New UCC and its Impact on Origin

31 de Mayo de 2017 -

On May 2016 significant changes became applicable in the EU as a result of the new Union Customs Code (“UCC”). These changes may  impact  many companies with supply chains in the EU.

One of the the most relevant changes in the EU legislation concerns the value of goods for customs valuation purposes and therefore origin management. We will explain why.Two main changes should be highlighted regarding customs valuation:

1.- The first sale for export rule has been abolished

We are not going to analyze this rule in this post we just want to mention that even though abolished, this rule will be still applicable if certain requirements are met and under certain circumstances under the new Union Customs Code.

When party "A" exports from a country outside the EU to the EU, being goods sold by "A" to "B" and later by "B" to "C", acting "C" as importer or records in the EU, "C" can choose (if certain requirements are met) as customs value for customs duties calculation, the invoice value from "A" to "B" instead of its purchasing price. This is the first sale for export rule under the current Customs Code

Later guidelines were introduced with a definition on DS

2.- Royalties and Licenses fees

Companies paying royalties and license fees in relation to their imports should consider the impact of the new legislation on their operating models. Royalties and Licenses fees (including trademarks fees) has became most of them likely dutiable and just if certain requirements are met, these fees shall not be part of the customs value for customs duties calculation.

The increase of customs duties based on both facts commented above will lead to an increase of the  total cost of the imported goods.

If goods imported in the EU undergo processing in the EU to be later re exported outside of the EU, these goods may qualify as "EU origin goods". If goods could qualify as goods originating in the EU, goods could profit from the different Free Trade Agreements (FTA) signed by the EU and third countries.

"According to IMF estimates, over the next years, 90% of world demand (90%!) will be generated outside the EU. That is why it is a priority for the EU to open up more market for European business by negotiating Free Trade Agreements"

EU preferential origin  based on Free Trade Agreements confers tariff benefits(reduced import duty rate or even zero import duty rate) on goods traded between countries which have concluded a Free Trade Agreement with the EU.

In order to qualify for EU preferential origin, goods must fulfill certain requirements.

One FTA common requirement to qualify as EU origin (among others) states that the total cost of non-EU goods cannot exceed a % over the final EXW sale price of the goods to be exported. This maximum cost of non EU goods over the final sale price may varies from FTA to FTA and from item to item.

Therefore if the cost of non EU goods increases based on the abolishment of the first sale for export or based on dutiable royalties fees, it would be more difficult to fulfill the above mentioned requirement and so to qualify for EU preferential origin and then the usage of EU FTA

This new situation that could lead to an increase of customs duties and therefore impact on preferential origin, may impact as well on EU non-preferential origin.

What is EU non-preferential origin? 

Non-preferential rules are used for all kinds of commercial policy measures, like, for instance, anti-dumping duties and countervailing duties, trade embargoes, safeguard and retaliation measures, quantitative restrictions, but also for some tariff quotas, for trade statistics, for public tenders and so on. In addition, the EU's export refunds in the framework of the Common Agricultural Policy are often based on non-preferential origin.

Non-preferential origin Certificates are usually issued in the EU by Chambers of Commerce and certain requirements need to be met as well to qualify for non-preferential origin, where the total cost on non-EU goods over the final sale price is a relevant factor as well in some cases.

That is why it is crucial for any Company involved in international trade to carefully analyze the impact of the new Customs Code rules regarding customs valuation and so the potential impact on origin. And of course to align it with transfer pricing policies becomes paramount.

Based on the EU FTA Agreements concluded and the coming new ones (e.g. EU on going negotiations with USA and China) origin management becomes critical for a company that wants to success in international markets.

"If the EU was to complete all its current free trade talks tomorrow, it could add 2.2% to the EU's GDP or €275 billion. This is equivalent to adding a country as big as Austria or Denmark to the EU economy. In terms of employment, these agreements could generate 2.2 million new jobs or an additional 1% of the EU total workforce" Source: EU Commission website