Union Customs Code – Reform
On May 17, 2023 the European Commission (EC) published the first draft of the Union Customs Code - Reform (hereafter: New UCC). Such a comprehensive document, with 190 pages and 259 articles, cannot be summarized in a few pages. Nevertheless, we would like to share several of our initial findings.
The New UCC was preceded by a study by the Wise Persons Group (WPG). The Directorate General for Taxation and Customs Union (DG TAXUD) had invited this group of experts to look at the future of customs formalities within the European Union. The President of the European Commission, Ursula von der Leyen, had also made clear to the European Commission that:
“It is time to take the Customs Union to the next level, equipping it with a stronger framework that will allow us to better protect our citizens and our Single Market. I will propose a bold package for an integrated European approach to reinforce customs risk management and support effective controls by the Member States.“
The WPG’s report was published on March 31, 2022.
Almost immediately after its publication, discussions began between Member States and the EC and the EC began drafting the New UCC.
In short, the WPG report made 10 recommendations to the EC. According to the WPG, the EC should:
Table a package of reform proposals by the end of 2022, including reform of the UCC.
Provide a single-entry point for customs formalities and a new approach to data.
Set up a comprehensive framework for cooperation with other law enforcement bodies (single window).
Create a European Customs Agency.
Introduce a System-Based Approach centered on a reformed Authorised Economic Operator scheme.
Facilitate trade with confidence and build a new framework of responsibility and trust (Self-Assessment).
Remove the customs duty exemption threshold of EUR 150 for e-commerce.
Implement a package of measures to ‘green’ EU customs.
Properly resource, skill and equip customs.
Introduce an annual Customs Revenue Gap Report.
These 10 recommendations served as the basis for the New UCC. Although the business community has embraced the main thrust of the WPG report, it is particularly opposed to elements such as the removal of the duty exemption threshold.
Clearly, reforms are needed. The current system of transaction-oriented declaration and control can no longer meet today’s needs, and certainly not those of the future. The number of import declarations has exploded in recent years as a result of further globalization and e-commerce in particular.
The current declaration system has its origins in the Middle Ages when tax collectors levied taxes for landowners for crossing borders, river crossings and suchlike and is no longer sustainable. A modern data-driven system-based approach would be eminently more suitable, especially if we look at the total number customs declarations compared to the marginal amount of tax revenue collected. With an average import duty rate below 2% combined with the large number of free trade agreements the EC has concluded to promote global trade, the current time-consuming and expensive formalities system is no longer feasible. The administrative burden on businesses does not match the marginal levy of tax revenue.
However, the associated tasks assigned to customs authorities, such as safety and security, product safety etc, will also make physical inspections and border delays unavoidable in the future.
For the levying of import duties, a system grafted onto the levying of VAT, whereby importers report on the customs debt retrospectively, would be far more appropriate. For the moment, however, that is still a bridge too far for the EC.
Several fundamental issues stand out in the New UCC, which I would like to address here:
For e-commerce goods, a new general rule will apply based on a greatly simplified system for B2C transactions up to an amount of EUR 150. This will only be deviated from at the request of the importer and the normal declaration procedure should be followed. The Combined Nomenclature provides for such a standard commodity code.
B2C transactions will henceforth be taxed by default with 10% import duties in exchange for a simplified declaration process. This system will take effect as early as January 1, 2028.
The introduction of the concept of importer.
'Importer' means any person who has the power to determine and has determined that goods from a third country are to be brought into the customs territory of the Union. The importer is the single responsible person at import and export and must be established in the Union. The importer should preferably inform the customs authority before the goods reach the Union. The importer may be directly represented. The customs agent will therefore act in the name and on behalf of the importer. By not allowing indirect representation, only one person remains debtor for customs purposes.
This will have major consequences for companies established outside the Union (e.g., Swiss headquarters and UK companies) that are now indirectly represented by a customs agent. They will have to reorganize to comply with the new plans. Customs agents will also be severely affected by this change.
Another concept that has been introduced is that of ‘carrier’. In discussing this concept I will limit myself to imports. The carrier is "the person who brings the goods, or who assumes responsibility for the carriage of the goods, into the customs territory of the Union. However, (i) in the case of combined transportation, 'carrier' means the person who operates the means of transport which, once brought into the customs territory of the Union, moves by itself as an active means of transport; (ii) in the case of maritime or air traffic under a vessel-sharing or contracting arrangement, 'carrier' means the person who concludes a contract and issues a bill of lading or air waybill for the actual carriage of the goods into the customs territory of the Union."
Under the New UCC, there must be enhanced cooperation between carrier and importer so that the requested essential and applicable information can be verified in advance as much as possible. This information is not limited to customs data but more broadly concerns the information necessary for the entry of goods in the Union. The New UCC thus appears to be pivotal regulation for matters such as market surveillance, general product safety, safety and security and environmental legislation. This new role for the New UCC will eventually accelerate the achievement of a Single Window.
Crisis Management Mechanism
In order to respond swiftly to crisis situations (man-made and natural disasters), Chapter XI of the New UCC provides for crisis measures:
"The EU Customs Authority shall prepare procedures and protocols for all types of crises in cooperation with relevant authorities, with a view to ensuring a rapid, effective and proportionate response to the situation concerned."
The EU Customs Data Hub will play a central and predominant role. This hub will make it easier for Member States to exchange data with each other, not only in the area of customs, but also with regard to related legislation. The EU Customs Data Hub will form the basis for a single customs declaration system for both import and export, and will be directly applicable in all Member States. It will also be an important prerequisite for the use of future simplified customs procedures for AEO accredited companies. The EC hopes to have the EU Customs Data Hub up and running by 2037. Given the experience with previous IT-related projects such as Centralized Clearance, it cannot be ruled out that this could take far longer than expected, possibly only becoming a reality in 20 years’ time.
Trust and Check Trader
The New UCC will introduce the Trust and Check Trader.
“The customs authorities shall grant the status of Trust and Check trader to a person who meets all the following criteria:
(a) absence of any serious infringement (…)
(b) high level of control of his or her operations and of the flow of goods, (…)
(c) financial solvency (…)
(d) practical standards of competence or professional qualifications directly related to the type and size of activity carried out
(e) appropriate security, safety and compliance standards, adapted to the type and size of the activity carried out (…)
(f) having an electronic system providing or making available to the customs authorities all real-time data on the movement of their goods and their compliance with all requirements applicable on those goods (…)
(g) the absence of significant changes in its corporate structure, ownership, solvency situation, type of business activities concerned, trading models, customs operations or any other significant changes in its situation and activities.”
In addition, the customs authorities will perform a comprehensive audit of the authorised operator’s activities and internal records at least once every three years.
The future will tell whether companies are willing to allow customs authorities direct access to their ERP systems. If this were to happen, it will only take place if the EC can provide a rock-solid guarantee that none of the sometimes highly confidential information will fall into the hands of unauthorized persons. It is expected that companies will move in this direction only if very strict conditions are in place.
It appears that the Trust and Check Trader will replace the Self Assessor now found in the UCC. What is notable here is that while the Trust and Check Trader must meet the highest possible standards in terms of administrative organization and internal control measures, customs knowledge, etc., this will however be subject to continuous monitoring.
This is certainly reflected in the name Trust and Check, which seems to me rather a contradiction in terms. One would expect that the Trust and Check Trader with all its safeguards would be monitored less and that companies not meeting the conditions for such a status would come under some sort of continuous monitoring. The opposite now seems to be the case.
Furthermore, it appears that the use of the Trust and Check Trader will be linked to the entry into force of the EU Customs Data Hub. The question that remains unanswered for me is what do we do in the intervening 20 years? Self‑Assessment has proven to be a dead letter in the UCC as a result of the implementing regulations. There are no Self Assessors in the Union. Trust and Check Trader status will not become active until 2037 at the earliest. What simplifications can companies expect from the EC that already meet the requirements now?
EU Customs Authority
There will be a customs agency that will operate between the Member States and the EC. The governing council of the EU Customs Authority will be made up of the EC and the Member States. The EU Customs Authority will deal with IT and Data and Risk Management. It will also liaise with organizations such as Europol and Frontex.
The EU Customs Authority will play a leading role in establishing “Customs acting as One”, or “One Customs” It is expected that the business community will broadly support these initiatives. For many multinationals, it is currently frustrating that they must maintain separate systems in each Member State where they perform customs formalities. A single uniform system in all Member States would remedy this.
It is notable that with the introduction of the EU Customs Authority and EU Customs Data Hub, the EC is taking giant strides toward a more standardized approach. This seems to match up perfectly with the linking pin role the EC wants to or perhaps must play with regard to other adjacent border activities (e.g., CBAM, VAT, REACH). It will ultimately simplify the cross-border movement of goods and is expected to be warmly received by the business community. Most of the legislation will more or less remain the same. The formalities surrounding special procedures such as inward processing and end use will remain the same, although these customs saving procedures would benefit by being simplified even more than is now the case.
It is unfortunate that, as with the current UCC, many of the new initiatives cannot be realized until much later. This means that the benefits of the New UCC still seem a distant hope for many entrepreneurs and could better be described as “a peek into a candy store that is closed for now”.
The reincarnation of Self-Assessment (the basis for which can be found in the current UCC) could help many trusted traders begin to move forward now. But that would require the EC and the Member States to be willing to adjust the implementing provisions on this point.