorld, 17 April 2018. 9. Australian Bureau of Statistics (ABS), International Trade in Goods and Services, Dec 2018, Australia, cat. no. 5368.0, Table

14a, ABS, Canberra, 2019. 10. N Cloutman 'Free trade agreements may boost the higher education sector', op. cit. 11. Ibid. 12. Department of Foreign Affairs and Trade (DFAT), ‘Why is the Australian Government pursuing a free trade agreement with the

Pacific Alliance?’, DFAT website. 13. S Ciobo (Minister for Trade, Tourism and Investment), Launch of the Peru-Australia Free Trade Agreement, media release, 24 May 2017.

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favourably by some commentators, with a concern that the resulting agreement may be less than optimal.14

Peru expects to benefit from PAFTA by way of increased market access for its agricultural products, particularly fruit and fish, as well as various mineral and some machinery exports.15 Minerals are another key area for both economies. For example, Peru is a leading global producer of silver, copper, zinc, tin, and gold.16

Australia and Peru signed the Peru-Australia Free Trade Agreement (PAFTA) in Canberra on 12 February 2018, and it was tabled in the Parliament on 26 March 2018.17 PAFTA is the successor to the Agreement between Australia and the Republic of Peru on the Promotion and Protection of Investments, and Protocol (IPPA), which was signed in Lima on 7 December 1995 and will terminate when PAFTA comes into force.18

Along with Australia, Peru is a signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) .19 Under PAFTA, Australia has attained improved market access opportunities for Australian exporters over and above that attained under the TPP-11.20 For example, Peru will eliminate tariffs on 93.5 per cent of its tariff lines from entry into force of the agreement, and ultimately will eliminate 99.4 per cent of all its tariffs.21 Peru is offering Australia faster tariff elimination than that offered to the US, the European Union (EU) or Pacific Alliance partners.22

Committee consideration

Senate Standing Committee on the Selection of Bills On 14 February 2019 the Senate Standing Committee on the Selection of Bills deferred consideration of the Bills to its next meeting.23

Joint Standing Committee on Treaties

First report The Joint Standing Committee on Treaties (JSCOT) tabled a report on PAFTA on 15 August 2018 and recommended that binding treaty action be taken.24 The JSCOT report also supported the

14. For example, P Martin, ‘Peru-Australia agreement a sign of negotiating weakness rather than strength’, The Sydney Morning Herald, updated 11 November 2017. 15. International Centre for Trade and Sustainable Development, ‘Peru, Australia Clinch Free Trade Pact’, International Centre for Trade and Sustainable Development website. 16. Austrade, ‘Peru Market Profile’, Austrade website. 17. Joint Standing Committee on Treaties (JSCOT), Peru FTA; EU Framework Agreement; Timor Treaty-Maritime Boundaries; WIPO

Australian Patent Office; Scientific Technical Cooperation: Italy and Brazil, Report 180, JSCOT, Canberra, August 2018, p. 5. 18. Ibid. 19. Comprehensive and Progressive Agreement for Trans-Pacific Partnership, done at Santiago 8 March 2018. For information see

J Tomaras and M Robinson, Customs Amendment (Comprehensive and Progressive Agreement for Trans-Pacific Partnership Implementation) Bill 2018 [and] accompanying Customs Tariff Amendment Bill, Bills digest, 31, 2018-19, Parliamentary Library, Canberra, 2018. 20. National Interest Analysis [2018] ATNIA 4 with attachment on consultation; Free Trade Agreement between Australia and the Republic of Peru [2018] ATNIF 5 and The Agreement to terminate the Agreement between Australia and the Republic of Peru on the Promotion and Protection of Investments, Lima 7 December 1995, [1997] ATS 8, hereafter referred to as the NIA, para 5. 21. For example, the removal of nine per cent tariff on seafood, sheep meat, almonds and wine, see: DFAT website, ‘Peru Australia Free Trade Agreement: outcomes at a glance’. 22. NIA, para. 9. Preferential tariff negotiations towards an FTA aim at eliminating existing tariffs for almost all trade, be it measured by the number of tariff lines or the value of imports covered by the agreement. A tariff line is a single item in a country's tariff schedule, where a tariff schedule is a list of all of a country's tariffs, organised by product. 23. Senate Selection of Bills Committee, Report, 1, 2019, The Senate, Canberra, 14 February 2019, p. 4.

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termination of the precursor agreement to PAFTA, the IPPA, on the date of entry into force of PAFTA. However, as termination will occur automatically when PAFTA comes into effect, the JSCOT did not make any recommendation regarding this termination.25

Second report On 23 October 2018, following discussions with the Australian Labor Party (ALP), the Government referred the PAFTA to the JSCOT for a second inquiry. Following the passage of the enabling legislation for the TPP-11,26 the ALP requested further investigation into PAFTA in order to satisfy themselves on the merits of the Agreement prior to consideration of its enabling legislation.27 The ALP particularly sought further inquiry in relation to the Investor-State Dispute Settlement (ISDS) provisions and ‘concerns over the increasing complexity created by the number of trade agreements, particularly multiple agreements with the same partner’.28

The JSCOT’s second report again recommended that PAFTA be supported and that binding treaty action be taken.29 Additional comments were made by Australian Labor Party (ALP) members and a dissenting report was made by Senator Sarah Hanson-Young for the Australian Greens (Greens) (discussed below).

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bills.30

Policy position of non-government parties/independents

Australian Labor Party The ALP additional comments to the second JSCOT report indicated that the ALP has ‘a number of serious concerns’ with PAFTA.31 The first mentioned concern was the ‘noodle bowl’ problem, referring to the complexity created by multiple and overlapping bilateral trade agreements. It stated that ‘[it] is not entirely clear that some of the tariff and market access benefits in PAFTA could not have been incorporated through mechanisms that exist in the [TPP-11]’.

The additional comments also pointed to ‘the shortcomings previously identified in the process through which trade agreements are negotiated and determined’ in relation to independent economic analysis and modelling.32 It noted that ALP members had moved for the inclusion of a recommendation on this issue in the JSCOT report, but this recommendation had not been supported. The proposed recommendation was:

The Committee recommends that the Australian government consider implementing a process through which independent modelling and analysis of a proposed trade agreement is undertaken by the

24. JSCOT, Peru FTA, Report 180, op. cit., p. 18. 25. Ibid., pp. 17-18. 26. Parliament of Australia, ‘Customs Amendment (Comprehensive and Progressive Agreement for Trans-Pacific Partnership Implementation) Bill 2018 homepage’ and ‘Customs Tariff Amendment (Comprehensive and Progressive Agreement for

Trans-Pacific Partnership Implementation) Bill 2018 homepage’, Australian Parliament website. See J Tomaras and M Robinson, op. cit., for information. 27. JSCOT, Aspects of the Peru-Australia Free Trade Agreement Revisited, Report 183, Canberra, 20 November 2018, p. 1. 28. Ibid. 29. Ibid., p. 37. 30. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 12, 2018, The Senate, Canberra, 17 October 2018, p. 62. 31. JSCOT, Aspects of the Peru-Australia Free Trade Agreement Revisited, Report 183, op. cit., p. 44. 32. Ibid., p. 45.

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Productivity Commission, or equivalent organisation, and provided to the Committee alongside the National Interest Assessment (NIA) to improve assessment of the agreement, and, further, that the projected benefits be subsequently assessed and reported on at appropriate intervals. 33

The issue of labour-market testing (which requires domestic employers to ‘test’ the local market by advertising jobs before they are offered to foreign workers) was also raised. The ALP additional comments stated:

While PAFTA requires labour-market testing, evidence to the Inquiry was that Peruvian contractual service providers would be able to choose the more permissive option provided to Peruvian companies under the [TPP-11]. That suggests the inclusion of a labour-market testing requirement in PAFTA is a hollow gesture, and begs the question of why the government would allow the removal of labour-market testing in the [TPP-11] in the first place.

34

The ISDS provisions in PAFTA were also raised. The ALP has previously opposed the inclusion of ISDS provisions in free trade agreements.35 The additional comments focused on the potential problems with ISDS arrangements for Australia and Peru differing between TPP-11 and PAFTA. Possibly, this could lead to situations where ‘aggrieved corporations can choose from either version in seeking to bring an action against the Australian government’.36 It stated ‘there is no good reason for ISDS mechanisms at all’. The ALP members of JSCOT unsuccessfully sought to have the following recommendation included:

The Committee recommends the Australian government negotiate with the Peruvian Government to withdraw the proposed ISDS arrangements in the PAFTA as there is no clear benefit to such mechanisms, they bring well-established and serious risks, and in any case there is no justification for having a second and different ISDS mechanism between Australia and Peru.

37

The additional comments stated that the Government had agreed to work with the Peruvian Government to remove the ISDS clause from PAFTA. While it described this as ‘an example of the positive outcomes that can be achieved through bipartisanship’ it stated that ‘consideration of the implementing legislation should be postponed until these negotiations are completed and the relevant clause is removed’.38

Australian Greens The dissenting report made by Senator Hanson-Young to the second JSCOT report indicated that the Greens did not support the passage of the implementing legislation for PAFTA. Their concerns with PAFTA included:

• the ability for large multi-national corporations to sue Australian governments under the ISDS provisions

• a lack of enforceable commitments to key international environmental agreements

• the absence of an independent evaluation of the costs and benefits of PAFTA to the economy as a whole and

33. Ibid., p. 46. 34. Ibid., p. 47. 35. In October 2018, the Shadow Minister for Trade and Investment, Jason Clare and Senator Kim Carr introduced Bills that would prevent the Government signing trade agreements that include Investor State Dispute Settlement provisions. See: Parliament

of Australia, ‘A Fair Go for Australians in Trade Bill 2018 homepage’, Australian Parliament website, and Parliament of Australia, ‘A Fair Go for Australians in Trade Bill 2018 [No. 2] homepage’, Australian Parliament website. 36. JSCOT, Aspects of the Peru-Australia Free Trade Agreement Revisited, Report 183, op. cit., p. 48. 37. Ibid.

38. Ibid., p. 49.

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• the unnecessary nature of a second free-trade agreement with Peru, which is also a signatory to the TPP-11.39

The Greens recommended that PAFTA not be ratified. Further, the Greens recommended that the process for signing and ratifying trade deals and treaty agreements be ‘radically overhauled’ and that a ban be legislated on ‘any trade agreement or treaty that includes ISDS provisions’.40

Position of major interest groups Submissions to the JSCOT inquiries on PAFTA from industry groups were strongly supportive of the agreement. For example, the Australian Red Meat and Livestock Industry pointed out that all tariffs on Australian beef, sheepmeat and goatmeat would be eliminated within five years under PAFTA whereas under the TPP it would take ten years to achieve this result.41 Further, in its submission to the second inquiry, it did not view multiple agreements with the same trading partner as a disadvantage:

With TPP-11 sitting alongside PAFTA, Australian beef exporters servicing Peru will have the choice of using the tariff schedule under either agreement. This will not be complex - as the benefits of utilising PAFTA are obvious…

Providing the subsequent agreement between trading partners improves market access and other trade facilitation conditions for our products (which PAFTA in this case does) multiple agreements should be supported. 42

Similarly, the Minerals Council of Australia (MCA) noted that tariffs on all product groups that include mining equipment will be eliminated.43 The MCA also noted Austrade figures and identified the significant potential for both investment and Australian services in the Peruvian mining sector:

[Peru] is already a major mining province, ranking third in global copper production, second for silver and sixth for gold. Furthermore there is a pipeline of US$58 billion ($74 billion) in new mining investment projects expected to be delivered over the period from 2016 to 2020. 44

The ISDS mechanisms were supported by many industry submissions in the context that an ISDS mechanism already existed between Australian and Peru under the IPPA. The MCA considered that the ISDS provisions would enhance:

… business certainty and predictability around regulatory matters, while including extensive safeguards to ensure the Governments of Australia and Peru retain scope to implement public policy and regulate in their respective countries’ public interest. 45

Conversely, the Australian Fair Trade and Investment Network (AFTINET) did not support the ISDS mechanisms in PAFTA:

39. Ibid., p. 51. 40. Ibid., p. 52. 41. Australian Red Meat and Livestock Industry, Submission to Joint Standing Committee on Treaties, Inquiry into Peru FTA, [Submission no. 4], 20 April 2018, p. 1.

42. Australian Red Meat and Livestock Industry, Submission to Joint Standing Committee on Treaties, Inquiry into aspects of the Peru-Australia Free Trade Agreement revisited, [Submission no. 11], 2 November 2018, pp. 1-2. 43. Minerals Council of Australia, Submission to the Joint Standing Committee on Treaties, Inquiry into the Peru FTA, [Submission no. 5], April 2018, p. 2. 44. Ibid., p. 9. 45. Ibid., p. 11.

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It is disappointing that PAFTA includes ISDS provisions, since there is increasing evidence of the flaws in the ISDS system including that the EU and US are moving away from ISDS, and that ISDS institutions have acknowledged its flaws and are reviewing it structures. 46

Conflicting views were expressed in relation to the increasing complexity created by the number of trade agreements, particularly multiple agreements with the same partner. The Australian Chamber of Commerce and Industry noted that it had ‘repeatedly warned of the aggregate complexity associated with negotiation of multiple agreements that cover the same market’. It stated:

Our call has been supported and economically analysed by the Productivity Commission, along with academics from the ANU who agree that the increasing complexity of overlapping trade agreements is detrimental to our trade liberalising efforts. 47

In contrast, the MCA disagreed with claims that additional trade agreements make ‘it more complex and imposes additional red-tape and costs on Australian exporters’. It characterised the evolution of Australia’s trade agreements as providing ‘building blocks towards the eventual goal of complete trade liberalisation and removal of tariffs’ and highlighted the improved tariff outcomes under PAFTA.48

The Australian Sugar Industry Alliance claimed that PAFTA has implications beyond this agreement for the sugar industry:

While the new market access opportunities for sugar may be modest, the Peru-FTA provides strategic trade policy outcomes. Sugar’s inclusion in the deal sends a clear message that sensitive commodities, such as sugar, which have been excluded from some past Australian trade agreements can and should be included in all trade agreements.

49

Financial implications The Government stated in the 2018-19 Budget that PAFTA is estimated to have a negligible cost to revenue over the forward estimates period.50

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.51

46. Australian Fair Trade and Investment Network (AFTINET), Submission to the Joint Standing Committee on Treaties, Inquiry into the Peru FTA, [Submission no. 2], April 2018, p. 3. 47. Australian Chamber of Commerce and Industry (ACCI), Submission to Joint Standing Committee on Treaties, Inquiry into aspects of the Peru-Australia Free Trade Agreement revisited, [Submission no. 16], 5 November 2018, pp. 1-2. 48. Minerals Council of Australia, Submission to Joint Standing Committee on Treaties, Inquiry into aspects of the Peru-Australia

Free Trade Agreement revisited, [Submission no. 15], 2 November 2018, p. 12. 49. Australian Sugar Industry Alliance, Submission to the Joint Standing Committee on Treaties on the Peru-Australia Free Trade Agreement, [Submission no. 8], 1 May 2018, p. 1. 50. Explanatory Memorandum, Customs Tariff Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018, p. 2;

Australian Government, ‘Part 1: revenue measures’, Budget measures: budget paper no. 2: 2018-19, p. 15. 51. The Statement of Compatibility with Human Rights can be found at page 19 of the Explanatory Memorandum to the Customs Amendment Bill, and at page 12 of the Explanatory Memorandum to the Tariff Bill.

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Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considered that the Bills did not raise human rights concerns.52

Key issues and provisions

Rules of origin and their significance Chapter 3 of PAFTA deals with the rules of origin which set out the procedures and documentation required to show that a good qualifies for a preferential tariff rate under PAFTA.53

All preferential and free trade agreements (FTA) contain rules of origin. Notwithstanding rules of origin requirements differ in varying degrees between different FTAs, these rules have the general purpose of governing whether or not a product is eligible for the tariff preferences that are provided in a given FTA. The key objective of rules of origin is to ensure that the economic benefits from trade preferences are granted only to the countries that are a party to the particular FTA. In order to achieve this, rules of origin take into account for example, where the goods are produced and what materials are used to produce them.54 Indeed, the key purpose of ‘[rule of origin] requirements is to ensure that materials imported from non-Parties to a particular FTA partner are "substantially transformed" prior to trade between the FTA partners’.55

Rules of origin are generally complex, and one cannot make assumptions without a careful reading of the rules as to whether a particular good satisfies those rules. There will often be different rules of origin in FTAs for different goods. As part of PAFTA’s implementation procedures, an amendment to the Customs Act is required in order to facilitate the PAFTA Chapter 3 provisions.

Part 1—Peruvian originating goods Customs Act 1901

Part 1 of Schedule 1 to the Customs Amendment Bill inserts proposed Division 1EA into Part VIII of the Customs Act, titled Peruvian originating goods. It sets out new rules to determine whether goods imported to Australia satisfy the criteria to qualify as ‘Peruvian originating goods’, and thus be eligible for tariff reductions.

Proposed Division 1EA comprises seven Subdivisions (A-G).

Proposed Subdivision A provides key definitions that apply to proposed Division 1EA.56 These definitions include:

Certificate of origin means a certificate that is in force and that complies with the self-certifying requirements of Article 3.17 of Chapter 3 of PAFTA (Box 1). A certificate of origin is a document to certify the place of growth, production or manufacture of goods for the purpose of making a claim for preferential tariff treatment under a trade agreement.57

52. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 11, 2018, 16 October 2018, p. 72. 53. DFAT, Peru-Australia Free Trade Agreement, chapter 3. 54. Rules of origin should not be confused with country of origin, which is a term used in dumping and counter-veiling cases. 55. Department of Foreign Affairs and Trade (DFAT), ‘Prove the origin of your goods’, DFAT website. 56. Proposed subsection 153ZIM(1) of the Customs Act, at item 1 of Schedule 1 to the Customs Amendment Bill. 57. Australian Trade and Investment Commission (AUSTRADE), ‘What is a Certificate of Origin?’, AUSTRADE website.

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Harmonized Commodity Description and Coding System means the Harmonized Commodity Description and Coding System (the HCDC System) that is established by or under the International Convention on the Harmonized Commodity Description and Coding System.58 The HCDC System is the worldwide classification system that has been adopted by all countries that are members of the World Customs Organization (WCO).

In Australia, the HCDC System has been adopted in the Customs Tariff Act. The HCDC System is a structure for classifying goods based on internationally agreed descriptors for goods and related six-digit codes administered by the WCO. This six-digit classification uniquely identifies all traded goods and commodities and is uniform across all countries that have adopted the HCDC System. The WCO reviews the system every five years to reflect changes in industry practice, technological developments and evolving international trade patterns.

Indirect materials means:

(a) goods or energy used in the production, testing or inspection of goods, but not physically incorporated in the goods or

(b) goods or energy used in the maintenance of buildings or the operation of equipment associated with the production of goods

including:

(c) fuel (within its ordinary meaning)

58. International Convention on the Harmonized Commodity Description and Coding System, done in Brussels on 14 June 1983, [1988] ATS 30 (entered into force 1 January 1988).

Box 1: Article 3.17 - Claims for Preferential Treatment

1. Each Party shall provide that an importer may make a claim for preferential tariff treatment, based on certificate of origin completed by the exporter, producer, or an authorised representative of the exporter or producer.

2. Each Party shall provide that the certificate of origin: a. need not follow a prescribed format b. be in writing c. specifies that the good is both originating and meets the requirements of this Chapter d. contains a set of data requirements as set out in Annex 3-A and e. be in English or in Spanish. The importing Party may require the importer to submit a

translation in the language of the importing Party.

3. Each Party shall provide that a certificate of origin may apply to: a. a single shipment of a good into the territory of a Party or b. multiple shipments of identical goods within any period specified in the certificate of origin, from or after the date of issuance but not exceeding the period of validity of the

certificate.

4. Each Party shall provide that the certificate of origin is valid for one year after the date that it was issued or for such longer period specified by the laws and regulations of the importing Party.

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(d) catalysts and solvents

(e) gloves, glasses, footwear, clothing, safety equipment and supplies

(f) tools, dies and moulds

(g) spare parts and materials and

(h) lubricants, greases, compounding materials and other similar goods.

Non-originating materials means goods that are not originating materials.

Originating materials means:

(a) Peruvian originating goods that are used in the production of other goods

(b) Australian originating goods that are used in the production of other goods or

(c) indirect materials.

Proposed Subdivisions B-E outline the circumstances (rules or preference criteria) under which goods are to be considered Peruvian originating goods under the PAFTA rules of origin.

Rule 1—goods wholly obtained or produced entirely in Peru, or in Peru and Australia (proposed Subdivision B) In simple terms, goods will meet the requirement of being Peruvian originating goods if they are wholly obtained or produced entirely in Peru, or in Peru and Australia and either:

• the importer of the goods has, at the time the goods are imported, a certificate of origin, or a copy of one, for the goods or

• Australia has waived the requirement for a certificate of origin for the goods.59

Proposed subsection 153ZIN(2) of the Customs Act provides for eleven possible ways that goods can be ‘wholly obtained or produced entirely’ in Peru, or in Peru and Australia (see Box 2).60

59. Proposed subsection 153ZIN(1) of the Customs Act, at item 1 of Schedule 1 to the Customs Amendment Bill. 60. Proposed subsection 153ZIN(2) gives effect to articles 3.2, 3.3, 3.17, 3.20 and 3.21 of Chapter 3 of PAFTA.

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Rule 2—Goods produced in Peru, or in Peru and Australia, from originating materials (proposed Subdivision C) Articles 3.2, 3.3, 3.17, 3.20 and 3.21 of PAFTA are given effect to by proposed section 153ZIO of the Customs Act, which sets out rules for goods that are produced exclusively in Peru, or in Peru and Australia from originating materials only. In relation to such goods, there are relevant requirements under the rules of origin which must be satisfied if the goods are to receive preferential customs duty treatment.

Goods are Peruvian originating goods if ‘they are produced entirely in Peru, or in Peru and Australia, from originating materials only’ and the importer has a certificate of origin (or a copy of one), or the need for this has been waived by Australia.

Rule 3—goods produced in Peru, or in Peru and Australia, from non-originating materials (proposed Subdivision D) Non-originating materials means goods that are not originating materials.61 Even if they contain non-originating materials, goods may nonetheless be treated as originating in Peru if they satisfy

61. Proposed subsection 153ZIM(1).

Box 2: Goods that are wholly obtained or produced entirely in Peru, or in Peru and Australia

The types of goods that are wholly obtained or produced entirely in Peru, or in Peru and Australia are:

• plants, or goods obtained from plants, that are grown, cultivated, harvested, picked or gathered there

• live animals, born or raised there

• goods obtained from live animals

• animals obtained by hunting, trapping, fishing, gathering or capturing in the territory of Peru

• goods obtained from aquaculture in the territory of Peru

• minerals, or other naturally occurring substances, extracted or taken from the territory of Peru

• fish, shellfish or other marine life taken from the sea, seabed or subsoil beneath the seabed:

- outside the territory of Peru and the territory of Australia and - in accordance with international law, outside the territorial sea of non-Parties; by vessels that are registered or recorded with Peru and are entitled to fly the flag of Peru.

• goods produced from goods referred to above on board a factory ship that is registered or recorded with Peru and is entitled to fly the flag of Peru

• goods (except fish, shellfish, other goods of sea-fishing or other marine life) taken by Peru, or a person of Peru, from the seabed, or subsoil beneath the seabed, outside the territory of Peru and the territory of Australia, and beyond areas over which non-Parties exercise jurisdiction, but only if Peru, or the person of Peru, has the right to exploit that seabed or subsoil in accordance with international law

• waste or scrap derived from production in the territory of Peru and that is fit only for the recovery of raw materials, or waste or scrap that has been derived from the aforementioned or

• goods produced exclusively from goods referred to above or from their derivatives.

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this rule. The rules which deal with the treatment of goods produced from non-originating materials are commonly referred to as specific rules of origin and are based on a change in tariff classification, 62 a regional value-content requirement,63 or both.

Goods are considered to be Peruvian originating goods under proposed Subdivision D if:

a) the goods are classified by the regulations for the purposes of the Subdivision (that is, according to a Chapter, heading or subheading of the Harmonized System that is covered by the table in Annex 3-B (product-specific rules of origin) to Chapter 3)

b) they are produced entirely in Peru, or in Peru and Australia, from non-originating materials only or from non-originating materials and originating materials

c) each requirement that is prescribed by the relevant Annex in relation to the goods is met and

d) the importer of the goods has, at the time the goods are imported, a certificate of origin, or a copy of one, for the goods, or the need for one has been waived by Australia.64

Change in tariff classification In order to meet the requirements of paragraph (c), above, a good may be required to have undergone a change in tariff classification. In such a case, each of the non-originating materials used in the production of the goods must undergo the applicable change as a result of production occurring entirely in the territory of Peru or Australia. This means that the non-originating materials are classified under one tariff provision prior to processing and classified under another upon completion of processing. The specific rule of origin defines exactly what change in tariff classification must occur for the goods to be considered originating.

Proposed subsections 153ZIP(3)-(4) provide that regulations may prescribe that each non-originating material used in production of a good is required to satisfy a change in tariff classification, and when such a requirement (if any) is satisfied. A change in tariff classification relates to Article 3.5 of PAFTA, and Annex 3-B to the Agreement which provides for product-specific rules of origin.65 If regulations are made in relation to non-originating materials and the non-originating materials used do not satisfy the change in tariff classification requirements, the requirement is taken to be satisfied providing that the non-originating materials do not exceed ten per cent of the customs value of the goods.66 This gives effect to the de minimis requirement in Article 3.9 of PAFTA.67

62. Tariff classification is the process of determining the correct code number for goods in order to have them accurately recorded. This is important for the following reasons: ensuring the correct collection of customs duties; determining any regulations that may apply to the import of those goods; statistical purposes at import and export. It is the Tariff Number, also known as a Commodity Code, which identifies goods for Customs purposes. As already mentioned, the Harmonised System provides a standard system of numbers to identify types of goods. The HS Commodity Code is made up of a series of numbers. The first four are recognised worldwide, the first two representing the Chapter to which the goods apply, and an additional two digits (making six) giving a more detailed description (these digits may differ in some countries).

63. In simple terms, Regional Value Content rules require that a product include a certain percentage of originating content. 64. Proposed subsection 153ZIP(1). 65. DFAT, ‘Peru-Australia Free Trade Agreement’, Annex 3-B: product-specific rules of origin, DFAT website. A change in tariff classification relates to a change of tariff under the Harmonized Commodity Description and Coding System.

66. Proposed subsections 153ZIP (4) and (5). 67. The de minimis requirement provides that each Party shall provide that a good that contains non-originating materials that do not satisfy the applicable change in tariff classification requirement specified in Annex 3-B for the good is nonetheless an originating good if:

• the value of all these materials does not exceed ten per cent of the value of the good, as defined under Article 3.1, or • the good is classified in Chapters 50 through 63 of the Harmonized System (which deal with textiles and clothing), the total weight of all such materials does not exceed ten per cent of the total weight of the good and the good meets all the other applicable requirements of Chapter 3 (Rules of Origin) of PAFTA.

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Regional value content (RVC) Regional value content is a variation on rules of origin, and prescribes that a certain minimum percentage of the total value of a good must be from regional (i.e. domestic) origin. The method of calculation is prescribed in Article 3.4 of PAFTA. Proposed subsection 153ZIP(6) provides that where there is a requirement that particular goods have a regional value content of not less than a particular percentage calculated in a given way, then the RVC is to be worked out in accordance with the method set out in Article 3.4, or as prescribed in the regulations.

Accessories, Spare Parts, Tools and Instructional or Other Information Materials Proposed subsection 153ZIP(7) provides that if a requirement exists in relation to goods, that the goods must have a RVC worked out in a particular way:

• the goods are imported into Australia with accessories, spare parts, tools or instructional or other information materials

• the accessories, spare parts, tools or instructional or other information materials are classified with, delivered with and not invoiced separately from the goods and

• the types, quantities and value of the accessories, spare parts, tools or instructional or other information materials are customary for the goods

the regulations must provide for the value of the accessories, spare parts, tools or instructional or other information materials to be taken into account for the purposes of working out the regional value content of the goods (whether the accessories, spare parts, tools or instructional or other information materials are originating materials or non-originating materials).

Proposed 153ZIP(7) enables regulations to be made so as to give effect to Article 3.11 of Chapter 3 of PAFTA in relation to the value of the accessories, spare parts, tools or instructional or other information materials for working out regional value content. The Explanatory Memorandum states that this is ‘necessary because the value of such goods would not normally form part of the value of materials that are used in the production of the underlying goods’.68

Goods put up in a set for retail sale ‘Goods put up in a set for retail sales’ refers to a set of two or more articles classifiable in different headings that are packed for sale as a unit and are used together to meet a particular need or to carry out a specific activity.69 Proposed subsection 153ZIP(9) provides that where goods are put up in a set for retail sale and the goods are classified in accordance with Rule 3(c) of the General Rules for Interpretation of the Harmonised System,70 they are only Peruvian originating goods under this section if:

• all of the goods in the set, when considered separately, are Peruvian originating goods or

• the total customs value of the goods (if any) in the set that are non-Peruvian originating goods does not exceed 20 per cent of the customs value of the set of goods.

Packaging materials and containers Rule 5 of the General Rules for Interpretation of the Harmonised System provides guidance regarding the treatment of cases and packing containers. In most cases, according to this rule, containers are classified together with the goods they contain; they are not classified separately.

68. Explanatory Memorandum, Customs Amendment (Peru-Australia Free Trade Agreement Implementation) Bill 2018, p. 13. 69. Rule 3(b) of General Rules for the Interpretation of the Harmonized System. 70. Rule 3(c) of General Rules for the Interpretation of the Harmonized System.

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This is true of containers that are made for only one item as well as general containers such as crates.71

Proposed subsection 153ZIQ(1) provides that if goods are packaged for retail sale in packaging material or a container and the packaging material or container is classified with the goods in accordance with Rule 5 of the General Rules for Interpretation, then the packaging material or container is to be disregarded for the purposes of Subdivision D.

However, if there is a requirement that the goods have a RVC of not less than a particular percentage, calculated in a particular way, then the regulations must provide for the value of the packaging material or container to be taken into account, for the purposes of calculating the RVC of the good (proposed subsection 153ZIQ(2)).

Rule 4—goods that are accessories, spare parts, tools or instructional or other information materials (proposed Subdivision E) Proposed section 153ZIR of the Customs Act provides for specific rules which will apply to goods that are accessories, spare parts, tools or instructional or other information materials, treating or deeming those goods as Peruvian originating goods if the following requirements are met:

• they are accessories, spare parts, tools or instructional or other information materials in relation to other goods

• the other goods are imported into Australia with the accessories, spare parts, tools or instructional or other information materials

• the other goods are Peruvian originating goods

• the accessories, spare parts, tools or instructional or other information materials are classified with, delivered with and not invoiced separately from the other goods and

• the types, quantities and value of the accessories, spare parts, tools or instructional or other information materials are customary for the other goods.

However, this deeming provision will not apply when performing a RVC calculation on goods (proposed subsection 153ZIP(7)). In this case, proposed subsection 153ZIP(8) imposes a requirement that the value of the accessories, spare parts, tools or other instructional or information materials that are originating or non-originating materials, are included in that RVC calculation.

Rule 5—Consignment (Subdivision F) In simple terms the issue of consignment means goods must comply with the consignment rules of PAFTA (Article 3.16), which provide that goods are not Peruvian originating goods under proposed Division 1EA if the goods are transported through the territory of one or more non-Parties to PAFTA and either or both of the following apply:

71. There are three instances where this rule does not apply: (i) When the container itself gives the good its essential character. For example, a silver tea caddy containing tea or an ornamental ceramic bowl containing sweets. (ii) When the container is shipped separately. If you just ship an empty crate, it is classified as a crate. (iii) When the packing container is suitable for repetitive use. Many companies have heavy-duty crates or boxes that they use

to ship repair and return items to and from overseas destinations. These must be classified separately as the type of containers they are. Source: H Selby, ‘Doing it by the book: classifying your goods for international trade’, International Trade blog, 23 July 2018.

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• the goods undergo subsequent production or any other operation in the territory of a non-Party (other than unloading, reloading, storing, separation from a bulk shipment, labelling or any other operation that is necessary to preserve the goods in good condition or to transport the goods to the territory of Australia)

• while the goods are in the territory of a non-Party, the goods do not remain under customs control at all times.72

Subdivision G—Regulations Proposed section 153ZIT provides that regulations may make provisions for and in relation to determining whether goods are Peruvian originating goods under new Division 1EA.

Part 2—Verification powers Item 4 amends Part VI of the Customs Act to insert new Division 4DA, which is titled ‘Exportation of goods to Peru’.

Proposed sections 126AJE, 126AJF, 126AJG and 126AJH combine to set out new obligations on exporters of eligible goods to Peru, who wish to obtain preferential treatment of customs duty in respect of those goods, and on people who produce such goods.

Definitions Proposed section 126AJE provides definitions of key terms used in Division 4DA including: producer, production and Peruvian customs official.

Record keeping obligations Proposed subsection 126AJF(1) provides that regulations may prescribe record keeping obligations in relation to goods that are exported to Peru and are claimed to be Australian originating goods, in accordance with Chapter 3 of the Agreement, for the purposes of obtaining preferential tariff in Peru. Proposed subsection 126AJF(2) provides that record keeping obligations may be imposed on the exporter or producer of goods.

Power to require records Proposed subsection 126AJG(1) provides that an authorised officer (as defined in existing section 4 of the Customs Act) may require a person who is subject to record keeping obligations under regulations made for the purposes of section 126AJF to produce to the officer, records as the officer requires.

Under Article 3.23 of Chapter 3 of PAFTA, the Customs Administration of a Party to the Agreement may take action to verify the eligibility of goods for preferential treatment, including requesting the supply of records relating to the production or export of the goods. Proposed section 126AJG(2) gives effect to this Article in respect of goods that are exported to Peru that are claimed to be Australian originating goods for the purpose of obtaining a preferential tariff in Peru.

The note to this subsection states that where an authorised officer has requested a person to produce a record in order to verify the origin of goods in accordance with this section, a failure to do so may be an offence under section 243SB of the Customs Act. This is a strict liability offence. The note also indicates that, under section 243SC of the Customs Act, a person does not have to produce a record if doing so would tend to incriminate the person.

72. Proposed subsection 153ZIS(1).

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Proposed subsection 126AJG(2) provides that an authorised officer may disclose any records so produced to a Peruvian customs official for the purpose of verifying a claim for a preferential tariff in the territory of Peru.

Power to ask questions Proposed subsection 126AJH(1) provides that an authorised officer (as defined in existing section 4 of the Customs Act) may require a person who is an exporter or producer of goods:

(a) are exported to the territory of Peru and

(b) are claimed to be Australian originating goods, in accordance with Chapter 3 of the Agreement, for the purpose of obtaining a preferential tariff in the territory of Peru

to answer questions in order to verify the origin of the goods.

The note to this subsection states that failure to answer a question when required to do so by an authorised officer may be an offence under section 243SA of the Customs Act. The note also indicates that, under section 243SC of the Customs Act, a person does not have to answer a question if doing so would tend to incriminate the person.

As with the proposed section above, proposed subsection 126AJH(2) provides that an authorised officer may disclose any answers to such questions to a Peruvian customs official for the purpose of verifying a claim for a preferential tariff in the territory of Peru.

Part 3—Application provisions Item 5 operates with the effect that the amendments made by Part 1 of Schedule 1 of the Bill will apply in relation to:

• goods imported into Australia on or after the commencement of that Part and

• goods imported into Australia before the commencement of that Part, where the time for working out the rate of import duty on the goods had not occurred before the commencement of that Part.

The amendment made by Part 2 of Schedule 1 of the Bill, will apply in relation to goods exported to Peru on or after the commencement of that Part (whether the goods were produced before, on or after that commencement).

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