Tag Archives: UCC

EU Commission Guidelines on Customs valuation

Removal of reference to domestic sale, role of the purchase order, sales under customs warehouses and treatment of royalties/licence fees 

The European Commission  has published on September 17th 2020 an updated version of its customs valuation guidelines, related to the sale for export, within the meaning of Article 70 UCC and Articles 128 and 347 of the UCC Implementing Regulation, and the dutiability of royalties and license fees under Article 71 UCC and Article 136 of the UCC Implementing Regulation.

The first noticeable change in this guidance is the removal of any reference to the concept of domestic sale (a sale occurring between two EU companies can thus be considered as “the last sale for export”). Such change is consistent with the WTO Customs Valuation Agreement, as reminded by Advisory opinion 14.1 of the WCO Technical Committee on Customs Valuation.

This removal was made necessary since few EU administrations linked domestic sale and domestic movement of goods, meaning that they refused that a sale made between two EU entities served as basis for valuation purposes, even though that sale was accompanied by a cross-border movement of goods. This was causing two main practical issues:

  • In cross trade operations (one physical flow between non-EU Seller A and importer C, with two financial flows between a non-EU Seller A to an EU buyer/reseller B and from an EU buyer/reseller B to EU importer C), importer C never holds the invoice of the sale between A and B. By requesting that invoice to be presented at customs clearance, customs administrations forced importers to declare on the basis of an alternative method. This was particularly problematic for transactions between independent parties, but also to some extent for transactions made between related parties.
  • Customs duties were be paid on the price of the sale between A and B, while VAT was to be paid on the basis of sale between B and C. Reconciliation between the two sales for VAT purposes was a non needed complication.

By removing the concept of domestic sale, the Commission invites all member States to consider a sale made between two EU entities for customs valuation purposes.

In one significant clarification, the Commission stated that a purchase order (PO) cannot serve as the basis for determining the customs value of goods. Not only the transaction price can serve as basis for valuation purposes only when an offer (PO) is formally accepted by the seller, but the invoice should be available at clearance and presented as supporting document. The Commission seems to be willing to grant a central place to the invoice and this point of view regarding the exclusion of PO can be seen as consistent regarding the provisions of the International Vienna agreement on the international sale of goods.

Further important developments on the last sale for export concept were made regarding goods sold under customs warehouses. The Commission has provided some examples of various models involving successive sales of goods under warehouses, identifying which sale was to be seen as the last one for export. It seems that private sector was not properly consulted on these aspects, creating confusion and uncertainty for various models. Also, it appears that Member States are not fully aligned on certain points.

As a matter of illustration, examples 4a, 4b and 7 shown in the guidance describe a situation where an importer could find himself in a place where he is not in possession of the invoice of the sale for export identified by the Commission as the sale of reference and does not know (most of the time) that sale for export price. Transaction value will then not be available, and that importer would need to use an alternative method to clear the goods. But will any of them be relevant?

The comparative method (similar or identical good) will be useful, for example for those that import fungible goods, for which similar/identical goods imported can be easily found. Nevertheless comparison remain difficult for certain categories of goods. Deductive method is, when strictly applied, opened to goods sold in the EU in the condition as imported, and at the first commercial level after importation, to unrelated persons. Three cumulative conditions that render the use of this method very difficult, notably in warehouses were goods are usually (at least) minimally processed and sometimes declared for import following several successive sales. The computed value will be tough to apply in cases where an importer cannot access the invoice for the sale for export, it will not be able to access data on production costs. If those three methods are not relevant, only the fall back one, with all its uncertainty, will remain.

Last point, the guidance provides new examples of situations where royalties and license fees are dutiable. The definition of royalties and license fees was modified compared to the last version, and the following wording was removed: or the use of, or the right to use, industrial, commercial or scientific equipment. We witness an evolution leading to assess, in an increasing number of cases, the inclusion of intangible assets into customs value under article 71-1-b UCC (assists), rather than under article 71-1-c (royalties and licence fees). We have seen situations where the provision of intangible assets (know-how for example) compensated under the form of a license fee was included in the value as an engineering study in the sense of article 71-1-b-iv UCC. Sometimes even under 71-1-b-i UCC, as a material cost. In situations where intangible assets, provided in return of a payment of royalties, are identified as production factors, assessment of their dutiability will be made following article 71-1-b UCC rather than article 71-1-c, whose conditions make it more difficult for administrations to reintegrate in customs value. Case 3 (page 30 of the guidance) shows this new approach, which was underlined in Conclusion n°30 of the EU 2018 Customs Valuation Compendium.

Regarding Case 1, the outcome is in line with recent ECJ cases (GE Healthcare, Curtis Balkans), and with TCCV Commentary 25.1. The trend is, when assessing the payment as condition of the sale criterion, to give more weight to the actual manufacturing and supply organization than to the contractual provisions signed between the seller for export and the buyer.

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The Customs and International Trade team of DS Avocats is at your disposal to provide you with any further information you may require. 

CONTACT US :

dscustomsdouane@dsavocats.com

 

The European Court of Justice confirms the possibility of including in the customs value of a product the cost of an intangible good designed in the EU and made available free of charge to the third party seller by the purchaser

The Court of Justice of the European Union (“ECJ“), in a judgment of 10 September 2020 (BMW Bayerische Motorenwerke AG, case C509/19), interpreted Article 71-1-b of the Union Customs Code (“UCC“) relating to adjustments made to the transaction value.

In this case, the European car manufacturer BMW buys order units from producers in various third countries. BMW owns a software which enables a communication among the applications and the systems of the vehicle included in the control unit. This software, developed in the EU, is provided free of charge to the manufacturers of the control units. In this way, they can ensure that the interaction between the control unit and the software works and understand any errors that might occur during delivery. Those units of commands equipped with the software were then imported by BMW.

For the customs value of the imported order units, BMW indicated the price paid to the sellers but did not include the cost of software development. In the dispute before the ECJ, the referring court wanted to know whether Article 71-1-b UCC allows the economic value of a software developed in the EU and made available to the seller free of charge to be added to the transaction value of the imported goods.

The question is therefore whether intangible goods can be considered as “goods and services (…) supplied directly or indirectly by the buyer free of charge” within the meaning of Article 71- 1-b of the UCC. In response, not only does the Court explicitly include immaterial goods in the definition of points i and iv but it considers that the value regulation allows any immaterial goods to be considered as being capable of constituting a contribution within the meaning of Article 71-1-b (as material costs, engineering and research and development costs, but also as a production tool or material consumed in the production process).

Yet, a careful reading of the value regulation does reveal a difference in the treatment to be accorded to tangible and intangible assets (the latter are subject to additional conditions for reintegration – studies and R&D work, royalties and license fees). Also, while the Court leaves open the question of whether a software is a service or a good, there is little doubt that contributions provided in the form of services can only be analyzed under Article 71-1-b-iv of the UCC.

This decision is part of a more general trend towards increasingly integrating the value of intangible assets into the customs tax base. Nevertheless, the Court’s position could be detrimental to the economic activity of European operators, whose significant costs of research, design and studies carried out on EU territory could be more easily reintegrated into the customs value of the products they import.

The compatibility of this decision with Interpretative Note 7 under Article 8 of the WTO Agreement on Customs Valuation, of which the European regulation is a transposition might be questioned. The Note states that in cases where the production of engineering work (such as a software) involves a number of countries and takes place over a certain period of time, the adjustment should be limited to the value actually added to this item outside the country of importation.

Following this statement, the Court seems to provide us, in what looks like a judgment of principle, the analytical grid of the texts applicable to the reinstatement of immaterial material:

  1. It should first be checked whether the intangible good is ‘necessary for the production of the imported goods’. In this case, reinstatement takes place on the basis of Article 71-1- b-iv of the UCC. Thus, the reinstatement of an intangible material under the visa of Article 71-1-b-i of the UCC is not automatic, and can only be made if the conditions of Article 71-1-b-iv of the UCC are not met.
  2. Failing this, it is a question of looking at whether the good is connected or incorporated and makes it possible to operate or improve the goods produced. If this is the case, the reinstatement of the value of this intangible asset under the terms of Article 71-1-b-i of the UCC is possible.

It is therefore up to the operator to determine how these functionalities are such as to confer on the order units a real value greater than their transaction value, and to determine the said real value with regard to its internal data. Thus, an intangible good such as this software designed by the buyer, which is not commercialized, may have an economic value that must be taken into account for customs value purposes, even thought it doesn’t have any market value. Even when the parties have, by virtue of the principle of freedom of contract, agreed not to attribute any value to this good.

The calculation of the value of such an intangible asset and its allocation to a specified number of goods will be technically complex and will require ever greater precision in the operators’ internal data, on which this calculation will be based.

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The Customs and International Trade team of DS Avocats is at your disposal to provide you with any further information you may require.

CONTACT US:

dscustomsdouane@dsavocats.com

Customs valuation: The CJEU recalls that the reintegration of royalties and license fees paid by a subsidiary to its parent company cannot be automatic

Referred for a preliminary ruling, the Court of Justice of the European Union interpreted, in a judgment of 9 July 2020, Direktor na Teritorialna direktsiya Yugozapadna Agentsiya “Mitnitsi”, case C-76/19, Article 32-1-c of regulation (EEC) 2913/92 establishing the Community customs code (“CCC”), relating to the conditions for reintegrating royalties and license fees into the customs value of imported goods. Although the CCC is no longer in force, the reasoning of the Court remains fully relevant for interpreting the customs valuation rules of the Union Customs Code (“UCC”), applicable since May 1, 2016.

The facts:

The question was twofold:

  • Under what conditions must the 10% royalties paid to the parent company by its subsidiary be reintegrated into the value of the imported parts and elements purchased from third-party suppliers?
  • Insofar as these imported parts and elements are only integrated into a part of the finished products covered by the know-how supply agreement, how to manage the appropriate adjustment of the part of these royalties that can be reintegrated into the value of these parts and elements?

First comment, the Court of Justice clearly affirms that royalties paid in return for the supply of know-how for the purposes of manufacturing finished products in which the imported goods are incorporated, can only be analyzed with regard to the single Article 32-1-c  of the CCC. Important reminder, which could slow down certain attempts (by customs administrations) to requalify, for customs valuation purposes, the fees paid in return for know-how into engineering or R&D costs. In the latter case, the royalties are analyzed on the basis of Article 32-1-b-iv of the CCC, without assessment of the relationship between the royalties and the goods as well as the conditionality of their payment for the sale for export to the EU.

On the relationship between the imported parts and elements and the royalties, the Court makes some interesting developments. After recalling that the method for calculating the royalties is not a relevant element in assessing this relationship, the Court held that the mere fact that a good is incorporated into a finished product is not sufficient to conclude that the royalties, paid in return for the supply of know-how for the manufacture of this finished product, relates to the latter. The relationship must be tighter. It is for example the case where the know-how provided under the license agreement is necessary for the manufacture of the imported good, which is for example, established when the imported goods are specifically designed to be incorporated into the manufactured finished products on the basis of the licensed know-how, without any reasonable alternative use being considered.

With regard to the payment of these royalties as a condition of the sale for export, the Court continues in line with its GE Healthcare judgment of March 2017, adopting an extensive interpretation, based, not on the content of the contracts signed between the licensee and the licensor, but on the balance of power between the parties involved and the commercial dominant position of the licensor,. Thus, even if the contract for the provision of know-how signed between the two companies of the same group does not mention the supply of imported goods, or if that same contract does not specify that the payment of the royalties is necessary for the supply of these parts and elements, the fact that the licensor controls the production chain until the sale of the finished products, is sufficient to recognize this condition of sale. By focusing more on commercial reality than on the legal relationship, the Court follows in the footsteps of the European Commission (Guidelines on Customs Valuation) and the WCO (see for example, comment 25.1 TCCV). In contrast, it differs from the case law recently established in several countries, including the United States (see for example, US CIT, Trimil SA v. United States, December 17, 2019).

In the end, the Court counterbalances a restrictive approach on the concept of relationship between royalties and imported goods, by an extensive interpretation of the condition of the sale. Will this give hope to operators who see, in the drafting of the UCC customs valuation rules, a mechanism implying automatic integration of royalties into the value of imported goods? The Court thereby confirms that it does not tolerate such automatism.

This judgment, without marking a break with existing law, allows the Court to refine its interpretation of the two cumulative conditions for reintegrating royalties into the customs value of goods, in the context of recent changes in the applicable rules introduced by the UCC.

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The Customs and International Trade team of DS Avocats is at your disposal to provide you with any additional information.

CONTACT US :

dscustomsdouane@dsavocats.com

 

Consequences on inward processing of the application of EU trade defense measures to certain products originating in the United States

As a reminder, the inward processing procedure (IP) allows third-country goods to be imported into the Union, processed or repaired before being re-exported or released for consumption.

The Union Customs Code (UCC) and its delegated and implementing acts provide for certain common conditions applicable to special procedures. They concern, in particular, the discharge of the IP special procedure by (i) placing the goods under another customs procedure, (ii) taking them out of the EU customs territory, (iii) by destroying them without leaving waste or (iv) by abandoning them to the State (UCC, art 215).

For the purposes of discharging IP procedure, certain operations are regarded as re-export (Implementing Regulation 2015/2447, Article 324), and in particular the delivery of aircraft or spacecraft and related equipment.

On the other hand, such presumption is not possible when:

  • non-Union goods placed under the IP are subject to agricultural or commercial policy measures, provisional or definitive anti-dumping duties, countervailing duties, safeguard measures or any additional duty resulting from a suspension of concessions if they had been declared for release for free circulation;
  • a customs debt was incurred in accordance with Article 78 (1) of the Code for non-originating goods placed under the IP if the holder of the authorization intends to re-export the processed products.

In a Note of 2 December 2019*, the French customs and indirect taxation authorities (DGDDI), recalls that in response to the trade defense measures put in place by the United States, the European Union (EU) has instituted two types of safeguard measures applicable to imports of steel and aluminum from the United States:

  • Trade Policy Measures (TPMs), which result in the production of surveillance certificates for aluminum and certain aluminum products originating in the United States.This measure has been applicable since May 12, 2018.
  • Tariff measures, ie additional duties levied on certain products originating in the United States (aluminum, steel and products made from these metals) due from 22 June 2018.

These measures have the following effects on IP authorizations for the goods concerned:

1. Review of economic conditions

Applications for IP authorizations (including renewals of authorizations) for goods subject to TPM must be subject to a review of the economic conditions by the European Commission, provided that the authorization provides for taxation on the basis of finished products (Article 85.1 of the UCC):

  • If the economic conditions are considered as not fulfilled, the authorization can not be issued.
  • If these economic conditions are met, the authorizations thus issued can not be retroactive.

2. Prohibition to use the simplified clearance procedure

The simplified clearance provided for in Article 324 of Implementing Regulation 2015/2447 of 28 July 2015, applicable in particular in the field of aeronautics, is prohibited.

Therefore, only a clearance of common law can be implemented which has the consequence of transforming the authorization “324 REC”(in French) into a “common law” authorization.

Holders of an IP authorization for goods subject to the commercial policy measures and benefiting from the simplified clearance procedure must send a letter by 31 December 2019 to the customs office which issued the authorization in order to specify:

  • the desired clearance arrangements; and
  • in the case of release for free circulation, the taxation arrangements chosen.

3. Consequences of the introduction of additional duties

The consequences are identical to those mentioned above, but in addition, it will be forbidden to use the equivalent compensation method (use of Union goods in place of non-Union goods subject to tariff measures).

In addition, a modification of the existing IP authorizations will be necessary, when they include the equivalent compensation or simplified clearing modality under Article 324 of the Implementing Regulation 2015/2447.

4. Regularization with respect to the collection of duties and taxes

Economic operators liable to duties (customs duties and additional duties) and import VAT due to the introduction of trade defense measures must regularize their situation by approaching their interregional customs clearance offices before 31 January. 2020. The Note explains the modalities of such regularization.

* For more information, you will find the DGDDI Note and the corresponding appendices on the links below:

Note DGDDI commercial measures IP

Annex 1 – Review of economic conditions

Annex 2 – Prohibition to implement Article 324 REC

Annex 3 – Consequences of the production of the surveillance certificates for the IP

Annex 4 – Consequences of the introduction of the additional duty

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

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Increasing limitation of the role of non-established companies in customs declarations – Strict implementation by French Customs Authorities

The Union Customs Code (UCC), which entered into force on May 1st, 2016, has undertaken to severely limit the role played by non-established companies in the context of export or import declarations in the EU. This trend is well applied in France.

With regard to exports, a non-established company will no longer be able to act as an exporter from January 1st, 2021. Until this deadline, a non-established company remains entitled to appear as exporter in the customs declaration, provided that it has an EORI number, is registered for VAT in the exporting country, has appointed a tax representative in France, and has appointed a customs representative to proceed to export of goods from the EU, acting under indirect representation.

With regards to imports, in a note to operators dated July 13th, 2019, the Regional Customs Directorate of Le Havre recalled that any customs declaration filed on behalf of non-established companies also had to be done by a representative acting under indirect representation, illustrating a joint interpretation of articles 5§15, 18 and 170§2 UCC.

Under article 5§15 UCC, the representative may lodge a customs declaration in its own name, but also in the name of the person for whom the declaration is lodged. As such, the declaration made in the name and on behalf of others is defined by Article 18 UCC as a direct representation. Conversely, a declaration made in its own name but on behalf of others is defined as an indirect representation.

Article 170§2 UCC provides that, except for the derogations specified in §3 of Article 170 UCC, the customs declarant must necessarily be established in the customs territory of the Union.

Thus, it is impossible for any importer or exporter not established in the territory of the Union to make its own customs declaration. It must appoint a customs representative, acting under indirect representation.

In conclusion, the Regional Customs Directorate of Le Havre implements strictly the provisions of the UCC and limits the role of companies not established in the territory of the Union, while strengthening the system of indirect representation.