RVC vs CTC: Which Origin Rule Applies to Your Product?

The change in tariff classification (CTC) rule checks whether the HS codes of non-originating materials changed in the finished product; the regional value content (RVC) rule checks whether enough value was added inside the FTA region. Which one applies is set by the product-specific rule of origin (PSR) for that agreement and product. To claim a preferential tariff, look up that rule first and then test your product against it.

Key takeaways

• CTC treats goods as substantially transformed when the HS codes of non-originating materials change to the finished product’s code at the required level (2, 4 or 6 digits).
• RVC looks at the share of regional value, using methods such as build-up (BU), build-down (BD) and net cost (NC).
• In the Korea Customs Service FTA portal’s examples, RVC(35/45) means at least 35% under build-up or at least 45% under build-down. Thresholds differ by agreement and product.
• An “or” rule needs only one criterion met; an “and” (+) rule needs both.

What are rules of origin?

Rules of origin decide which country a good is treated as coming from. They split into the wholly obtained criterion (WO), for goods produced entirely in one country, and substantial transformation criteria, for goods made from materials of several countries.

Substantial transformation is tested by a tariff-shift rule, a value-added rule or a specific-process rule; the first two are the ones exporters meet most. You can look up the rule for each agreement and product on the Korea Customs Service FTA portal, and a certificate of origin is the document that proves the rule was met. See how to get a certificate of origin for the issuing steps.

How does the CTC rule work?

The CTC rule compares the HS codes of the non-originating materials with the code of the finished good, and treats the good as sufficiently processed if the code changed at the required level. Originating materials are not tested; only non-originating ones are.

There are three levels.

• CC: change at the 2-digit (chapter) level, the strictest of the three.
• CTH: change at the 4-digit (heading) level.
• CTSH: change at the 6-digit (subheading) level, usually the easiest to meet.

Some rules add an exception such as “CTH ex. from heading XXXX”, which refuses a shift from a named heading or chapter, so read the full wording. For getting the HS code right, see the HS code guide.

How do you calculate RVC?

RVC (regional value content) is the share of the good’s price that was created inside the region. It judges substantial transformation by value instead of by a code change, and the two common formulas are build-up and build-down.

• Build-up (BU): RVC (%) = value of originating materials ÷ value of the good × 100
• Build-down (BD): RVC (%) = (value of the good − value of non-originating materials) ÷ value of the good × 100

In the Korea Customs Service FTA portal’s examples, RVC(35/45) requires at least 35% under build-up or at least 45% under build-down, and CTH + RVC(30/45) requires a heading change plus at least 30% build-up or 45% build-down. Other rules use net cost (NC), or an MC rule that caps non-originating materials at a share of the ex-works price. Whether the base value is ex-works or FOB, and which costs go in or out, also differs by agreement.

What does a worked example look like?

The numbers below are hypothetical, for illustration only, and are not a real product case. Build-up and build-down give different results for the same good, so first check which method the rule allows.

Assumed: value of the good 10,000, non-originating materials 5,000, originating materials 3,000, other costs (labour, profit and so on) 2,000

• Build-up: 3,000 ÷ 10,000 × 100 = 30%
• Build-down: (10,000 − 5,000) ÷ 10,000 × 100 = 50%

Under an RVC(35/45) rule, the good misses 35% under build-up but clears 45% under build-down, so it qualifies. In practice you work from the bill of materials (BOM), recording the origin and price of each input, and applying accumulation can change the result.

What mistakes do exporters often make?

The most common mistake is using a familiar rule without checking the PSR for that agreement and product. The same HS code can carry different rules and thresholds under different FTAs.

• Writing a criterion on the certificate of origin that does not match the PSR, so the importing customs refuses the preferential rate
• Treating partner-country materials as non-originating when accumulation could apply
• Mixing up FOB and ex-works as the value of the good
• Overlooking de minimis tolerances (which allow a small share of non-originating materials that fail the tariff shift) or non-qualifying operations
• Not keeping the supporting records (BOM, purchase documents)

FAQ

Do I need to meet only one of RVC or the tariff shift?

It depends on the wording. With an “or” rule such as “CTH or RVC(35/45)”, one is enough; with an “and” (+) rule such as “CTH + RVC(30/45)”, both must be met.

Can goods qualify without a tariff shift?

Yes, if the rule is an alternative (“or”) or a pure RVC rule. Keep the calculation and supporting records so you can answer a verification.

Which criterion goes on the certificate of origin?

The one you actually met. The importing customs can check that it matches the agreement’s PSR and that the calculation is right.

Are freight and insurance included in the calculation?

It depends on the agreement and the method. Whether the value of the good is ex-works or FOB, and which freight counts in material values, should be checked in the FTA text and on the Korea Customs Service FTA portal.

Sources

• Korea Customs Service FTA Portal, types of rules of origin and rules of origin in FTA texts (Korean): https://www.customs.go.kr/ftaportalkor/cm/cntnts/cntntsView.do?mi=3396&cntntsId=1058