COMMUNICATION FROM THE COMMISSION

Guidelines to facilitate the application of the IPI Regulation by contracting authorities and contracting entities and by economic operators

(2023/C 64/04)

Contents

1.

Determination of the origin of an economic operator

8

1.1.

Elements of evidence that can be used to determine whether a legal person is engaged in ‘substantive business operations’ in a given country

8

1.2.

Documentary evidence that may be used to determine ‘substantive business operations’

8

2.

Determination of the origin of services

9

3.

Determination of the origin of goods

9

3.1.

Origin of goods on the basis of the concept of goods wholly obtained in a single country

9

3.2.

Origin of the goods which involves more than one country and the concept of ‘last substantial transformation’

10

3.2.1.

Determination of origin for products which are included in the Annex 22-01 UCC-DA

10

3.2.2.

Determination of origin for products not included in the Annex 22-01 UCC-DA

10

4.

Obligations upon successful tenderers

11

4.1.

Obligations regarding subcontracting in the execution of the contract

11

4.2.

Obligations regarding the origin of goods used in the execution of the contract

12

4.3.

Obligations regarding provision of adequate evidence upon request

12

4.4.

Obligations regarding the payment of proportionate charge

13

5.

How and when should contracting authorities and contracting entities apply an IPI measure

13

Regulation (EU) 2022/1031 (‘IPI Regulation’) (1) lays down procedures for the Commission to undertake investigations into alleged third-country measures or practices against Union economic operators, goods and services and to enter into consultations with the third countries concerned. It also provides for the possibility for the Commission to impose IPI measures in relation to such third-country measures or practices to restrict the access of economic operators, goods or services from third countries to Union’s public procurement procedures.

Article 12 of the IPI Regulation provides that the Commission should issue guidelines, within 6 months from 29 August 2022, to facilitate its application by contracting authorities and contracting entities and by economic operators.

Recital 34 of this Regulation states that the guidance should provide information, in particular, on the notions of the origin of natural and legal persons, the origin of goods and services, additional obligations and the application of those provisions within the framework of this Regulation. Those guidelines should also take into account the specific information needs of SMEs, in their application of this Regulation, with a view to preventing their overburdening.

1.   Determination of the origin of an economic operator

For the purposes of the application of the IPI Regulation, the origin of an economic operator should be determined as follows:

In case an economic operator is a natural person, its origin is the country of which the person is a national or where that person has a right of permanent residence.

In case an economic operator is a legal person, its origin is the country where the legal person is constituted or otherwise organised, provided that the legal person is engaged in substantive business operations in that territory.

The criterion of substantive business operations serves to avoid potential circumvention of any IPI measure adopted under this Regulation through the creation, by natural or legal persons originating in a country subject to an IPI measure, of shell or letterbox companies in the territory of a country other than the country subject to an IPI measure.

1.1.    Elements of evidence that can be used to determine whether a legal person is engaged in ‘substantive business operations’ in a given country

A legal person is engaged in ‘substantive business operations’ in a given country if it carries out, in the territory of that country, business operations that are not an artificial arrangement set up mainly for tax purposes or for the purpose of circumventing an IPI measure.

In order to demonstrate that it is engaged in ‘substantive business operations’ in a given country, the economic operator may invoke, inter alia, the following elements:

—	type of business operations (e.g. production facility, representation office, R&D centre, etc.);

—	volume / intensity / percentage of business operations in that country;

—	capital investment in that country;

—	number of employees in that country;

—	information on customer / clients in that country;

—	duration of establishment of the company in that country;

—	business or correspondence address in that country;

—	payment of taxes in that country.

These non-exhaustive elements should be assessed as a whole on a case by case basis. For the purposes of this assessment, other elements could be taken into account, depending on the characteristics of each case.

1.2.    Documentary evidence that may be used to determine ‘substantive business operations’

Examples of documentary evidence that may be required from economic operators, including SMEs, for consideration in case of doubt as to their engagement in ‘substantive business operations’ in the territory of the country where they are constituted or otherwise organised, include the following:

—	business records (sales and other operations) - invoices, receipts, business contracts, letters of credit, shipping documents, business plans, correspondence with and list of suppliers/creditors and buyers, records of stock purchased and goods sold, company visit report, etc.;

—	financial information – audited account, financial statement, bank statement, tax returns and assessments issued by relevant bodies, etc.; and

—	employees’ information – records of contribution to medical insurance or pension/retirement schemes, employment contracts, etc.

The above lists of examples is non-exhaustive. Contracting authorities and contracting entities may require any type of documentary evidence they consider appropriate with a view to determining the country in which an economic operator has its substantive business operations.

2.   Determination of the origin of services

For the purposes of the IPI Regulation, the origin of a service is determined on the basis of the origin of the economic operator providing it. Thus the guidance relevant to determine the origin of the economic operator is also relevant for the determination of the origin of services.

3.   Determination of the origin of goods

For the purposes of the IPI Regulation, the origin of goods supplied in the execution of a public procurement contract should be determined based on the non-preferential rules of origin which are laid down in the Union Customs Code (‘UCC’) (2), as further specified by the relevant provisions of Commission Delegated Regulation (EU) 2015/2446 (‘UCC-DA’) (3).

In essence, non-preferential rules of origin are used to determine the country of origin of goods for the application of the most-favoured nation treatment (MFN) (i.e. Union standard tariff treatment), but also for the implementation of a number of commercial policy measures such as anti-dumping and countervailing duties, trade embargoes, safeguard measures and quantitative restrictions or tariff quotas. They are also used for trade statistics, public tenders and origin marking. The Union applies its own set of non-preferential rules of origin provisions, which may be different from those of any other third country.

The non-preferential origin can be different from the preferential origin which is determined in the context of a preferential trade arrangement for goods, such as the Union Generalized Scheme of Preferences or a free trade agreement, which provides for a preferential tariff treatment. It needs to be borne in mind that even if the goods used in the execution of a contract have obtained a tariff preference upon importation into the Union and the origin of such goods was determined on the basis of the preferential rules of origin applicable to trade with the exporting country, the origin of those goods, in the context of the application of IPI measures, should be nevertheless declared to the contracting authority or entity on the basis of non-preferential rules of origin. In this context, it needs to be noted that the country of origin is not necessarily the country from which the goods were shipped and/or supplied.

At the outset, it is important to know the correct classification of the final good in the ‘Harmonised System’ (4) (‘HS’), because a specific rule of origin is linked to each good based on its classification in the HS.

Two basic concepts are used to determine the non-preferential origin of goods, namely the concept of ‘wholly obtained’ products and the concept of products having undergone a ‘last substantial transformation’.

3.1.    Origin of goods on the basis of the concept of goods wholly obtained in a single country

According to Article 60(1) UCC ‘goods wholly obtained in a single country or territory shall be regarded as having their origin in that country or territory’.

Article 31 of the UCC DA includes an exhaustive list of goods that shall be considered as wholly obtained in a single country or territory. This list refers mostly to products obtained in their natural state and products derived from wholly obtained products. Thus, also for the purposes of the IPI Regulation, these products can be considered as wholly obtained in a single country and territory.

3.2.    Origin of the goods which involves more than one country and the concept of ‘last substantial transformation’

According to Article 60(2) UCC ‘goods the production of which involves more than one country or territory shall be deemed to originate in the country or territory where they underwent their last, substantial, economically justified processing or working, in an undertaking equipped for that purpose, resulting in the manufacture of a new product or representing an important stage of manufacture’.

The concept of ‘last substantial transformation’ means that the last substantial processing or working should result in the manufacture of a new product or represent an important stage of manufacture.

In practice, in order to assess where the last substantial transformation took place, it is necessary to obtain information by the economic operators participating in the procurement procedure on all the materials used. In particular, the non-originating materials used in the last country of production must be identified. Indeed, those non-originating materials must have been substantially processed or worked in the last country in order to assign the origin of the relevant goods to that country of production of the final product.

Essentially, the newly produced good in one country should possess distinct characteristics and functionalities, which should differ from the materials used in its production in order to obtain the origin of that same country of production.

The ‘last substantial transformation’ criterion must be checked in two different ways, depending on whether the product concerned is included in the Annex 22-01 UCC-DA (see point 3.2.1) or not (see point 3.2.2) (5).

3.2.1.   Determination of origin for products which are included in the Annex 22-01 UCC-DA

The rules set out in Annex 22-01 (including in its introductory notes) only apply to goods specifically listed at minimum 4 HS digit level in that Annex.

Goods listed in that Annex shall be considered to have undergone their last substantial processing or working, resulting in the manufacture of a new product or representing an important stage of manufacture, in the country or territory in which the primary or residual rules set out in that Annex are fulfilled or which is identified by those rules. For example, goods listed in Annex 22-01 UCC-DA include certain agricultural products (e.g. meats, coffee, milled cereals), certain chemical products, textile products, clothing and apparel, footwear as well as certain iron and steel products, metal tools, machinery products, including electrical machinery. The list, in fact, is quite limited and does not cover the entire spectrum of products that are classified in the Union Combined Nomenclature.

The rules applicable to products of Annex 22-01 are listed and highlighted in the table of ‘list rules’ (6). Where the last country of production cannot be determined on the basis of the specifically listed primary rules, it should be determined by application of the ‘residual rules’ laid down at the beginning of each Chapter.

3.2.2.   Determination of origin for products not included in the Annex 22-01 UCC-DA

For goods not listed in Annex 22-01 UCC-DA, the origin is determined on a case-by-case basis by evaluating any process or operation in relation to the concept of the last substantial processing or working as defined in Article 60(2) UCC.

In an effort to increase the harmonised interpretation of the basic principle of 'last substantial transformation' for goods not listed in Annex 22-01 UCC-DA, specific non-legally binding guidance for those products has been elaborated. The guidance for those products is also listed (but not highlighted) in the table of ‘list rules’ mentioned above.

When the list rule is not fulfilled in the last country of production, the country of origin is determined by application of the ‘residual rules’ laid down at the beginning of each Chapter.

The contracting authorities and contracting entities, as well as the contractors, including SMEs, should follow the respective rules and take into account the guidelines referring to non-preferential origin (see the Guidance on non-preferential rules of origin ) (7).

In case of doubts as to the origin of goods or in order to ensure legal certainty, contractors, and in particular SMEs that may lack the necessary expertise, may apply for Binding Origin Information. For more information: https://trade.ec.europa.eu/access-to-markets/en/content/binding-origin-information-2

4.   Obligations upon successful tenderers

Article 8 of the IPI Regulation imposes a number of obligations upon successful tenderers in public procurement procedures, which are subject to an IPI measure, as well as in the case of contracts awarded on the basis of framework agreements (so called call-offs) that were subject to the IPI measure, regarding: i) subcontracting; ii) the origin of goods used in the execution of the contract; iii) the provision of adequate evidence in relation to the subcontracting and the origin of goods, upon request; and iv) the payment of proportionate charge for non-observance of the subcontracting and origin obligations.

Contracting authorities and contracting entities have to include in the public procurement documents, to which an IPI measure applies, a reference to these obligations, so that economic operators participating in relevant procedures, and in particular SMEs, are fully aware of the applicable requirements in case they are awarded the contract.

4.1.    Obligations regarding subcontracting in the execution of the contract

Subcontracting means arranging the execution of a part of a contract by a third party and does not include the mere delivery of goods or parts that are necessary for the provision of a service.

Economic operators who have been awarded a contract for the provision of services (including public works) are required not to subcontract more than 50 % of the total contract value to economic operators originating in a third country that is subject to an IPI measure.

In case of public works contracts, the mere use of materials, goods and components to be incorporated into or to form part of permanent works under a works contract does not constitute subcontracting and as such should not be included in the calculation for the 50 % threshold requirement. For example, if the awarded contract concerns the construction of a bridge, the cost of the materials used (such as steel, concrete, stone, asphalt etc.) should not be included in the calculation of the contract value for the purposes of the 50 % threshold.

In addition, goods purchased by the contractor for use during the execution of the contract (such as machinery used by a supply contractor for testing and installing the goods supplied, equipment used by a works contractor for building a road, computer(s) used by a service contractor to draft a study) should not be included in the calculation of the contract value for the purposes of the 50 % threshold.

4.2.    Obligations regarding the origin of goods used in the execution of the contract

For contracts whose subject matter covers the supply of goods, operators who have been awarded the contract are required to ensure that goods or services supplied or provided in the execution of the contract and originating in the third country, which is subject to the IPI measure represent no more than 50 % of the total value of the contract.

Therefore, more than 50 % of the goods used in the execution of contracts of supply of goods must originate in the Union or in a third country not subject to the IPI measure.

All goods to be delivered under a supply contract fall under this threshold. Goods are defined as goods referred to in the object of a public procurement procedure and in the specifications of the relevant contract, but do not cover any input, material or ingredient incorporated in the supplied goods. Consequently, materials, goods and components to be incorporated into or to form part of the procured goods do not fall under this threshold. For example, if the procurement concerns delivery of electronic devices, semi-conductors used in the production of such devices will not be counted towards the 50 % value threshold, but more than 50 % of such electronic devices procured must originate in a country which is not subject to the IPI measure.

The information on the origin of the goods used may be requested by the contracting authority or contracting entity anytime during the execution of a contract.

If requested, the successful tenderer who is awarded the contract must state expressly that the goods supplied in execution of the contract meet the requirements concerning the threshold regarding the origin of the goods supplied. To this effect, the contractor should provide the contracting authority with a statement, which may be drafted in the following way: ‘I hereby certify that no more than 50 % of the goods supplied in the execution of contract XXX are originating in country [X] subject to [XYZ] IPI measure of [date: xx.yy.zz]’.

The Commission recommends, as part of the risk-assessment and controls procedures on the implementation of Article 8 of the IPI Regulation, that contracting authorities and contracting entities invite the successful bidder to provide a voluntary declaration by indicating the percentage of goods or services originating in countries subject to IPI measures in the total value of the contract.

This voluntary declaration should in principle be provided prior to the final payment of the contract and can be based on the existing supply chain and traceability control systems that the company has in place as part of normal course of business. When such declarations are provided, the risk of circumvention can be considered as lower than in the absence of any such information.

4.3.    Obligations regarding provision of adequate evidence upon request

The contractor is obliged to provide, at the request of the contracting authority or contracting entity, adequate evidence to prove compliance with the threshold regarding the origin of the goods. In this respect, it is sufficient to provide evidence that more than 50 % of the total value of the contract originates in the Union or in other third countries not subject to the IPI measure.

In practice, in a contract for the supply of goods two situations may occur:

a)	The contractor may purchase the final goods, which have been used for the execution of the contract, in the Union (or a third country) or in a country subject to the IPI measure, or

b)	The contractor may have produced those goods with the use of components or ingredients originating in the Union (or a third country) or in a country subject to the IPI measure.

Non-preferential rules of origin as explained above apply equally in both cases.

In the first case, if the imported final goods originate in a country subject to an IPI measure, their share in the total value of the contract cannot exceed 50 % of the value of the contract. This means that more that 50 % of goods supplied on the basis of the contract should be originating in the Union or in third countries (other than countries subject to the IPI measure). The contractor may prove compliance with this threshold by producing relevant invoices and/or accompanying statements from external suppliers. Where a foreign currency was used on the invoices, their value shall be converted into EUR on the basis of the EUR exchange rate valid at the moment of purchase.

In the second case, the contractor must demonstrate that a majority (more than 50 %) of goods produced and supplied on the basis of the contract have acquired Union or third country (other than a country subject to the IPI measure) origin. Although components originating in a country subject to the IPI measure may be used, they must have undergone substantial transformation in the production process so that the final product obtains Union or third country (other than a country subject to the IPI measure) origin, in line with the non-preferential rules of origin as explained above.

The contractor should provide any information, certificate, supporting document or statement that proves compliance with the threshold regarding origin. Such evidence consists of documents showing that more than 50 % of the goods originate in the Union or a third country not subject to an IPI measure. It can also contain a description of manufacturing processes, including samples, descriptions or photographs, enabling the determination of the origin of the supplied goods. The evidence can also consist of a statement or another form of evidence from a supplier of goods in the Union, if the contractor has purchased the goods on the Union market.

Relevant documents could also be declarations or certificates of origin. Such documents could be issued by the competent body of the declared country of origin of the goods (for example the chamber of commerce). However, such declarations or certificates of origin provide no information about the accuracy of the origin declared, insofar as third countries could have different rules concerning the determination of the origin of goods. This kind of certificate merely gives an indication about the place of production or provenance of the goods. Therefore, declarations/certificates of origin are not to be regarded as legal proof, but as a useful element for the determination of the origin, which may, in case of doubt, facilitate further checks.

4.4.    Obligations regarding the payment of proportionate charge

Where the contracting authority or contracting entity established that the contractor failed to meet the obligations under Article 8.1(a-b) or where it has reasonable doubts about the reliability of the evidence submitted by the contractor under Article 8.1(c), it may impose a proportionate charge between 10 % and 30 % of the value of the contract (as per Article 8.1 (d)). The actual amount of that charge will have to be established on a case-by-case basis and may depend on, but not be limited to, a share of goods or services, in respect of which reasonable doubts exist.

5.   How and when should contracting authorities and contracting entities apply an IPI measure

The IPI Regulation provides in its Article 6(4) that the IPI measure only apply to public procurement procedures with an estimated value above a threshold to be determined by the Commission in light of the results of the investigation and consultations and taking into consideration the criteria set out in paragraph 3 (8). That estimated value should be equal to or above EUR 15 000 000 net of VAT for works and concessions, and equal to or above EUR 5 000 000 net of VAT for goods and services.

For the application of the thresholds in this Regulation, the relevant estimated values of the contracts should be calculated in accordance with Article 8 of the Directive 2014/23/EU, Article 5 of the Directive 2014/24/EU and Article 16 of the Directive 2014/25/EU respectively.

An IPI measure shall apply only to covered public procurement procedures, which have been launched between the entry into force of that IPI measure and its expiry, withdrawal or suspension.

For framework contracts, IPI measures will be applied only once at the award of the framework agreement. IPI measures do not apply to contracts based on a framework agreement (at the so called call-off stage).

The IPI Regulation provides in its Article 13(2) that contracting authorities and contracting entities should report to the Commission through the Tenders Electronic Daily about the application of IPI measures, as part of the information on contract awards. Such report will include, for each relevant procedure, information on the application of IPI measures, the number of tenders received from third countries subject to the relevant IPI measure, the number of tenders for which the exclusion of the tender or score adjustment were applied and the application of specific exceptions from the IPI measure.

There will be specific fields in TED that contracting authorities will need to fill in.

An IPI measure in the form of score adjustment should be applied at the stage of evaluation of the award criteria (more precisely at the moment of calculation of the final score).

An IPI measure in the form of exclusion should be applied at the stage of evaluation of the selection criteria.

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(1)  Regulation (EU) 2022/1031 of the European Parliament and of the Council of 23 June 2022 on the access of third-country economic operators, goods and services to the Union’s public procurement and concession markets and procedures supporting negotiations on access of Union economic operators, goods and services to the public procurement and concession markets of third countries (International Procurement Instrument – IPI) (OJ L 173, 30.6.2022, p. 1).

(2)  Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code (OJ L 269, 10.10.2013, p. 1).

(3)  Commission Delegated Regulation (EU) 2015/2446 of 28 July 2015 supplementing Regulation (EU) No 952/2013 of the European Parliament and of the Council as regards detailed rules concerning certain provisions of the Union Customs Code (OJ L 343, 29.12.2015, p. 1).

(4)  https://trade.ec.europa.eu/access-to-markets/en/content/harmonised-system-0

(5)  See also Guidance on non-preferential rules of origin: https://taxation-customs.ec.europa.eu/system/files/2022-03/Guidance%20on%20non-preferential%20rules%20of%20origin.pdf

(6)  https://taxation-customs.ec.europa.eu/table-list-rules-conferring-non-preferential-origin-products-following-classification-cn_en

(7)  https://taxation-customs.ec.europa.eu/system/files/2022-03/Guidance%20on%20non-preferential%20rules%20of%20origin.pdf

(8)  In particular; (a) the proportionality of the IPI measure with regards to the third-country measure or practice and (b) the availability of alternative sources of supply for the goods and services concerned, in order to avoid or minimise a significant impact on contracting authorities and contracting entities.