AfCFTA: Rules of Origin for Digital Products - new approaches in the Digital Trade Protocol's ROO Annex

Last year I wrote about the African Continental Free Trade Agreement’s (AfCFTA) Digital Trade Protocol (the Protocol), which on paper contains some relatively high ambition digital trade rules. This includes a rule that Parties will not impose customs duties on digital products traded electronically (an idea with a long history).

The customs duties rule, however, was subject to “scope and origin criteria” that were to be set out in a promised Annex on Rules of Origin (ROO Annex). The ROO Annex was adopted back in February and has some new approaches to determining what qualifies for preferential treatment under digital trade rules.

In this post I set out how I read the the ROO Annex as working, along with some questions it raises, and comparisons with past practice.

For context, Article 6 (Customs Duties) of the Protocol sets out the primary rule prohibiting customs duties and makes this subject to the ROO Annex’s scope and origin criteria:1

Article 6
Customs Duties

1. A State Party shall not impose customs duties on digital products transmitted electronically originating from other State Parties, subject to the scope and origin criteria that shall be set out in the Annex of Rules of Origin, in accordance with Article 5 of this Protocol.

The primary provision in the ROO Annex that limits the scope of the customs duty prohibition is Article 7 (Eligibility for Preferential Treatment):

Article 7
Eligibility for Preferential Treatment

1. African content traded by African-owned enterprises or persons of State Parties or on African digital platforms shall be eligible for preferential treatment under the Protocol.

2. State Parties shall, in the application of this Annex, accord favourable treatment to African start-ups, Micro, Small and Medium-Sized Enterprises (MSMEs), women, youth, indigenous peoples, rural and local communities, persons with disabilities, and other underrepresented groups.

This establishes a two-stage test for what content must be treated preferentially under Article 6 of the Protocol. Namely, the content must be:

1. African content; and

2. That content must be traded:

   1. By an African-owned enterprise or person of a Party;2 or

   2. On an African digital platform.

Each of these terms are then defined further.

First, Article 6 (African Content) of the ROO Annex specifies that “Content is African if it is owned by a natural or juridical person of a State Party…”.

It is not clear how ownership is defined here - for example, does it include copies of software or media licensed from a company? Does it depend on the terms of the licence? Is it limited to ownership in the intellectual property sense of who owns copyright over the product (this would significantly limit the scope of the customs duty prohibition)?

Second, Article 4 (African-Owned Enterprise) of the ROO Annex sets out three criteria that must be met for an entity to be an “African-owned enterprise”:

1. First, it must be “a legal entity duly constituted, registered, or otherwise incorporated and operated under the applicable laws and regulations of a State Party”.

2. Second, it must be “owned and controlled by a natural or juridical person of a State Party or State Parties”.

3. And, third, it must “maintain… substantial business operations in the territory of a State Party.”

Ownership is defined as beneficially owning more than 50 per cent of the equity interest in the enterprise. Control is defined as having the power to appoint a majority of an enterprise’s directors or to otherwise direct its legal operations. Substantial business operations is defined by reference to the AfCFTA Protocol on Investment’s definition of “substantial business activity”.3

Third, Article 5 (African Digital Platforms) of the ROO Annex defines a digital platform as African if it “is duly constituted, registered, or otherwise incorporated and operated under the applicable laws and regulations of a State Party, and owned and controlled by a natural or juridical person(s) of a State Party or State Parties.”

“Digital Platform” is also itself defined as:

a digital interface or application which enables interactions and transactions between businesses and/or consumers to facilitate digital trade, including, but not limited to, online marketplaces, collaborative or sharing economy platforms, communication platforms, online social networks, online search engines, web browsers, online maps, news aggregators, music platforms, video and other media sharing platforms, digital payment systems, application stores, online advertising platforms, operating systems, and online intermediary services[.]4

One issue that I am unsure of with the above is whether the Parties intended for the customs duty prohibition to be limited to only electronic transmissions that originate from AfCFTA Parties, or for the prohibition to also apply to transmissions of African content regardless of where the transmissions came from.

The relevant language is in Article 6(1) (Customs Duties) of the Protocol, which limits the customs duty prohibition to “digital products transmitted electronically originating from other State Parties”.

I had initially read this as adding a requirement that the electronic transmission must begin in an AfCFTA Party. And on this, I’d note that the transit of the transmission is not explicitly addressed. Given the nature of the internet, you would hope a transmission bounced through various jurisdictions before getting to its destination in another AfCFTA Party would not be excluded purely due to its ‘transit route’. But this is also a further complication.

However, Article 6(2) (African Content) of the ROO Annex clarifies that “For greater certainty, African content shall be interpreted as a digital product originating from State Parties as stipulated in Article 6(1) of the Protocol.” This seems to link the ‘originating’ in Article 6(1) (Customs Duties) of the Protocol to the digital product (or the content) as opposed to the transmission. That is, this clarification seems to refer to Article 6(1) of the Protocol as requiring the digital product to originate from an AfCFTA Party, and then says this test is deemed satisfied for African content.

I’m not entirely sure I’m reading all of this right though. Perhaps the intention is to apply both tests - requiring the digital product and the transmission to originate from an AfCFTA Party. Views from others are welcomed!

Comparing the approach in the ROO Annex to past agreements, the two key differences that stand out are:

1. Adding a test of who owns the digital product or content to previous tests that focused on the ownership, control or nationality of the persons (juridical or natural) doing the transmitting; and

2. As I read Article 7 of the ROO Annex, allowing trading by persons of non-Parties to benefit from the preferential treatment, as long as the trade is done on an “African digital platform” and is of “African content”.

Previous digital trade agreements, such as the Digital Economy Partnership Agreement (DEPA), limited their customs duties on electronic transmissions rule to “content transmitted electronically, between a person of one Party and a person of another Party” (Article 3.2(1)).5 The addition in AfCFTA of an ownership requirement linked to what is being transferred significantly limits the scope of what content is required to be duty-free (in addition to the issue of what ownership means as mentioned above).

The allowance for all trading on African digital platforms perhaps provides some benefits for African digital platforms above and beyond the traditional approach. But I’m not sure how important this will be in practice, particularly given the content ownership test.

It is also interesting that, unlike DEPA and CPTPP, there are no general or security exceptions that apply to the customs duty prohibition in the AfCFTA Digital Trade Protocol as far as I could see. This is unlike other AfCFTA Digital Trade Protocol Annexes, such as the Annex on Cross-Border Transfers, which do apply exceptions to its provisions.

The use of nationality or ownership/control of an enterprise to determine access to preferential treatment is not new. This is how it’s been done in the services and investment context as a matter of course.

However, the overall effect of the ROO Annex is to significantly limit the scope of value of the Digital Trade Protocol’s rule on customs duties on electronic transmission, or at least to make its benefits less clear and certain. It will be interesting to see exactly how AfCFTA Parties implement this - in particular whether it will be worth the effort to narrow down the application of zero duties to just those digital products that meet the ROO Annex requirements or if it is easier to just apply the zero duties non-preferentially.

Also - as Sam Lowe has recently noted - what Sam calls ‘Rules of Control’ look to be expanding into the goods context too. Rather than just looking at where a good originated it (or where most of its value was added), the US is now looking at who is making the good too (and who owns or subsidies that entity).

Finally, to make this more concrete, here’s a hypothetical trade to show why these various approaches to ROOs matter (particularly for lawyers). Imagine an Australian purchasing an internet connected EV from a seller in China. Thanks to Australia’s FTA with China (ChAFTA), the purchase should get preferential or protected treatment - but this depends on:

• For the tariffs on the physical car entering Australia, the amount paid will depend on whether the car qualifies as originating in China under the goods rules of origin (e.g. where was car made or the most value-added?);

• For any connected services (such as remote access, remote control, entertainment, or vehicle monitoring services) provided from China to the car in Australia, whether or not they are protected by ChAFTA’s services rules will depend on the services meeting requirements around where and from whom they were supplied (and who owns and controls those entities); and

• For any data being transmitted to or from the EV from China (such as a software update), if ChAFTA had substantive data rules these would only apply if relevant origin, nationality, or ownership requirements were met in relation to who was doing the transmitting.

Certainly something to keep lawyers busy as governments move to regulate our increasingly connected devices.