Showing posts from tagged with: EU

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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Accessing New Markets – Using EU Trade Agreements

With the increasing concern on the additional costs companies will face on accessing the UK market in the future this is now a good time to look at leveraging off current EU Trade Agreements. The EU is extremely active in negotiating trade agreements and there are significant opportunities for companies looking to diversify their markets outside of the UK and Continental Europe.

It is also worth remembering that once the UK leaves the EU they will have to negotiate independent trade agreements outside these EU agreements.

In our first newsletter we outlined the benefits of Canada as an opening market for Irish Companies with the new CETA agreement. Over the last month there has, in addition, been an extremely strong focus on this market with visits by An Taoiseach and the EU Commission for Agriculture, Phil Hogan. For the Irish Food and Drink Industry the Canadian FTA is of particular benefit as it opens up the Canadian Market to exporters of cheese, wine and spirits, fruit and vegetables, and processed food products, which is not typical of Trade Agreements. In fact Commissioner Hogan recently tweeted that “once CETA” is fully in place, Europe will be able to export nearly 92% of its agricultural and food products to Canada duty-free”

However along with the Canadian Agreement there are many other agreements as can be seen by the EU infogram below.

Exporters looking to develop new markets could therefore look at countries such as

To name but a few.

In our next newsletter we will expand on how to qualify, under rules or origin, to take advantage of these Trade Agreements. We will also update on ongoing trade and market access discussions taking place with countries such as Japan, Indonesia and China.

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Customs Classification – the What? Why? & How?

Traders who import or export goods into or out of the EU and following Brexit, the UK are required to provide a classification code for the customs clearance of each of their goods being shipped. When asked to supply a classification code by a clearance agent a number of questions arise, namely;

  • What are customs classification codes?
  • Why do traders need to be aware of them?
  • How do you classify goods for customs declarations?
  • What to do if there is uncertainty regarding the correct classification?

So what are customs classification codes?

Customs classification codes are often referred to as HS / HTS Codes, commodity codes or tariff codes. They consist of a 10 digit code for imports or an 8 digit code for exports. There is a worldwide Harmonised System which around 180 countries apply, which aims to harmonise the first 6 digits of the code across these countries. However, the interpretation of the legislation can differ between countries, so if a US supplier has a HS code on the commercial invoice it may be dangerous to assume that this code will also apply when importing into the EU.

Why do traders need to be aware of them?

Traders need to be aware of the correct classification of their products for a number of reasons;

  • Determines Rates of duty and other taxes at import – the classification of an imported good drives the customs duty rate for the imported goods. The duty rates can vary between 0% up to 25% for certain food items.

The classification of the good also determines if anti-dumping duty or agricultural levies will apply.

  • Origin requirements/benefits for preferential trade – this is particularly important when considering the post BREXIT era. Many traders believe that if a Free Trade Agreement (FTA) is in place then customs duties and declarations will no longer apply. However, the reduction of customs duties in a FTA are conditional, with the condition rules differing between classification headings. Therefore, it is required that the imported goods are correctly classified and a customs declaration is lodged even when a FTA exists.
  • Whether goods are subject to restrictions at import or export
  • Avoid delays or seizures
  • To avoid penalties and post-entry audit issues

The Importer is responsible for correctly classifying their goods on import and export.

Many traders rely on their clearance agent or HTS codes on the supplier invoice to classify their products. However, as an international trader you should be aware of the significance of the data on the customs clearance declaration or the Single Administrative Document (SAD). In the event of a post clearance check some of the more obvious information that a customs official may look out for is consistency of the information provided in the SAD. Take for instance a manufacturing company which imports plastic pipes as part of its operations. In box 31 of the SAD the product description is “Pvc plastic piping 50mm” then the Revenue officer would expect to see a tariff heading 3917 …., In box 33 of the SAD indicting that the product is “tubes, pipes and hoses of plastic”. However, if it is found that the tariff code provided is 4006 …., which covers “tubes … of rubber” this would be a red flag and could result in a post clearance customs audit.

Taking the above example, tariff heading 4006 which the importer has been using, attracts a 0% duty rate upon import into the EU. The correct tariff heading 3917 attracts 6.5%, so if Revenue go back 3 years (further in cases of suspected fraud) then 6.5% of the total shipments of plastic piping could mount up to a significant unbudgeted expense.

Regardless of how the error occurred, it is the importer who will be assessed for this duty which is generally not recoverable, so is a dead cost to the business. Furthermore, if the importer had been aware that the import of this product would have a duty impact prior to commencing importation, they may have been about to avail of customs economic (or special) procedures to suspend or eliminate the duty on import.

How do you classify goods for customs declarations?

The legal document which is used for classification in the EU is called the Combined Nomenclature (CN);

It is made up of:

-21 Sections

-99 Chapters

-960 pages

-Approximately 5,000 headings and subheadings

Classification is determined according to the terms of the headings and is subject to the Section and Chapter notes which are legally binding.

When classifying the product it is important to understand; the make-up of the product, its function, how it is presented at import, if it is an unassembled or unfinished product and the essential character of the product.

There are also guides to assist with the classification process such as the WCO Explanatory Notes and databases such as the eBTI database and TARIC in the EU and CROSS rulings in the US.

What to do if there is uncertainty regarding the correct classification?

There may be times when the classification of a good could fall between two or more headings. In other cases the risk of getting the classification incorrect could be too great in terms of extra customs duty or if one heading applied anti-dumping duty whilst another did not. Additionally, diverging codes could lead to falling foul of import/export restrictions if the classification of a product was deemed incorrect post clearance.

As the penalties for non-compliance can be severe in both financial and reputational terms, certainty is required by traders. The solution in these instances is to obtain a decision from revenue which is known as a Binding Tariff Information (BTI).

A BTI is legally binding on the holder and on all customs administrations within the European Union. Therefore, it provides legal certainty for its validity period of 3 years. The processing time for a BTI can be up to 120 days, so it is important to plan ahead before shipping materials.

Following the introduction of the Union Customs Code, the right to be heard has been removed for BTI applications. Therefore, if a trader submits a complete application to Revenue, Revenue can issue the BTI to an alternative heading without engaging in a further consultation process with the applicant. Whilst the option to appeal the decision remains, whilst the appeal is ongoing the BTI issued will be legally binding on the applicant. We would therefore advise that professional advice is sought prior to submitting an application, to allow the best chance of a satisfactory outcome.

 

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Brexit: FAQs

  1. When will the UK finally leave the EU?

At present it looks like this will be April 2019. Theresa May intends to trigger article 50 in March and, from this point, there are two years allowed to complete the exit negotiations. This can be extended if all Member States agree.

At the same time the UK need to negotiate a new form of Trade Agreement with the EU. It is generally believed however that this will be difficult to achieve in two years.

 

  1. What happens if there is no Trade Agreement in place in April 2019?

This is not fully clear. There is a view that a transitional agreement will be put in place however this will depend on whether the trade negotiations are proceeding well.

If not, the UK will revert to being a 3rd Country for the purposes of trading with the EU - essentially it will be treated similarly to the US in terms of imports and exports.

 

  1. What does this mean?

If there is no Trade Agreement then all imports from the UK will be subject to EU import duties.

These duties range from 0% to 14% for industrial goods, 8% to 50% for Agri-food products and 12% for clothing.

 

  1. Will there be a border with the UK?

As a non-EU country the UK will have a border with the EU.

 

  1. How does this differ from the current situation?

This differs from the present situation whereby all 28 EU Member States (which includes the UK) have a common border with all countries outside the EU.  This is called a Customs Union and means that all members of the Union (the EU 28 + Turkey and Andorra):

  1. Operate a common external tariff on all imports so that no matter which country you import into the duty rate applied is identical
  2. Negotiate Free Trade Agreements as a bloc.

 

  1. Why would the UK leave the Customs Union?

Theresa May has stated she wants the UK to have the ability to set its own tariffs and to negotiate its own trade agreements. This is fundamentally incompatible with the rules of a Customs Union.

 

  1. Will the EU and UK negotiate a preferential trade agreement instead then?

It is assumed that some form of trade agreement would be in everyone's interest however this will depend on the negotiations which take place over the next two years.

The most recent comprehensive trade agreement was concluded between the EU and Canada and would provide a good model. However this agreement took eight years to agree.

 

  1. How will this affect the movement of goods?

Regardless of whether, or if, a Trade Agreement is concluded all companies moving goods between the EU and the UK (and vice-versa) will be required to lodge import and export declarations with the relevant authorities. All goods moving across or through the borders therefore will be subject to customs controls and intervention in the same manner as applies to any non-EU import or Export.  If we look at the EU Canada FTA all imports and exports will continue to require import and export declarations to be lodged with Customs regardless of the applicable duty rate.  In addition goods will only qualify for the reduced (or preferential) rate if you can prove your goods qualify as "originating products"

 

  1. How do you qualify goods as "originating"?

This is a complex process. All goods have an applicable tariff code and each tariff code has a listed rule of origin.  Therefore you first need to determine the tariff classification and secondly to check the applicable rule of origin for that heading.

A good rule of thumb is that goods are generally required to obtain 60% added value in the EU (to qualify as EU originating) or undergo a change of tariff heading between imported raw materials and finished products. Minimal processing operations or simple assembly operations do not qualify.

 

  1. What if I move my goods through the UK to get to Europe?

The recent IEA survey found that 2/3 of exporters transit their goods through the UK to mainland Europe and further afield. Goods currently move freely as part of this process and do not encounter any customs requirements.  Going forward this will now be equivalent to goods moving out of the EU to get back into the EU.

It is hoped there will be transit agreements put in place to simplify the movement, however goods will still be subject to customs controls, transit requirements, and guarantees.

 

  1. What should I be doing now to plan for this?

There are several steps to take at this point. Primarily we would advise the following:

  1. Review your supply chain to determine where goods may be caught by customs controls and documentary requirements
  2. Determine the options for alternative routes
  3. Assess your company’s ability to handle these additional requirements
  4. Identify the additional information which will be required by Customs e.g. Tariff Classifications, Customs Origin, EU status of goods.

The additional time and cost involved in moving goods through a non-EU border are extensive and, unfortunately, there is no current scenario whereby this will not be a requirement for the UK if they leave the Customs Union.

It is also advisable to:

  • Assess the impact of additional EU Import duty costs if introduced
  • Assess the impact of WTO rates on any UK imports

While this would be worst case scenario planning it is important to be prepared for these costs. Customs duties are "sticking taxes" and, once paid, are generally not recoverable. They will therefore be a direct hit to your bottom line.

 

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