Indirect Tax Alert | 26 January 2016
EU publishes Union Customs Code Implementing and Delegated Acts: Major changes as of 1 May 2016
On 29 December 2015, the Implementing Act (IA) and Delegated Act (DA) to the Union Customs Code (UCC) were published in the European Union’s (EU) Official Journal. With these two Acts, the legislative framework of the new European customs legislation is almost complete. The Transitional Delegated Act (TDA), capturing transitional measures, allowing the Member States’ Customs Authorities to continue using any existing IT systems and/or paper-based systems as long as the new systems are not up and running is still pending publication.
The UCC provides for a new, streamlined and codified framework of customs legislation, up-to-date with recent developments, and replacing the current Community Customs Code (CCC). The UCC will be implemented gradually as from 1 May 2016 until the end of 2020. Based on the IA and DA, there will be substantial changes to customs valuation which have considerable financial consequences for multinational businesses that import goods into the EU. Other major changes include the new definition of exporter, special procedures (warehousing, processing etc.), authorized economic operator (AEO) and Binding Tariff Information (BTI).
When the draft texts of the DA and IA were released to the public, a number of substantial changes were already identified. With the publication of the DA and IA, most of these changes have now materialized into definitive legal texts.
A previous EY Global Tax Alert highlights the most radical changes, such as the more stringent rules for royalties and trademarks. The new rules on royalties are a clear attempt to increase the taxable scope, as under the UCC, royalties and license fees are much sooner included in the customs value than under current legislation. With the abolishment of the exception for trademark royalties, business currently importing products for which trademark royalties are paid will be hit hard by this change.
This Alert focuses on those areas where new insights are now available and on the topics where uncertainty or room for interpretation remains.
First Sale for Export abolished - grandfathering clause may be applied
Under current EU legislation, importers may use the so called First Sale for Export (FSFE) customs value, i.e., provided certain conditions are met, they can use the value of an earlier sale in the supply chain as the customs value. Under the UCC, importers must use the value of the sale ”occurring immediately before the goods are brought into the customs territory of the Union.” This rule is better known as the “Last Sale for Export rule.”
The IA contains a provision, generally referred to as the “Grandfathering clause,” which allows companies currently using FSFE to continue doing so until 31 December 2017, where the importer “is bound by a contract concluded prior to 18 January 2016.” In this context, it is not further specified what constitutes a binding contract.
Recently some clarification has been given by the UK Customs Authorities, saying that “there must be a contract in place clearly specifying a start date but they need not specify the value of each expected shipment or consignment.” This may mean that more generic contracts (or addendums to existing contracts) may be sufficient to qualify as a ”binding contract” for the application of the “Grandfathering clause.” A similar flexible approach is also taken by the Dutch and Irish Customs Authorities. Other Customs Authorities may even take the position that a ruling issued in the past and confirming FSFE valuation is also sufficient to apply the “Grandfathering clause.” That being said, views on what constitutes a binding contract may differ from Member State to Member State.
Valuation of goods entered into a bonded warehouse
There has been confusion on the valuation rules applicable when goods are entered into a bonded warehouse and upon import from that warehouse, when the goods are sold at a higher value than the one at which the goods were introduced into the warehouse.1 From contacts with national customs authorities, it appears that if goods are sold for export to the EU and are entered into a bonded warehouse, the purchase price of those goods can be used as the customs value. However, where there is no sale which leads to the introduction into the warehouse, the (higher) price charged with regard to the subsequent sale from the warehouse will be the basis for the customs value. This would apply in the case of a transfer of own goods. For example, a US manufacturer transfers the goods it has produced to a bonded warehouse in the EU and from that warehouse sells the goods to EU customers. In such case, the transfer from the US to the EU is not a sale and therefore the price charged for the subsequent sale from the warehouse should be used as the customs value. Businesses should determine whether they will be affected by this exception and what actions can be taken to mitigate the impact of this rule.
New definition of exporter: issues for non EU businesses
The definition of “exporter” is relevant to determine the specific customs office where the export declaration must be submitted and to determine who is responsible for compliance with the export formalities. Also it has implications for the entitlement to apply the value added tax (VAT) exemption for export outside the EU.
The new rules redefine the concept of ”exporter” with strong emphasis on i) being established in the customs territory of the Union; ii) holding the contract with the consignee in the third country; and iii) having the power to determine that the goods be transported out of the Union. However, the new definition remains subject to interpretation: in a restrictive reading, the requirement of being ”established in the customs territory of the union” may make it problematic for non-EU established business to export from the EU, for instance when a Swiss principal wishes to export its goods from an EU warehouse.
When identifying the ”exporter” under the new definition, the meaning of a “permanent business establishment” from a customs perspective will be crucial. Permanent business establishment is defined in the UCC as “a fixed place of business, where both the necessary human and technical resources are permanently present and through which a person’s customs-related operations are wholly or partly carried out.”
It is yet unclear whether, for example, hiring storage facilities including using a customs agent to perform export formalities for a non-EU established business wishing to export, offers a solution. Therefore, the question rises whether non-EU established businesses can still act as an exporter under the UCC and what the consequences are for the VAT exemption on exports. We understand that these issues have also come to the attention of several EU customs authorities, who have addressed the EU Commission on the matter. Further guidance from the Commission through the issuance of UCC guidelines is eagerly anticipated. In the meantime, customs authorities in some Member states have indicated that pending these discussions, they will keep allowing export declarations to be filed on behalf of non-EU business by e.g., customs agents, as is practice under current legislation. We are closely monitoring this issue with both the EU Commission and customs officials in various Member States and will issue a new Alert if there are any further developments.
Processing activities in the EU
The current customs procedures, Inward Processing Relief (IPR) and Processing under Customs Control (PCC), are merged into one special procedure, namely the Inward Processing Procedure (IPP). It is expected that the merge between IPR and PCC will reduce the complexity of the customs-related administration of these activities. Another interesting change is that no more compensatory interest will be due for processing activities (as is currently the case for IPR). Moreover, as storage is not allowed under said procedures, companies will probably be asked by customs to combine processing activities with a customs warehouse procedure. Any current holder of an authorization IPR (”suspension system” and ”drawback system”) or PCC may expect a re-assessment of his authorization before 1 May 2019 or before the expiry date of the authorization (whichever is earlier). Existing authorizations for PCC and IPR ”drawback system,” issued before 1 May 2016 but valid after that date, will be considered as an authorization for IPP under the new rules.
AEO accreditation becomes a ”must have”
The UCC strongly encourages companies to become AEO accredited, in order to keep or maintain specific customs-related facilitations and simplified procedures. Although some facilitations still do not require AEO accreditation per se, they do require that almost all AEO criteria are met. The more sophisticated facilitations such as ”self- assessment” and ”centralized clearance” are indeed exclusively reserved for AEO accredited companies. This makes that AEO accreditation is no longer a “nice to have,” but has become a “must have” for many companies.
There will be two types of AEO licenses under the UCC: ”Customs simplifications” and ”Security and safety.” A new criterion for AEO applicants is the requirement to have ”practical standards of competence or professional qualifications.”
Binding information rules have changed
With regard to Binding Tariff Information (BTI) and Binding Origin Information (BOI), substantial changes will be implemented as of 1 May 2016. The BTI and BOI will be valid for a three year period instead of the current six year period. Moreover, it will be binding both on the customs authorities and the applicant/holder, where currently they are only binding on the customs authorities.
1. See EY Global Tax Alert, Implementation of EU Customs Code to bring substantial changes to customs valuation, dated 2 October 2015.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Consultants SCCRL/BCVBA, Brussels
- Franky De Pril
+32 2 774 94 84
Ernst & Young Belastingadviseurs LLP, Amsterdam
- Walter de Wit
+31 88 4071390
- Jeroen Scholten
+31 88 4071009
Ernst & Young LLP (UK), London
- Arjen Odems
+44 207 951 1446
Ernst & Young GmbH, Düsseldorf
- Robert Boehm
+49 211 9352 10529
- Frank-Peter Ziegler
+49 6196 996 14649
Ernst & Young (Ireland), Dublin
- Neil Byrne
+353 1 221 2370
Ernst & Young LLP, Dallas
- Bill Methenitis
+1 214 969 8585
Ernst & Young Serviços Tributários S.S., Sao Paulo
- Frank de Meijer
+55 11 2573 3413
Ernst & Young Shinnihon Tax, Tokyo
- Yoichi Ohira
+81 3 3506 2678
Ernst & Young Tax Services Limited, Hong Kong
- Marc Bunch
+852 9666 9580
Ernst & Young Solutions LLP, Singapore
- Adrian Ball
+65 6309 8787
EYG no. CM6192