Over the last couple of years we have regularly updated you on the impact of the new EU customs regulation (UCC) which will be effective as of May 1, 2016. One important topic that is high on the agenda of EU importers is the change in customs valuation rules. Up until April 30, 2016 EU importers can use the ‘First Sale for Export’ (FSFE) concept if certain conditions are fulfilled. The UCC Implementing Regulation (published on December 29, 2015), abolished this opportunity as of May 1, 2016. However, if an EU importer fulfills a strict set of conditions, it may invoke the ‘Sunset Clause’ until December 31, 2017.
In earlier communications we indicated that the new provisions governing EU customs valuation not only abolish the regular FSFE concept but may also result in the taxation of intra-EU or domestic transactions. This is because the language of the new regulations stipulates that the customs value of imported goods is to be based on the sale occurring immediately before the goods were brought into the EU customs territory. A literal application of this wording would mean that EU importers should use their resell price for customs valuation purposes where goods have been ‘pre-sold’ prior to their physical entry into the EU customs territory. Pre-selling goods happens quite regularly in the footwear & apparel sector, the automotive industry and other industries that use a ‘back-to-back’ ordering process (often also referred to as pre-order or made-to-order models). In this respect it is important to note that the term ‘sale’ is a concept of European Union law and must be interpreted in light of the purpose of the rules in question and the context of those provisions. The Court of Justice of the European Union has ruled that for the purposes of the customs valuation, priority is to be given to the transaction value, which is assumed to be the most appropriate and the most frequently used valuation method. In order to maintain that priority, it is necessary to interpret the term ‘sale’ broadly (case number C-116/12, par. 45). Based on this guidance, it seems clear that the authorities will consider any obligation to supply and/or purchase goods for/against a consideration to constitute a sale within the meaning of both the current customs regulation as well as the UCC and its Implementing Regulation. Consequently, the customs authorities will likely argue that when a purchase order is placed and accepted by parties, this triggers a sale within the meaning of current and future customs legislation.
Until recently, most EU importers considered it unlikely that the EU customs authorities would indeed apply such a literal interpretation of the new customs valuation provisions. However, in recent meetings with the Dutch customs authorities they explicitly indicated that (depending on the exact facts and circumstances) they will apply a literal interpretation of the respective provisions and, as such, will indeed take the position that intra-EU or domestic transactions will have to be taken into account when establishing the customs value of the imported goods. We understand that the UK authorities are taking a similar approach. The following example will serve to show the enormous impact that such a rigid interpretation by the EU authorities could have.
A consumer orders a car from a dealer who then orders the car from the importer, causing the car to be manufactured at a factory outside the EU. When the car is eventually imported into the EU, three transactions have already occurred:
1. the consumer placed an order with the dealer;
2. the dealer placed an order with the importer; and
3. the importer placed an order with the factory.
Typically, the importer would declare as the value the price he paid the factory. However, under the terms of the new legislation, the transaction that caused the car to be released into free circulation occurred between the dealer and the consumer at a price that surely includes a mark-up.
Although mitigation of the negative impacts seems to be possible, it usually requires long-term planning as companies will likely have to implement operational changes.
The second problem arises at an EU administrative law level. We doubt whether an Implementing Act can be used to abolish the FSFE concept when the current legislation and UCC itself support it. Under EU case-law, the European Commission is authorized to adopt all measures which are necessary or appropriate for the implementation of basic legislation (such as the current Community Customs Code and the future UCC), provided they are not contrary to such legislation. Both the UCC’s customs valuation definition and the Community Customs Code provide for the customs value to be based on the price actually paid or payable for the goods when sold for export to the customs territory of the EU. As such, the process for determining value remains fixed. Therefore, to lawfully implement the legislation the European Commission must reconcile the language affirming FSFE (‘‘price paid or payable for the goods when sold for export to the customs territory of the EU’’) and the language abolishing the FSFE concept. In order to abolish the FSFE concept, the European Commission (in our view) must successfully argue that the FSFE structures, declared over the last 35 years, in which there has been a common customs union, conflict with the Community Customs Code customs valuation definition. This will be a difficult position to support as the policy has been applied consistently across Member States. As such, importers may have a solid argument against the proposed legislation, which can be presented to the Court of Justice of the European Union.
Over the years Meijburg & Co’s trade and customs lawyers have gained extensive experience with EU customs valuation matters (both with restructurings and litigation with the national and EU courts). As such we are very well-positioned to assist your company in evaluating the impact of the new customs valuation provisions, with designing alternative supply chain structures mitigating the negative impact either partially or in full and if required, can represent your company before Dutch and EU courts of law.