As of May 1, 2016, the Union Customs Code (UCC) will come into effect and will replace the current Community Customs Code. The new UCC brings along significant changes in the customs rules which impact importers in the EU. Amongst the most relevant issues are the increased taxation of royalties and the abolition of the so-called 'First Sale for Export'-rule (FSFE-rule).
Under the current rules importers may opt to use the value of an earlier sale in the supply chain as basis for determining the customs valuation if such sale was destined for the EU. The FSFE-rule is currently frequently applied in customs structures of multi-national companies importing products into the EU as it leads to a lower customs value and consequently lower duties being due. Under the UCC, the FSFE rule can no longer be applied as the new implementing provision state that either the customs valuation should be determined either on the basis of the sale occurring immediately before the goods were brought into the EU or if such sale does not exist, a sale that takes place while the goods are under a customs suspension regime after entering the EU.
Specifically the phrase "immediately before the goods were brought into the customs territory" gives rise to discussions with Customs authorities; "immediately before' can be interpreted chronologically or physically (in the supply chain), and depending on the customs authorities' interpretation transactions (e.g., backorders) taking place within the EU may become subject to customs duties. This prognosis is further substantiated by the fact that the Court of Justice of the European Union ruled that the definition of 'sale' for the purposes of the customs valuation must be interpreted broadly which brings more transactions into scope. In addition, a higher customs valuation may also lead to more VAT payable as import VAT is calculated based on customs value plus duties due.
Under the UCC, the FSFE option is no longer available and importers must use the value of the sale occurring immediately before the goods are brought into the EU as the customs value. In other words: the 'First Sale for Export'-option is replaced by a 'Last Sale for Export'-requirement. In order to accommodate importers, the UCC provides for a grandfathering clause which allows importers currently using the 'First Sale for Export'-option to continue using the option until December 31, 2017, provided the importer is bound doing so by a contract concluded prior to January 18, 2016. Customs authorities in a number of EU Member States (the UK, Ireland and the Netherlands, among others) have already provided some guidance on the interpretation of what qualifies as a binding contract.
Increased taxation of royalty and license fees
Under the current customs legislation, royalty and licence fees are only dutiable if they relate to the imported goods and are paid as a condition of sale of those imported goods. Under the UCC, the latter condition of sale requirement is assumed to be met in the absence of evidence to the contrary. Under the new UCC, royalties and licence fees are considered to be paid as a condition of sale for the imported goods when any of the following conditions is met:
- the seller or a person related to the seller requires the buyer to make this payment;
- the payment by the buyer is made to satisfy an obligation of the seller, in accordance with contractual obligations; or
- the goods cannot be sold to, or purchased by, the buyer without payment of the royalties or license fees to a licensor.
Specifically the third condition increases the number of situations in which royalty and license fees become dutiable as it focusses primarily on the obligations of the buyer (instead of the requirements of the seller) and the licensor may even be a third-party (i.e., unrelated to the seller). Moreover, under the current rules additional more stricter conditions apply specifically to trademark royalties. Under the UCC, the distinction between trademark royalties and other trademarks will be removed and the exception for trademark royalties will be abolished.
As of May 1, the new UCC will affect a great many companies importing into the EU. Specifically the increased taxation of royalties and licence fees and the abolition of the 'First Sale for Export'-option, may lead to substantial higher customs duties and import VAT being due. EU importers should therefore review their current supply chain, customs planning structures and royalty arrangements to determine the impact of the new UCC. EU importer should anticipate on these changes now in order to mitigate any adverse impact.
For more information please contact the authors.