All goods have a non-preferential origin, which is in a way their nationality. All international trade operators must allocate a non-preferential origin to a good, which is more or less difficult depending on whether the good has been entirely obtained in one territory or has undergone several industrial operations in different countries. Such allocation is part of customs compliance and is binding for operators.

Pursuant to Article 60§2 of the Union Customs Code (hereinafter “UCC”), goods the production of      which involves more than one country or territory  shall be  deemed  to  originate  in  the  country  or  territory  where  they  underwent  their  last,  substantial, economically-justified  processing  or working, in an undertaking equipped for that purpose, resulting in the manufacture of a new product or  representing an important stage of manufacture.

In order to assess these conditions, and in particular the substantiality of the processing, the Commission and European Customs apply list rules, annexed to the UCC Delegated Regulation (EU Regulation 2015/2446) or published on the Commission’s website, which set out, by tariff code, the relevant criterion or criteria. Only the list rules referred to in Annex 22-01 of the UCC Delegated Regulation, which concern only a few products, are legally binding. The others are not officially binding, but are still widely followed.

As a matter of example, motorcycles are classified under heading 8711 and not listed in Annex 22-01: under the non-binding list rule, a motorcycle acquires the origin of the last country in which it has undergone an industrial operation that gives it more than 45% of its ex-works value or gives it a new tariff code.

From experience, many operators analyze the conditions for acquiring non-preferential origin solely from the perspective of the list rules. However, in two recent decisions, the European Commission reminds us of the importance of the criterion of the economic justification of the industrial operation that can grant a new origin to a product.

I. Optimization of non-preferential origin and additional duties: the commission is watching

 Under article 33 of the UCC’s Delegated Regulation, any  processing  or  working  operation  carried  out  in  another  country  or  territory  shall  be  deemed  not  to  be  economically  justified  if  it  is  established  on  the  basis  of  the  available  facts  that  the  purpose  of  that  operation  was  to  avoid  the  application  of  the commercial measures of the Union.

In response to the Trump Administration’s additional taxes on European goods, the EU imposed additional import duties on a variety of products of U.S. origin[1], including internal combustion motorcycles with an engine capacity of more than 800 cm3 under tariff code 8711 50 00.

To protect itself from these additional duties (25% of the declared import value, in addition to the 6% customs duty usually applied), Harley Davidson, whose motorcycles sold in Europe were of American origin, changed its supply chain and reorganized its production so that it could import motorcycles assembled in production sites outside the United States into Europe.

After ensuring that the criteria set forth in the listing rule for products classified under tariff code 8711 were met, the Wisconsin-based company then obtained binding origin informations (“BOIs”) in Belgium, the port of entry of the motorcycles into the EU, confirming their non-US origin.

This was until the European Commission, which reinforced its vigilance, enjoined in a decision of 31 March 2021[2] the Belgian customs administration to rescind the BOIs issued, on the grounds that the overseas operations at dispute were not economically justified, since they were mainly motivated by the company’s intention to avoid the additional tax measures imposed by the EU on certain products originating in the United States.

In reaching this conclusion, the Commission relied on a form issued by the U.S. Securities and Exchange Commission in which the company justified the reasons for its industrial relocation. It also considers that its decision is compliant with the ECJ case law[3], according to which “the transfer of assembly from the country in which the parts were manufactured to another country in which use is made of existing factories does not in itself justify the presumption that the sole object of the transfer was to circumvent the provisions applicable in the Community or the Member States to goods from certain countries unless the transfer of assembly coincides with the entry into force of the relevant regulations”.

II. Industrial processing not economically justified – Clarification for determining non-preferential origin

When a product meets the criteria for acquiring the origin of the country in which the last industrial operation takes place according to the list rule applicable, but this last operation has no economic justification, it becomes even more complex to attribute a non-preferential origin to it. However, a product cannot circulate without non-preferential origin. Then, how to determine it?

In order to tackle this difficulty, the European Commission has decided to modify article 33 of the above-mentioned delegated act of the UCC, in a draft regulation[4] published on the website of the European Commission, and which should be formalized in the coming weeks.

In such a case, there will be three solutions:

• The few products covered by Annex 22-01 of the UCC Delegated Regulation remain subject to the residual rules for determining non-preferential origin contained in that Annex;
• For goods not covered by Annex 22-01 of the UCC Delegated Regulation and classified under Chapters 2 to 5; 7 to 14; 16 to 17; 19 to 29; 31 to 40 of the tariff nomenclature, the non-preferential origin will be that of the country where the major portion of the materials originates, determined on the basis of the weight of these materials; and
• For goods not covered by Annex 22-01 of the UCC Delegated Regulation and to be classified under Chapters 1, 6, 15, 18, 30 and 41 to 97 of the tariff nomenclature, the non-preferential origin will be that of the country where the major portion of the materials originates, determined on the basis of the value of these materials.

This amendment to Article 33 of the UCC delegated regulation would provide valuable additional information for those who have to determine the non-preferential origin of products by navigating through the complex analysis criteria defined by the European regulation.

For Harley-Davidson motorcycles, classified in Chapter 87 of the tariff nomenclature, their origin will then depend on the most expensive materials in the final product. Following the revocation of the BOIs, Belgium informed that motorcycles manufactured by the company and imported to Europe would be taxed at 56% on import from June 2021! The company announced on April 19, 2021 its intention to appeal this decision. It is now up to the company to prove that there were reasonable grounds, other than avoiding the consequences of additional tariff measures imposed by the EU, for carrying out assembly operations in a country other than the United States. To be continued…

 

DS Avocats’ Customs and International Trade team is at your disposal to assist you or to provide you with any additional information.

 

CONTACT US: dscustomsdouane@dsavocats.com

 

 

[1] Implementing Regulation (EU) 2018/886 of 20 June 2018

[2] Implementing Decision (EU) 2021/563 of 31 March 2021

[3] ECJ, C-26/88, Brother International GmbH v. Hauptzollamt Gießen, 13 December 1989

[4] Draft Regulation : https://ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupMeetingDoc&docid=48818