House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Justice and Customs, Senator the Honourable Christopher Martin Ellison)

Schedule 1 - Least Developed Countries

Customs Act 1901

Item 1 - Section 153B

This item amends section 153B to insert a new definition of Least Developed Country .

Least Developed Country will have the same meaning as in the Customs Tariff Act 1995 (the Tariff Act). The definition is being inserted into the Tariff Act by the Customs Tariff Amendment Bill (No. 1) 2003. In effect, a Least Developed Country (LDC) will be any country that is to be listed in Part 2 of Schedule 1 to the Tariff Act. This list of 50 countries comprises East Timor and the 49 countries that are recognised by the United Nations Conference on Trade and Development as being LDCs.

Item 2 - Section 153B (after paragraph (f) of the definition of qualifying area)

This item inserts new paragraph (fa) into the definition of qualifying area .

New paragraph (fa) provides that if goods are claimed to be the manufacture of a LDC, the qualifying area will be the Developing Countries (DCs), the Forum Island Countries and Australia.

The qualifying area is the area from which materials may be sourced and counted towards the allowable expenditure of a factory on materials (see new section 153NA inserted by item 5 below).

Item 3 - After subsection 153D(2)

This item amends subsection 153D(2), which sets out the rules for determining allowable expenditure of a factory on materials, by inserting new subsection 153D(2A).

The basic rule is that the allowable expenditure on materials is the cost of the materials in the form they are received at the factory. This new subsection contains a special rule in relation to goods claimed to be manufacture of a LDC.

New subsection 153(2A) provides that:

(a)

if goods claimed to be the manufacture of a LDC contain materials that, in the form they were received by the factory, were manufactured or produced in Developing Countries that are not LDCs; and

(b)

the allowable expenditure of the factory on those materials in aggregate would, but for this new subsection, exceed 25% of the total factory cost of the goods;

the allowable expenditure on those materials is taken to be 25% of the total factory cost of the goods.

DCs, which are currently listed in Parts 2 and 3 of Schedule 1 to the Tariff Act, form part of the qualifying area for LDCs. In relation to goods claimed to be the manufacture of a LDC, this special rule effectively caps the allowable expenditure of the factory on materials from a DC, that is not a LDC, at 25% of the total factory cost of the goods.

This special rule is designed to ensure that the benefits of duty-free access flow to LDCs, including East Timor, rather than to other DCs.

Item 4 - After paragraph 153D(3)(b)

This item inserts new paragraph 153D(3)(ba) into subsection 153D(3).

Subsection 153D(3) sets out the inland freight rule for goods that are claimed to be the manufacture of Papua New Guinea or a Forum Island Country (FIC). FICs are listed in Part 1 of Schedule 1 to the Tariff Act. Included in the new category of LDCs will be some countries that are presently FICs.

New paragraph 153D(3)(ba) contains the phrase "the goods are claimed to be the manufacture of Papua New Guinea or a Forum Island Country". The purpose of this new paragraph is to limit the application of the inland freight rule to goods claimed to be the manufacture of a FIC and to ensure that it does not extend to goods that are claimed to be the manufacture of a LDC.

Item 5 - After section 153N

This item inserts new section 153NA and contains the rules of origin for goods claimed to be the manufacture of a LDC. Goods claimed to be the produce of a LDC will be covered by current section 153H.

New section 153NA provides that goods claimed to be the manufacture of a Least Developed Country are the manufacture of that country if:

(a)

the last process of their manufacture was performed in that country; and

(b)

having regard to their qualifying area, their allowable factory cost is at least 50% of their total factory cost.

These rules of origin are similar to those for DCs.