3. Staging. The following staging categories apply to the reduction or elimination of customs duties by Korea pursuant to Article 2.3:
(a) customs duties on originating goods provided for in the items in staging category "0" shall be eliminated entirely and such goods shall be free of customs duty on the date of entry into force of this Agreement;
(b) — customs duties on originating goods provided for in the items in staging category "3" shall be removed in three equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year three;
(c) customs duties on originating goods provided for in the items in staging category "5" shall be removed in five equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year five;
(d) customs duties on originating goods provided for in the items in staging category "7" shall be removed in seven equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year seven;
(e) customs duties on originating goods provided for in the items in staging category "10" shall be removed in 10 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 10;
(f) customs duties on originating goods provided for in the items in staging category "12" shall be removed in 12 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 12;
(g) customs duties on originating goods provided for in the items in staging category "13" shall be removed in 13 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 13;
(h) customs duties on originating goods provided for in the items in staging category "15" shall be removed in 15 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 15;
(i) customs duties on originating goods provided for in the items in staging category "17" shall be removed in 17 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 17;
(j) customs duties on originating goods provided for in the items in staging category "18" shall be removed in 18 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 18;
(k) customs duties on originating goods provided for in the items in staging category "20" shall be removed in 20 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 20;
(l) customs duties on originating goods provided for in the items in staging category "B" shall be reduced by 50 per cent in 10 equal annual stages beginning on the date of entry into force of this Agreement and shall remain at that rate thereafter;
(m) customs duties on originating goods provided for in the items in staging category "S-1" shall be subject to the following provisions:
(i) for goods entered into Korea from 1 December through 30 April, customs duties shall be eliminated entirely and such goods shall be free of customs duty on the date of entry into force of this Agreement; and
(ii) for goods entered into Korea from 1 May through 30 November, customs duties shall be removed in 15 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 15;
(n) customs duties on originating goods provided for in the items in staging category "S-2" shall be subject to the following provisions:
(i) for goods entered into Korea from 1 October through 31 March, customs duties shall remain at base rates; and
(ii) for goods entered into Korea from 1 April through 30 September, customs duties shall be reduced to 30 per cent ad valorem on the date of entry into force of this Agreement. Beginning 1 January of year two, customs duties shall be removed in six equal annual stages, and such goods shall be free of customs duty, effective 1 January of year seven;
(o) customs duties on originating goods provided for in the items in staging category "S-3" shall be subject to the following provisions:
(i) for goods entered into Korea from 1 October through 31 March, customs duties shall remain at base rates; and
(ii) for goods entered into Korea from 1 April through 30 September, customs duties shall be removed in 18 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 18;
(p) customs duties on originating goods provided for in the items in staging category "S-4" shall be subject to the following provisions:
(i) for goods entered into Korea from 1 May through 30 November, customs duties shall remain at base rates; and
(ii) for goods entered into Korea from 1 December through 30 April, customs duties shall be reduced to 24 per cent ad valorem on the date of entry into force of this Agreement. Beginning 1 January of year two, customs duties shall be removed in four equal annual stages, and such goods shall be free of customs duty, effective 1 January of year five;
(q) customs duties on originating goods provided for in the items in staging category "8-5" shall be subject to the following provisions:
(i) for goods entered into Korea from 1 November through 30 April, customs duties shall remain at base rates; and
(ii) for goods entered into Korea from 1 May through 31 October, customs duties shall be removed in 15 equal annual stages beginning on the date of entry into force of this Agreement, and such goods shall be free of customs duty, effective 1 January of year 15;
(r) customs duties on originating goods provided for in the items in staging category "RE" shall remain at base rates; and
(s) no obligations regarding customs duties in this Agreement shall apply with respect to items in staging category "R". Nothing in this Agreement shall affect Korea's rights and obligations with respect to its implementation of the commitments set out in the WTO document WT/Let/492 (Certification of Modifications and Rectifications to Schedule LX — Republic of Korea) dated 13 April, 2005 and any amendments thereto.
4. The base rate of customs duty and staging category are indicated in Korea's Schedule.
5. Interim staged rates shall be rounded down, at least to the nearest tenth of a percentage point or, if the rate of customs duty is expressed in monetary units, at least to the nearest Korean won.
6. For the purposes of this Schedule, year one means the year of entry into force of this Agreement.
7. For the purposes of this Schedule, beginning in year two, each annual stage of tariff reduction shall take effect on 1 January of the relevant year.
Chapter 3. Rules of Origin and Origin Procedures
Section A. Rules of Origin
Article 3.1. Originating Goods
Unless otherwise provided in this Chapter, a good shall be regarded as originating in a Party where:
(a) the good is wholly obtained in the territory of one or both of the Parties within the meaning of Article 3.2;
(b) the good is produced entirely in the territory of one or both of the Parties, exclusively from originating materials;
(c) the good satisfies all applicable requirements of Annex 3-A, as a result of processes performed entirely in the territory of one or both of the Parties by one or more producers; or
(d) the good otherwise qualifies as an originating good in accordance with this Chapter.
Article 3.2. Wholly Obtained Goods
For the purposes of Article 3.1(a), the following goods shall be considered to be wholly obtained in the territory of one or both of the Parties:
(a) mineral goods and other natural resources taken or extracted from the territory of one or both of the Parties;
(b) vegetable goods grown and harvested, picked or gathered in the territory of one or both of the Parties;
(c) live animals born and raised in the territory of one or both of the Parties;
(d) goods obtained from live animals born and raised in the territory of one or both of the Parties;
(e) goods obtained from hunting, trapping, gathering, capturing, aquaculture or fishing conducted within the land territory, internal waters and the outer limit of the territorial sea of one or both of the Parties;
(f) fish, shellfish and other marine life taken from the sea, seabed, ocean floor or subsoil outside the territorial seas of the Parties by a vessel registered or recorded with a Party and entitled to fly its flag;
(g) goods produced on board a factory ship from the fish, shellfish or other marine life referred to in subparagraph (f), provided that such factory ship is registered or recorded with a Party and entitled to fly its flag;
(h) goods, other than fish, shellfish and other marine life, taken or extracted from the seabed, ocean floor or subsoil outside the territory of one or both of the Parties by a Party or a person of a Party, provided that the Party or person of the Party has rights to exploit such seabed, ocean floor or subsoil;
(i) goods taken from outer space, provided that they are obtained by a Party ora person of a Party and not processed in the territory of a non-Party;
(j) waste and scrap derived from:
(i) production in the territory of one or both of the Parties; or
(ii) used goods collected in the territory of one or both of the Parties, provided that such goods are fit only for the recovery of raw materials;
(k) goods collected from the territory of one or both of the Parties which can no longer perform their original purpose and are fit only for the recovery of raw materials; and
(l) goods produced entirely in the territory of one or both of the Parties exclusively from goods referred to in this Article or from their derivatives, at any stage of production.
Article 3.3. Regional Value Content
1. Where Annex 3-A specifies a regional value content requirement, the regional value content shall be calculated in accordance with one of the following methods:
(a) build-down method
RVC = AV-VNM x 100
AV
(b) build-up method
RVC = VOM x 100
AV
where,
RVC is the regional value content, expressed as a percentage;
AV is the adjusted value of the good and shall be:
(a) the FOB value of the good determined in accordance with the Customs Valuation Agreement, inclusive of the cost of transport and insurance to the port or site of final shipment abroad; or
(b) if there is no FOB value of the good or it is unknown and cannot be ascertained, the value determined in accordance with the Customs Valuation Agreement, mutatis mutandis.
VNM is the value of non-originating materials (including materials of undetermined origin) used in the production of the good, as determined in Article 3.4; and
VOM is the value of originating materials used in the production of the good, as determined in Article 3.4.
2. All costs considered for the calculation of regional value content shall be recorded and maintained in conformity with the Generally Accepted Accounting Principles applicable in the territory of the Party where the good is produced.
3. All values for the purposes of calculating regional value content shall be determined in accordance with the Customs Valuation Agreement. For this purpose, the Customs Valuation Agreement shall apply mutatis mutandis to domestic transactions.
Article 3.4. Value of Materials
1. Subject to paragraph 2, the value of non-originating materials referred to in Article 3.3 shall be:
(a) for a material imported directly by the producer of a good, the CIF value at the time of importation of the material; or
(b) for a material acquired within the territory of the Party where the good is produced, the earliest ascertainable value of the non-originating material in the territory of that Party.
2. For the purposes of paragraph 1, the following, where included in accordance with paragraph 1, may be deducted from the value of the non-originating materials:
(a) the value of originating materials used in the production of the non-originating material in the territory of a Party;
(b) the costs of freight, insurance, packing, and all other costs incurred in transporting the material within a Party's territory or between the territories of the Parties to the location of the producer;
(c) duties, taxes, and customs brokerage fees on the material paid in the territory of one or both of the Parties, other than duties and taxes that are waived, refunded, refundable, or otherwise recoverable, including credit against duty or tax paid or payable; and
(d) the cost of processing incurred in the territory of one or both of the Parties in the production of the non-originating material.
3. Subject to paragraph 4, the value of originating materials referred to in Article 3.3 shall be:
(a) for a material imported directly by the producer of a good, the CIF value at the time of importation of the material;
(b) for a material acquired within the territory of the Party where the good is produced, the value of the material; or
(c) for a material that is self-produced, the sum of all costs incurred in the production of the material, including general expenses, and an amount for profit equivalent to the profit added in the normal course of trade.
4. For the purposes of paragraph 3, the following, where not included in accordance with paragraph 3, may be added to the value of the originating materials:
(a) the costs of freight, insurance, packing, and all other costs incurred in transporting the material within a Party's territory or between the territories of the Parties to the location of the producer; and
(b) duties, taxes, and customs brokerage fees on the material paid in the territory of one or both of the Parties, other than duties and taxes that are waived, refunded, refundable, or otherwise recoverable, including credit against duty or tax paid or payable.
5. For greater certainty, when an originating good is used in the subsequent production of another good, no account shall be taken of the non-originating materials contained in the originating good for the purposes of determining the originating status of the subsequently produced good.
6. For greater certainty, when a non-originating good is used in the subsequent production of another good, an account shall be taken only of the non-originating materials contained in the non-originating good for the purposes of determining the originating status of the subsequently produced good.
Article 3.5. Accumulation
1. Originating goods of a Party, incorporated into a good in the territory of the other Party, shall be considered to be originating in the territory of the other Party.
2. A good is originating where the good is produced in the territory of one or both of the Parties by one or more producers, provided that the good satisfies the requirements in Article 3.1 and all other applicable requirements in this Chapter.
Article 3.6. De Minimis
1. A good that does not satisfy a change in tariff classification requirement pursuant to Annex 3-A is nonetheless originating if the value of all non-originating materials that have been used in the production of the good and do not undergo the applicable change in tariff classification does not exceed 10 per cent of the adjusted value of the good, provided that the value of such non-originating materials shall be included in the value of non-originating materials for any applicable regional value content requirement and that the good meets all other applicable requirements in this Chapter.
2. Paragraph 1 shall not apply to goods classified in Chapters 1 through 14 of the Harmonized System unless the non-originating material is provided for in a different subheading than the good for which origin is being determined under this Article.
3. Neither paragraph 1 or 2 shall apply to goods classified under Harmonized System codes 0301 through 0303; 0305 through 0308; 0701 through 0710.10; 0713 through 0714; 0801 through 0810; and 0813.10 through 0813.40.
4. A good classified in Chapters 50 through 63 of the Harmonized System, produced in the territory of a Party, shall be considered to be an originating good if the total weight of all non- originating fibres or yarns used in the production of the component that determines the tariff classification of the good, that do not undergo the applicable change in tariff classification, does not exceed 10 per cent of the weight of the good.
Article 3.7. Fungible Goods and Materials
1. An importer claiming preferential tariff treatment for a good may claim that a fungible good or material is originating where the importer, exporter, or producer has:
(a) physically segregated each fungible good or material; or
(b) used any inventory management method, such as averaging, last-in-first-out (LIFO) or first-in-first-out (FIFO), recognised in the Generally Accepted Accounting Principles of the Party in which the production is performed or otherwise accepted by the Party in which the production is performed.
2. The inventory management method selected in accordance with paragraph 1 for a particular fungible good or material shall continue to be used for that good or material throughout the fiscal year of the person that selected the inventory management method.
Article 3.8. Accessories, Spare Parts and Tools
The origin of the accessories, spare parts or tools presented and classified with a good and delivered with the good at the time of importation:
(a) shall be disregarded if the good is subject to a change in tariff classification requirement; and
(b) shall be taken into account as originating or non-originating materials, as the case may be, in calculating the regional value content of the good, if the good is subject to a regional value content requirement,
provided that:
(c) the accessories, spare parts or tools are not invoiced separately from the good and are included in the price of the good, regardless of whether they appear specified or separately identified in the invoice itself; and
(d) the quantities and value of the accessories, spare parts or tools are customary for the good.
Article 3.9. Packaging Materials and Containers for Retail Sale
1. Packaging materials and containers in which a good is packaged for retail sale shall, if classified with the good, be disregarded in determining whether all the non-originating materials used in the production of the good undergo the applicable change in tariff classification set out in Annex 3-A.
2. If a good is subject to a regional value content requirement, the value of packaging materials and containers described in paragraph 1 shall be taken into account as originating or non-originating materials, as the case may be, in calculating the regional value content of the good.
Article 3.10. Packing Materials and Containers for Transportation and Shipment
1. Packing materials and containers for transportation and shipment shall not be taken into account when determining whether a good is originating.
2. For the purposes of paragraph 1, "packing materials and containers for transportation and
shipment" means the goods used to protect a good during its transportation and does not include the packaging materials and containers in which the good is packaged for retail sale.
Article 3.11. Indirect Materials
1. In determining whether a good is originating, indirect materials shall be treated as originating.
2. For the purposes of paragraph 1, "indirect materials' means articles used in the production of a good which are not physically incorporated into it, nor form part of it, including :
(a) fuel and energy;
(b) tools, dies and moulds;
(c) spare parts and materials used in the maintenance of equipment and buildings;
(d) lubricants, greases, compounding materials and other materials used in production or used to operate equipment and buildings;
(e) gloves, glasses, footwear, clothing, safety equipment and supplies;
(f) equipment, devices and supplies used for testing or inspecting the good; catalysts and solvents; and
(g) any other goods that are not incorporated into the good but whose use in the
(h) production of the good can reasonably be demonstrated to be a part of that production.
Article 3.12. Non-qualifying Operation
1. Notwithstanding other provisions of this Chapter, a good shall not be considered to be originating merely by reason of having undergone one or more of the following operations or processes:
(a) preserving operations to ensure that the products remain in good condition during transport and storage;
(b) changes of packaging, breaking-up and assembly of packages;
(c) washing, cleaning, or removal of dust, oxide, oil, paint or other coverings;
(d) sharpening, simple grinding or crushing or simple cutting;
(e) simple placing in bottles, cans, flasks, bags, cases or boxes, fixing on cards or boards and all other simple packaging operations;
(f) affixing or printing marks, labels, logos and other like distinguishing signs on products or their packaging;
(g) disassembly; or
(h) mere reclassification of goods without any physical change.
2. All operations and processes carried out in the territory of a Party on a good shall be considered together when determining whether the operations and processes undergone by that good fall within the scope of paragraph 1.
Article 3.13. Outward Processing Zones on the Korean Peninsula
Notwithstanding Article 3.1, the Parties agree that certain goods shall be considered to be originating even if they have undergone working or processing outside Korea, on materials exported from Korea and subsequently re-imported there, provided that the working or processing is done in the areas designated by the Parties pursuant to Annex 3-B.
Article 3.14. Direct Transport
1. An originating good shall retain its originating status as determined in accordance with Article 3.1, provided that it is directly transported to the importing Party without passing through the territory of a non-Party.
2. An originating good that is transported through the territory of a non-Party shall not retain its originating status as determined in accordance with Article 3.1 if it:
(a) has undergone any subsequent production or other operation outside the territories of the Parties other than unloading, reloading, storing, repacking, relabelling, splitting up of loads for transport reasons or any other operation necessary to preserve it in good condition or to transport the good to the territory of a Party; or
(b) does not remain under the customs control in the territory of a non-Party.