Valuation of First Sale, Licensing Fees Spark Controversy Over EU Customs Law

The law behind the changes, the Union Customs Code, was published by the EU in October following passage by the European Parliament and European Council (see 13102201). It replaces an abortive attempt at customs reform launched in 2008 called the Modernized Customs Code. The new law takes effect on May 1, 2016, and will be phased in between that date and the end of 2020. However, the law only contains broad outlines of customs provisions, said Starling. The European Commission must issue several regulations to implement the Union Customs Code, including regulations governing the transitional period and the phase-in of new provisions between 2016 and 2020.

As it develops the implementing regulations, the European Commission will meet monthly with negotiators from EU member states to negotiate details, said Starling. The first of these meetings was held Feb. 10-14. These week-long sessions will continue at least until the end of 2014, said Starling. That’s when the European Commission wants to have a final agreement with its member states so that the trade community can get a full year to understand what the new regulations entail.

Areas of Contention Include Dutiability of Royalties and License Fees, First Sale

Two changes to existing EU customs law will be particularly contentious, said Starling. The first relates to dutiability of royalties and license fees. January’s draft implementation regulations broaden condition of sale requirements in a way that would create the potential for a “wide expansion” of scenarios in which royalties and license fees would be considered conditions of sale, and therefore be dutiable, said Jennifer Revis of Baker & McKenzie. Starling said the proposed change came as a surprise to U.K. customs authorities. “We are not at all clear why the Commission feels it’s necessary to go that broad,” he said. “Our immediate reaction is that it should stay as it was drafted before,” said Starling. The regulation’s broad wording leaves more up to interpretation, he said. “Potentially very different interpretation, of course.”

The proposed removal of “first sale” valuation is even more troublesome, according to Revis and Starling. Under current EU regulations, importers can use an earlier sale in the supply chain for valuation purposes, as long as they can show the merchandise was destined for the EU. For example, an EU importer can use the sale price of the Chinese export to a U.S. middleman instead of the price of the sale between the U.S. middleman and the EU importer, so long as the EU importer can show the goods were manufactured to EU specifications or produced specifically for an EU buyer. “By using first sale, you’re excluding the middleman’s markup, and reducing your customs valuation and therefore potentially the customs duty payable,” said Revis.

The proposed regulations, however, base transaction value on the “transaction occurring immediately before the goods are declared for free circulation” in the EU, said Revis. It would not allow importers to use an earlier transaction to set the value of merchandise. “I was personally a little bit surprised about that, given the nature of the discussions that had been had and the position the European Council had taken in the negotiations, but that’s where we are at this stage,” said Starling. The European Parliament also “expressed a very clear and forceful view” that first sale valuation should be retained, he said.

The elimination of first sale valuation could also pose problems in current Transatlantic Trade and Investment Partnership negotiations with the U.S., said Starling. Although both the EU and the U.S. signed a World Customs Organization agreement that envisions elimination of first sale valuation, the U.S. has so far decided to keep first sale provisions. “In practice one of our main trading partners is not complying yet, and therefore we felt that it was appropriate to wait and take these steps together,” he said. Starling said the first sale provisions were up for negotiations in March. “We’re pushing, as you would expect, for retention,” he said.

Other Changes Include Centralized Clearance, Guarantee Exemptions

The Union Customs Code makes several other major changes to the current EU customs regime. Several of these changes will also be the subject of fierce negotiations between European Commission and national regulators, said Starling.

Centralized clearance. Under the Union Customs Code, customs declarations will be able to be submitted in one member state when the goods are located in another. In order to use centralized clearance, a company would have to be an Authorized Economic Operator (AEO). Centralized clearance “has always been a troubled little baby” because of competing views within the EU on what centralized clearance should accomplish, including whether payment of value added tax (VAT) should be included. Regardless of how it turns out, implementation of centralized clearance will require a “fairly hefty amount” of development of IT systems, said Starling.

Guarantees. Traders that meet certain criteria would be eligible for reduction of the amounts needed on guarantees for duty deferment and other “potential debts” like bonded warehousing and inward processing. Only AEOs would qualify for reduction of duty deferment guarantees, said Starling. For “potential debts,” companies could qualify for a 50% or 70% reduction or even full elimination of the amount of guarantee required based on certain criteria.

Temporary storage. Changes would also include a uniform 90-day time limit on the amount of time goods can be held in temporary storage before they are considered unentered, said Starling. Although the 90 days is an increase from current time limits, the 90-day period would not be able to be extended. Another change is allowing goods to move inland under temporary storage. If finalized, goods would be able to be landed in the EU, then moved to another EU port and even inland, on a single authorization.