In February we provided you with an update regarding the customs valuation implications under the Union Customs Code per 1 may 2016. Based on (draft) guidance received in the previous two months, it appears that divergent interpretations exist throughout the European Union with respect to the impact of the UCC in this area.
In our February alert we indicated that a literal interpretation of the ‘last sale concept’ under the UCC and its Implementing Regulation, could mean that an importer should use its resell price for customs valuation purposes in case it ‘pre sold’ its goods prior to their physical arrival in the Union. This view was initially adopted by various EU customs administrations and lead to hefty debates between economic operators and customs authorities as well amongst Member States.
Recently the European Commission published draft guidance on the interpretation of the new customs valuation provisions. This guidance is by no means final or crystal clear on all aspects. In absence however of an official interpretation of the new rules, it may be considered to be a useful instrument for economic operators to determine the impact for their business.
The draft guidance consists of three topics, being:
- Article 128-1 UCC-IR – the last sale for import concept;
- Article 128-2 UCC-IR – transactions in a bonded facility;
- Article 136-4 UCC-IR – dutiability of royalties
With respect to the ‘last sale for import’ concept it remains unclear whether transactions between two or more EU based legal entities or persons have to be taken into account for customs valuation purposes. Although the draft guideline introduced the concept of ‘domestic’ sale to determine the applicable sold for export transaction in a bonded warehouse, the concept also seems to suggest that a ‘domestic’ sale never qualifies as a transaction within the meaning of Article 70 of the UCC and as such should not be taken into account. Unfortunately, the ‘domestic sale’ concept is neither defined nor explained in the draft guidance. As such many different interpretations of this concept exist. It is therefore likely that a revised draft guidance will be circulated shortly.
The draft guidance with respect to transactions occurring in a bonded facility do seem to provide the necessary clarity for economic operators, Article 128-2 UCC-IR only applies in case one cannot distinguish an eligible transaction based on Article 128-1 UCC-IR. In other words, this rule covers the case of a sale of goods in a bonded facility or other suspensive arrangement, in the absence of a sale related to the same goods which covered the goods on arrival into the Union. Unfortunately the guidelines do not provide a clear view on the transaction that needs to be used for valuation purposes in case multiple transaction occur in a bonded facility. Up until now the view of the Dutch customs administration is that any such sale may be used, provided that the relevant documents can be provided and that the transaction can be audited by the authorities.
With regard to the new royalty provision in the UCC-IR, the draft guidelines seem provide some relief for importers as it makes a clear reference to WCO Commentary 25.1. This WCO Commentary provides a set of criteria that can / should be used in order to determine whether a royalty payment must be considered a ‘buying condition’ and as such is dutiable. It regards the following factors:
- There is a reference to the royalty or license fee in the sales agreement or related documents
- There is a reference to the sale of the goods in the royalty or license agreement
- According to the terms of the sales agreement or the royalty or license agreement, the sales agreement can be terminated as a consequence of breaching the royalty or license agreement because the buyer does not pay the royalty or license fee to the licensor. This would indicate a linkage between the royalty or license fee payment and the sale of the goods being valued
- There is a term in the royalty or license agreement that indicates if the royalties or license fees are not paid, the manufacturer is forbidden to manufacture and sell the goods incorporating the licensor's intellectual property to the importer
- The royalty or license agreement contains terms that permit the licensor to manage the production or sale between the manufacturer and importer (sale for export to the country of importation) that go beyond quality control
Even though the set of conditions set out above seem to be quite rigid and strict, we believe that these criteria could be very useful in arguing that not by definition all royalty payments will have to be included in the customs value of the imported merchandise.
Unfortunately, the guidance received so far still gives ample room for discussion and divergent views. As such we strongly recommend each economic operator to assess its individual case in detail and where necessary enter into a discussion with the competent authorities.
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.