Showing posts from tagged with: Duty Rates

What now for Customs and Brexit?

Theresa May ran a Conservative campaign based on “Brexit means Brexit” which for May meant a Hard Brexit. In May’s vision of the future of the UK this meant leaving the Customs Union and leaving the Single Market.

For Irish Traders this meant the imposition of customs duties on trade with the UK, the imposition of border controls and potential complications for importing UK goods in terms of conformity with EU standards.

For the Agri-Food industry an additional nightmare would be the need for agricultural products to be imported from EU approved plants and the requirement for import licenses.

What Brexit means is still unclear

Brexit might still mean departure from the Single Market and Customs Union as planned by Theresa May and re-confirmed by the UK Chancellor of the Exchequer, Philip Hammond in an interview with the BBC on the 18th June.

However there may still be a Free Trade Agreement concluded which will minimise the impact of customs duties and tariffs.

Finally, with the DUP now entering a confidence and supply arrangement with May the views of Northern Ireland businesses will have to come front and centre in the negotiations. Arlene Foster has made it very clear that the DUP is against a hard border with the Republic of Ireland. For the border this can only mean good news and a focus on what will be good for business trading North to South (which equally impacts positively on South-North trade).

What steps should Exporters be taking at this point?

Essentially this has not changed from the advice provided in previous newsletters.

Firstly review the supply chain and determine the information and other requirements which will be necessary to enable you to complete Import/Export Declarations and minimise any delays at customs.

Secondly review your products and determine the best, likely and worst case scenario in terms of additional duty rates.

Thirdly upskill and train staff to understand and implement the new requirements.
 

What could a “practical” Brexit look like in trade terms and how should business now look to plan ahead for March 2019?

1. Trade Agreements and Tariffs

The first question often asked is whether or not customs duties will apply on imports into the UK from Ireland or on import into Ireland from the UK.  At this point there is no answer to this question as it will depend on the type of agreement the UK and EU conclude and the scope of that agreement (most agreements have limited applicability to agricultural products).

When people refer to a Hard Brexit or a Soft Brexit it generally refers to the UK being outside the EU/Customs Union/Single Market (Hard Brexit) or remaining part of the Single Market or Customs Union.

In the former case this would mean the UK being treated as a third country subject to standard MFN (WTO) rates. This can range up to 10% for industrial products and up to 50% for agricultural products.

In the case of a soft Brexit however any of the following scenarios could apply:

  • The UK and EU agree a Customs Union with the EU – similar to the current arrangement for Turkey. Under the Turkey Customs Union, Turkey agree to adopt the EU’s common external tariffs on third-country imports, as well as all EU preferential trade agreements concluded with third countries. However, Turkey does not have a say in the negotiations of EU Free Trade Agreements with third countries (despite being bound by them in relation to imports). This would mean therefore that the UK apply the EU’s Customs Tariff to all imports into the UK. Goods subsequently imported into the UK or EU would not be subject to an additional duty payment on movement to the other’s territory (subject to an ATR cert to confirm the status of the goods). The UK would be subject to EU Free Trade Agreements (FTA’s) and would have to allow FTA countries preferential access to the UK market (It is to be presumed that they would also easily agree UK access to the FTA countries market).
  • EEA (Norway, Iceland, and Lichtenstein)/EFTA (Switzerland) type arrangement.
    The EEA countries have full access to the Single Market in the same way as current EU Member states on the basis that all EU single market legislation is fully implemented in their countries. In addition they must apply the four freedoms. EEA countries do not however have a say in the EU decision-making process on relevant EU legislation and policies.Goods can move without customs duties where goods qualify as “originating products” (subject to a EUR1 document to prove originating status).
  • Preferential Trade Agreements – The EU has concluded a myriad of trade agreements such as the Canada Trade Agreement and South Korea Trade Agreement. Each agreement is specific to the party and what they agree to. In general however these agreements provide for preferential duty access to each other’s market subject to goods qualifying as “originating” – as per the EEA/EFTA agreements above.

 

2. Border Controls

Regardless of the type of agreement concluded, once the UK becomes a non-EU country a customs declaration will still be required on export from the EU and import into the EU. In addition some form of Border control will have to apply.

Even with imports from Turkey, which has a Customs Union with the EU, a SAD is required to be lodged along with an ATR document to prove that goods are in free circulation in the Union.

Similarly with the Norway- Sweden border there are customs controls and the requirement for customs declarations. On the Norway-Sweden border for example there are 10 customs checkpoints with HGVs required to travel via one of these road border crossing points.

However, with an EEA/EFTA type arrangement or a Customs Union then the possibility of an electronic border and customs facilitation stations, as envisaged by Revenue, becomes more likely. While this would simplify the position on the North-South border in terms of movement of goods it does not negate the need for customs compliance and declarations to be submitted to Customs to account for the movement of those goods.

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Claiming Preferential Duty Rates – what you need to know?

Free Trade Agreements Facilitation goals can include removing or cutting customs duties on goods; scrapping any limits (quotas) on the amounts firms can import/export; allowing businesses to provide services and bid for public contracts in the other country and cutting red tape whilst maintaining important standards like health and safety or environmental protection.

The reduction or removal of customs duties is usually the benefit that traders will focus on because it provides a tangible financial benefit to their business by reducing the cost of their raw materials or by making their goods more competitively priced in the free trade market.

However here are conditions attached to the FTA such as goods must be deemed to have preferential origin status in the country of supply and the importer must have proof of this origin status.

Origin is the 'economic' nationality of goods traded in commerce

Origin with regard to Customs is comparable to people passing through an airport after arriving in a destination country. The ease of movement through immigration controls depends on your nationality and any agreements made between your country and the country you are now entering. These checks can range from a simple glance at your passport to more vigorous checks and the need to purchase a visa for countries with no agreements in place.

In the case of goods, their preferential origin status is their nationality or citizenship and their proof of origin status (EUR1 or supplier declaration) is their passport.

Like citizenship, preferential origin is subject to a number of conditions. When an Irish citizen travels from Canada to the United States they are not doing so as a Canadian citizen and likewise it is not enough for a product to be simply transported from a country to claim that it has preferential origin status in that country.

The two principle determining factors in assessing a goods right to preferential origin are; that they are wholly obtained in that country or that they have they been sufficiently transformed in that country to confer origin.

Wholly obtained

Products are considered as "wholly obtained" in a country when they are entirely produced in that country without having used input from other countries.

Examples of wholly obtained products include:

  • Vegetable products harvested or gathered in that country;
  • Live animals born and raised in that country;
  • Products obtained from live animals in that country;
  • Products obtained from hunting or fishing conducted in that country;
  • Products obtained by maritime fishing and other products taken from the sea by a vessel of that country;
  • Mineral products extracted from its soil, from its territorial waters or from its seabed;
  • Products extracted from marine soil or subsoil outside that country’s territorial waters, provided that the country has sole rights to work that soil or subsoil and products produced from a combination of any of the above examples.

Sufficiently transformed

Ordinarily it should be clear whether or not a product has been wholly obtained in a country but what if a product has not been wholly obtained but has been manufactured in a country, can this qualify as preferentially originated?

The answer to this is yes.  It may qualify but first it must satisfy the conditions for preferential origin as set out in the FTA between the two countries.

The specific rules on how a product will qualify as being sufficiently worked in order to confer origin are dependent on the tariff classification of the finished product that is exported.  An outline of the classification process can be found here.

Some of the listed rules consider whether the processing carried out has added sufficient value to the exported product, that the finished product is of a different tariff heading to the non-originating raw materials used, that specific processing operations have been carried out or a combination of any these options.

Other concepts in preferential origin

The general tolerance or de minimis rule may allow the use certain non-EU materials in the processing of a wholly obtained product whilst still retaining preferential origin status.

Minimal operations or simple processing operations such as packaging or labelling products will not be sufficient to confer origin.

There are other considerations with preferential origin claims such as directly transporting the product, the non-manipulation of the product and duty drawback rules. The concept of cumulation can make it easier to meet the conditions for preferential origin claims, by forming countries into groups or zones for origin purpose. The application of these rules and concepts will differ depending on the products and countries involved and should be considered on a case by case basis.

It should be noted that while it is the exporter who is responsible for declaring the origin status of the goods, it is the importer who will receive the benefit of the preferential duty rate of the imported goods. The implication of this is that in a post clearance audit situation, if it is found that the product doesn’t qualify for preferential origin it will be the importer who will be assessed on the difference between the preferential rate of duty and the duty rate applied without preferential treatment. As assessing the originating status is generally completed on a self-review basis by the exporter, the importer should therefore be aware of the preferential origin rules in order to carry out their due diligence on their supplier’s claim of origin.

In cases where the preferential origin status may include an element of doubt, a trader can apply to their national customs authorities for an origin ruling. This will provide them with certainty regarding the application of the rules. In the EU this ruling is known as a Binding Origin Information (BOI).

Proof of origin

In order for a good to claim preferential origin on import the exporter must provide proof of origin status which comes in the form of either a preferential origin certificate or a supplier’s declaration. A preferential origin certificate is completed by the exporter and stamped by customs on export. The preferential origin certificate that is used in the EU is called a EUR1.

Alternatively, an exporter can make a declaration on the commercial invoice that the goods have preferential origin. In order to make an invoice declaration for goods exceeding a value of €6,000 an exporter will have to apply to Revenue to become an approved exporter.

The Registered Exporter system (the REX system) is the system of certification of origin of goods that applies in the Generalised System of Preference (GSP) of the European Union and was introduced on 1st January 2017 with a transition period running to 2020. To be entitled to make out a supplier’s declaration on origin, an economic operator will have to be registered in a database by their competent authorities. The economic operator will become a "registered exporter".

Important points to consider

  • Are the goods “wholly obtained”?
  • Do they qualify as sufficiently transformed? Note: that they have been correctly classified and the correct rule has been applied.
  • Will other factors affect the preferential origin status?
  • Will a ruling (Binding Origin Information) be required?
  • Do you need to register on the REX system?
  • Do you know how to complete a EUR1 or a supplier’s declaration?
  • When you receive proof of origin from an exporter, have you made sufficient enquiries to assess that this has been correctly issued?

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Brexit and Borders

As we move into the negotiation and “divorce” phase of Brexit the main questions being asked by Irish Exporters are

Will there be additional tariffs to consider

Will there be border controls on trade with the UK

While nothing is known with certainty, particularly in relation to tariffs, there are at this point some extremely likely outcomes which businesses need to start preparing for.

Tariff and Duty Costs

The question on the introduction or not of tariffs is probably the most “known unknown”. The answer will depend on whether, or not, there is some form of (Free) Trade Agreement concluded between the EU and the UK. This it-self will only be known after the conclusion of, or at least positive developments in the “Divorce Negotiations”.

At a high level there are two possible outcomes:

A Free Trade Agreement is concluded which allows for a 0% duty rate on trade between the EU and UK.
If this is concluded Exporters still need to be aware of two potential complications
i) Most FTAs require companies to prove their goods are “originating” in order to benefit from the preferential duty rate. This in itself can be a complex process.
ii) Most FTAs do not cover agricultural products or restrict the benefits for agricultural products. While this may be unlikely for an EU-UK Trade agreement it still needs to be considered.

No FTA type agreement is reached and Tariffs are imposed.
In this case the tariff on import into Ireland/ the EU will be the duty rate currently applied by the EU. The tariff on import into the UK will be set independently by the UK Government. This could range from 0% to EU tariff rates to WTO bound rates.

A prudent approach therefore is to assess the impact of EU/WTO rates in looking at the potential additional duty cost that might arise on imports into the UK; and assess the impact of the current EU rates on imports into Ireland from the UK.

 

Borders

The key question at present, possibly more than tariffs, is whether there will be border controls introduced. This tends to break down into two aspects

Will there be border controls, and the requirement for Export and Import Declarations, at the Sea Ports and Airports?

Will there be border controls, and the requirement for Export and Import Declarations, at the North-South Border?

The unfortunate answer is that it is extremely difficult to see a situation where, under current EU legislation, there are no border controls.

We do have to look however at what this means.

Firstly will there be a requirement to lodge Export and Import declarations (SADs in Ireland/C88 in the UK)? It is almost impossible to see a situation where this will not be a requirement once the UK is a non-EU Country.

What does this mean?

Customs Declarations require 54 boxes of information to be supplied to Revenue, from details of the consignor/consignee to customs value to tariff classification to weights. Probably the most complex part of this is the requirement to provide the tariff classification.

These Export and Import Declarations need to be lodged with Customs, electronically, prior to export/import. Most goods will obtain instant clearance (95%) but some goods will require further checks before being allowed to clear. In all cases however these Declarations can be subject to post-clearance audit any time within the next three years.

It is important to remember that the lodging of Export and Import Declarations is no different to lodging any Tax Declaration and therefore the information supplied to Customs needs to be 100% accurate and correct or you may be subject to additional duty costs, fines and penalties (As with any Tax Audit).

The next concern is the type of border controls which might be introduced by Customs. At this point this is not 100% clear but ideally, will involve the use of electronic systems to minimise delays. As we know from many of the recent news reports this is a critical aspect for Revenue at present.

What next?

At this point most companies impacted by trading in the UK are looking at reviewing their supply chains and assessing the impact of additional tariff and non-tariff barriers on their businesses.

This modelling can be done using many resources. Enterprise Ireland, for example recently launched the ‘Brexit SME Scorecard’, a new interactive online platform which can be used by all Irish companies to self-assess their exposure to Brexit under six business pillars. Based on answers supplied by the user, the Scorecard generates an immediate report which contains suggested actions and resources, and information on events for companies to attend, to prepare for Brexit. The platform can be accessed at www.prepareforbrexit.ie

We would therefore recommend that companies pro-actively engage in completing this type of analysis and increase their knowledge of Customs.  This is particularly important for those companies who sell only within Europe, and have a significant portion of sales in the UK,  as this may be their first interaction with the Customs Authorities.

 

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