Last reviewed 6 June 2013
Paul Ellis reports on customs-related issues in this regularly updated feature article.
As importers, we all know classification of goods for customs purposes is a complicated business. Not only does it affect the rate of customs duty for a product and other duties, such as anti-dumping duty and preferential rates, but it also provides details for trade statistics. Each and every item has its place in the Harmonised System and, subsequently, in the Online Customs Tariff Database (TARIC) and the UK Integrated Tariff. Making sure the correct tariff is used is therefore important.
What happens when you import more than one item? The general rule is that each product must be entered under its own heading. The problem arises when goods are imported in sets of two or more articles packaged together and for which a single price is paid. The EU has a set of rules to cover these items, provided they are put up for retail sale and packaged accordingly. The term “goods put up in sets for retail sale” means products consisting of at least two different articles that are prima facie classified in different headings. They will have been put together to meet a particular need or to carry out a specific activity, and are not subject to repacking. If all the above conditions are not met, all the goods must be classified separately (there are exceptions to this rule where sets are specifically classified in their own right, eg toys put up in sets 95030070).
There has long been confusion, not least between Member States, as to what constitutes a set and how to classify it, and the EU has recently issued some guidelines to assist importers and customs officials. The guidelines first discuss the terminology, as follows.
“Prima facie classified in different headings”: this is fairly straightforward but includes two or more different articles classified in different sub-headings, eg shampoo 35051000 and hair tonic 35059000 can be treated as a set under 3505.
“Put together to meet a particular need or carry out a specific activity”: this is interpreted broadly as the articles may be used to meet that need either in sequence, eg cosmetic care products, or randomly, eg a drill and rawlplugs.
“Specific activity” can be described as an action performed at a certain/specific occasion when all the articles are used together.
These conditions are not the “be all and end all” and each case must be examined on a case-by-case basis. A Christmas gift or Mother’s Day presentation does not necessarily mean the goods will meet a particular need. Articles presented together that all have the same motif, such as a wrist watch, an electronic calculator and a pen will not be considered a “set”. Similarly, neither will a beach set consisting of a beach bag, a beach towel and a Frisbee®. Nor does the fact that the goods are used by a certain person or group of people necessarily make it a set.
Another example is a bathroom set comprising shampoo, bubble bath, face cream, soap and body lotion (this may also include a flannel or sponge). This will be deemed a set as the articles are used simultaneously or in a sequence. However, a similar set also containing a candle slipper and a hair brush is not considered a set and each item needs to be separately classified.
The exception to the rule is the presence of a minor/negligible article that may be disregarded in determining whether it is a set. These items are subject to certain conditions, ie the item:
is merely incidental to the whole (referred to as a surprise article)
does not alter the character of the set
has minor/impractical use on its own or has a limited use (cannot be used repeatedly or has limited durability).
Thus a bathroom set of shower gel, soap, bath salt, body lotion and a tea light candle would be a set, but substitute the tea light for a decorative candle, which is not of negligible value, and it would not be a set.
Once it has been decided whether it is a set, the actual classification is decided by the following.
The heading, which provides the most specific description. However, if two or more headings refer to part of the set, each is regarded as equally important.
If point 1 above cannot provide the result, the classification is that of the component that gives the whole its essential character.
If neither 1 nor 2 apply, the set is classified under the article whose heading appears last in numerical order in the tariff of those that equally merit consideration.
One further rule may be applied where separating items for classifying individually would be uneconomic, ie they are all of small value, and that would be to use the heading of the product with the highest duty rate for the whole.
The classification of a set remains complicated and open to different interpretation, giving rise to conflicting results in different Member States, but hopefully these guidelines will assist.
Union Customs Code update
The replacement of the Customs Code by the Modernised Customs Code and, subsequently, the Union Customs Code (UCC) has been under consideration for about 10 years. Its climax is approaching, but don’t hold your breath as the final date of implementation is still in some doubt. The Commission put forward its proposal in early 2012 and the European Parliament and European Council have been studying this and have now put forward their amendments, at the Council in January this year.
The next stage is a set of discussions between all three parties to arrive at a final agreed text. This is currently ongoing and was expected to finish in April.
Most of the recent delay was due to the fact that no consideration was originally given to the Lisbon Treaty, which altered the way that Commission Regulations can be enacted. Previously, all Commission Regulations had to be negotiated with experts from all 27 Member States and agreed by a qualified majority (the number of votes each Member State can have is governed by its population).
After the Lisbon Treaty, only some regulations have to be negotiated this way, only some of them will need a vote and only some will need a qualified majority. Once the basic UCC is agreed, there will be Implementing Acts, which will be referred to the Parliament and Council, who can only object if they feel the Commission has exceeded its authority. There will also be Delegated Acts, which are also referred to the Parliament and Council for ratification but which may be blocked. The Delegated Acts will cover what someone has to do, eg provide information or make a declaration, whereas the Implementing Acts will dictate how that information is provided.
The UCC is expected to be ratified by the end of April this year, but this very much depends on how the three-way discussions go. The final version will then have to be translated into the various European Union languages, which is expected to take six weeks. The final version should be published at the start of June but, if this deadline is not met, the Commission has a back-up plan to roll over the present Customs Code for four or six weeks. The Implementing and Delegating Acts will then need to be discussed, which is scheduled to take 18 months and be ready by Autumn 2014. The fact that these contain approximately 100 more articles than the UCC itself makes this deadline seem highly unlikely. The present timeline expects to see the Regulations in force by July 2015 (again highly unlikely) and, with transitional arrangements, the final version will not be fully in force until 2020.
The current position, with what are seen as the major sticking points as far as the Council is concerned, is as follows.
Centralised clearance. This is retained, and confirmation that the goods have arrived will be required. Authorisation will be required (ie AEO customs) but if all the clearance is in one Member State the need for authorisation will be waived.
Self-assessment. AEO customs authorisation will be required.
Simplification. The movement of goods will be allowed using records only, which will continue for airlines (level 2). Those holding AEO customs authority will be able to move goods in temporary storage around the EU using their own records.
Guarantees. The UK and other States were unable to get a majority to allow a waiver of guarantees for duty deferment. A guarantee will be needed for all customs charges that are unpaid but this may be waived if the trader has AEO status or can satisfy the criteria for AEO. Control will be by audit rather than by transaction monitoring.
Valuation. The one real success story is that the Commission was finally persuaded to allow the current practice of the value of an earlier sale to continue. The final wording has to be agreed.
Temporary storage. This will remain a status rather than a procedure and the time limit is proposed to be 90 days instead of the current 21/45 days.
Customs and Excise Law Modernisation Project
The current UK law relating to the operation and powers of HMRC in the UK, the Customs and Excise Management Act (CEMA), has been in operation since 1979 and HMRC is in the process of bringing this into line with modern trends and procedures. The Act and a number of other outdated pieces of UK legislation covering Customs and Excise were due to be replaced by means of a Programme Bill, and a consultation procedure was set up in August 2011.
However, despite ministerial support and because of a large amount of pressure on the legislative programme, it was not possible to discuss the bill. It has now been decided to try and make the major changes by using the 2013 and 2014 Finance Bills, secondary legislation and any appropriate Home Office legislative changes.
Last year, the Government announced three measures concerning customs matters that will be included in this year’s Finance Bill.
Concerning the powers of HMRC to detain goods, an amendment to CEMA will make provision for the detention of goods, where there are reasonable grounds to suspect they may be liable to forfeiture, and will allow for a penalty if the detained goods are removed. Section 10 allows the Tribunal to take any reasonable excuse into account when removing goods.
The definition of “goods” to make it clearer that it includes any creature, article, thing or property whatsoever and any container.
Penalties to be set in line with current levels, where they may be imposed on any master or responsible officer who has been negligent in allowing smuggling by the crew.
HMRC is also conducting work on Statutory Instruments under the European Communities Act to remove any duplication of EU law. This work includes any changes that can be made to the Protections and Freedoms Act 2012. In addition, HMRC is looking at an update to the Customs (Contravention of Relevant Rules) Regulation 2003, which will take into account postal regulations.
AEO mutual recognition
The EU and USA have completed an agreement that their respective, certified trusted traders (AEO and C-TPAT) will enjoy lower costs, simplified procedures and greater predictability in their transatlantic operations as a result of the mutual recognition decision signed in May 2012. This will include faster clearance at the EU frontier for US C-TPAT exporters and at the US frontier for those holding AEOS/F. The decision allows the EU and USA to recognise each other’s safe traders, thus allowing companies to benefit from faster controls and reduced administration for customs clearance.
EU and US businesses are required to give consent for the exchange of data between the EU and US customs authorities. US businesses will be issued with an EORI-type number allowing them to be recognised by EU IT systems, and given an identifier for use on import entries.
Transit time limits
Customs have clarified the rules under which the Office of Departure will stipulate a time limit for Community/Common Transit (CT) movements, as shown in box D of the Transit Accompanying Document (TAD).
In setting the time limit, the Office of Departure will take into account the itinery and any current transport or other legislation. It will reflect the length of time taken only to move the goods to the Office of Destination and will not include any period of unloading or storage of the goods as these are not allowed under the transit procedure. The goods must be presented at the Office of Destination or delivered to the Authorised Consignee before any unloading takes place.
Under Article 96 of the Customs Code, the principal to a CT movement is responsible for making sure the goods are produced intact at the Office of Destination within the time limit. This also includes any carrier or recipient of the goods that knows they are moving under the CT procedure. Where goods are repeatedly presented after the time limit, the principal, carrier or recipient may receive a warning letter or civil penalty for non-compliance. CT principals are therefore advised to provide the Office of Departure with all the necessary information and details to ensure an adequate time limit is set.
EU Free Trade Agreements
It is estimated that, over the next two years, 90% of world demand will be generated outside the EU. This is why the EU has, as a priority, a policy to open up more market opportunities for EU business by negotiating Free Trade Agreements (FTAs) with key countries. If the EU were to complete all its current FTAs, it is thought it would add the equivalent of 2.2% of its gross domestic product (GDP), or €27.5 billion, to the EU economy. This would be the same as adding a country the size of Austria or Denmark to the EU. In terms of employment, the FTAs could generate 2.2 million jobs, equivalent to 1% of the current workforce.
The position regarding current negotiations is as follows.
Negotiations opened in November 2012. An FTA could increase the EU’s GDP by 1% and boost exports to Japan by a third. Furthermore, 400,000 additional jobs are expected to be created by this FTA alone. There are concerns about some non-trade barriers and the EU has agreed with Japan that, if they do not improve within the next 12 months, the EU could pull out of the negotiations. Japan is the EU’s second largest trading partner in Asia, and the EU and Japan together account for more than a third of the world’s GDP.
In terms of trade and services, this relationship is the biggest, with €1.8 billion traded every day. The EU and USA account for about one half of the world’s GDP and one third of world trade flow. The countries opened a high-level working group in 2011 to discuss how they could further integrate their trade relationship with the option of an FTA. The results should be known by the end of 2013.
Negotiating directives were adopted in December 2011 to upgrade the current agreement with Egypt, Jordan, Morocco and Tunisia. Last November, the Council agreed that negotiations could start with Morocco.
Negotiations started in November 2009 and are now in their final stretch. The EU and Canadian trade ministers met in November 2012 and have instructed their negotiators to narrow the gap on outstanding issues. This has been a slow process. An economic study has shown that a comprehensive trade agreement could increase two-way bilateral trade by €25.7 billion.
Singapore is already the EU’s 13th largest trading partner in goods and the largest trading partner in South East Asia. A third of all EU trade with the Association of Southeast Asian Nations (ASEAN), €65 billion, goes through Singapore, which is the gateway to ASEAN countries. Negotiations opened in 2010 and 11 meetings have been held to date. In the rest of South East Asia, the EU is currently negotiating FTAs with Malaysia and Vietnam, while preparatory talks are taking place with other ASEAN nations. The EU considers FTAs with individual ASEAN countries to be a way to the final goal of a region-to-region agreement.
Talks began in 2007 with good progress so far, but both sides need to finish the process.
There is a call to go forward and exchange market access offers after two years of negotiating.
The EU is currently negotiating in Eastern Europe with Georgia and Moldavia.
Talks with the Gulf Co-Operation Council began in 2008. Several regions of the African, Caribbean and Pacific (ACP) countries have initiated agreements.
FTAs in place, but not yet entered into force
The trade agreement with Peru and Columbia was signed in June 2012 and is due to come into force shortly. Once fully implemented, this is expected to produce a tariff saving of more than €500 million per year.
The Association Agreement between the EU and Central America was signed in June 2012 and, once ratified (possibly in March this year), it will open up the market on both sides. In 2010, bilateral trade between Central America and the EU amounted to €12 billion.
The EU and Ukraine concluded a comprehensive FTA in December 2011, but this has to be signed by the Council once certain political conditions are met.
FTAs in place and operating
These cover agreements with South Korea (July 2012), Mexico (October 2000), South Africa (2000) and Chile (2003).
EU Customs — the future
In December, the European Commission adopted a Communication on the State of the Customs Union. This looked at the current state of the customs union, identified the challenges that exist and set out an agenda for future improvements. The aim was to ensure the union would be as modern, effective and efficient as possible and to maintain a safe and competitive Europe. Algirdas Semeta, Commissioner for Taxation, Customs Union, Anti-Fraud and Audit, commented that the customs union has in the past four decades been a “guardian of the Internal Market”. He continued: “As we strive to boost EU competitiveness, while facing new rules on our supply and security, the services that the customs union provides are more important than ever. The protection of our citizens, the prosperity of our businesses and the promotion of EU trade depend on a top-class service provided by a seamlessly functioning customs union.”
Each year, EU customs processes two billion tonnes of goods worth €3300 billion and collects €16.6 billion of customs duty revenue. Over the past four decades, customs has developed into a multi-function service provider, ensuring smooth trade flows and protection against security risks. It also enforces other policies on public health, consumer protection, intellectual property rights, environment and agriculture. These growing responsibilities and the challenges of greater trade flows, increasingly complex supply chains, the faster pace of business and the globalisation of terrorism put a mounting strain on customs. At the same time, economic restraints squeeze available public funds to perform these tasks. The Communication sets out to modernise, strengthen and rationalise the customs union.
Firstly, the modernisation of the customs union, which started 10 years ago, must be completed as a priority. The Commission wants the Council and Parliament to adopt and implement the Union Customs Code and the replacement of the present Customs Code (although this is unlikely before 2014/15 together with a transitional phase lasting to 2020). This will hopefully make procedures simpler, more efficient and more adaptable to modern trade.
Secondly, work to address gaps must be accelerated. This includes improving customs risk management and security of the supply chain. In addition, other measures for 2013 include a proposal for approximation of customs penalties, a review of tariff suspensions/quota rules, implementing a crisis management action plan, and developing new procedures to improve efficiency of customs in enforcing health, safety and environment rules.
Finally, a review of how the customs union functions internally will be initiated. This review will be undertaken in close co-operation with Member States and should address how to work better together in a more harmonised way, to provide a higher quality of customs services and to improve resource efficiency across the EU.
Considering the latter objectives, I’m sure we would all agree that improvements are required and would be welcomed.
Countervailing duty (as opposed to anti-dumping duty)
Most of us are familiar with anti-dumping duty (ADD), whereby the EU imposes additional duty on imports of goods that are deemed to be sold for export at a lower price than they are sold in the exporting country. A similar countervailing duty is also imposed when the exporting country gives unfair subsidies to the exporter, thus giving a lower, unfair export price.
An example of this is an anti-subsidy investigation announced by the Commission on solar panels imported from China. As with ADD, the Commission is legally obliged to do this when it receives a valid complaint from a Union industry, which can provide evidence that import of the product is causing injury to EU business. In this case, EU ProSun, an association representing more than 20 EU companies producing solar panels, brought sufficient evidence to show that there was possible subsidisation by the Chinese government, they were suffering injury as a result of cheaper imports, and there was a possible link between the two. EU ProSun’s members’ collective output represents more than 25% of that in the EU and producers opposing the complaint are less than this amount, which is another legal requirement for the procedure to go ahead. The Commission will now send out questionnaires to various interested parties, including the Chinese government, exporting producers, Union producers and importers asking for information and views related to the alleged problems regarding solar panels and their key components.
On the basis of this information, the Commission will establish if there is subsidisation and whether injury has been caused. If so proved, they will then, within nine months, impose a provisional countervailing duty (for another four months). Before deciding on final matters, the Commission will examine whether the imposition of additional duties will be economic and, on that basis, either terminate proceedings (and repay the provisional duties) or impose a definitive countervailing duty. The latter must be done within 13 months of the investigation being started, in this case before 5 December 2013.
The EU has so far initiated four anti-subsidy proceedings against China and currently has 10 anti-subsidy measures in force against third countries.