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EU Customs valuation and classification - June 2014 (webinar)
1.
EU Anti-Bribery, Trade
and Customs Webinar Series 2014 How to classify and value your products Sophie Clocheret, Of Counsel, Brussels Jennifer Revis, Of Counsel, London Bettina Mertgen, Associate, Frankfurt Vanessa Dersch , Associate, Frankfurt 26 June 2014 Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2014 Baker & McKenzie LLP
2.
Speakers
3.
Moderator Speakers ©
2014 Baker & McKenzie LLP Jennifer is Of Counsel in the EU, Competition and Trade Practice of Baker & McKenzie's London Office. She specialises in customs, trade sanctions and anti-bribery and corruption matters. Jennifer has extensive experience in advising clients on compliance issues (including third party due diligence and in M&A transactions). Jennifer routinely undertakes compliance audits for clients and advises on preparation of voluntary disclosures to government authorities. Jennifer has been on secondment to the UK customs authorities (Her Majesty's Revenue and Customs) in their Tax and Excise Litigation department and to the firm's European Law Centre in Brussels. Jennifer is a member of the London office Anti-Bribery and Corruption Unit. Jennifer is frequently invited to speak at external conferences on trade matters and regularly 3 Jennifer Revis contributes articles to tax journals. London Tel: +44 20 7919 1381 jennifer.revis@bakermckenzie.com Sophie is a counsel in the Tax Practice Group of our Brussels office. She advises both multinational clients and Belgian companies on a broad range of VAT-related issues, including general VAT planning and advice, restructurings, mergers and acquisitions, due diligence, post-acquisition integration, supply chain management, review of VAT processes and systems, VAT compliance, VAT audits, etc. Sophie also deals with various Customs and Excise Duty issues. Sophie Clocheret Brussels Tel: +32 2 639 36 11 sophie.clocheret@bakermckenzie.com
4.
Speakers © 2014
Baker & McKenzie LLP Vanessas practice focuses on the advice of national and international companies with regard to the optimization of inbound transactions under the provisions of customs law, and providing support during tax audits. She mainly deals with customs valuation matters and the implementation of customs procedures with economic impact. Furthermore, she also handles the preparation of claims, appeals and applications for binding tariff rulings and AEO licenses. She has special knowledge with the customs clearance system of the German Customs Administration ATLAS. 4 Vanessa Dersch Frankfurt Tel: +49 (0) 69 29 908 376 vanessa.dersch@bakermckenzie.com Bettina advises national and international companies with respect to all value added tax and customs related matters. Her practice focuses on advising national and international clients in all VAT and customs matters with a special emphasis on representing clients before tax and customs authorities. Her work comprises representation in opposition proceedings and litigation, review of companies' customs compliance as well as advice in general customs matters. Bettina Mertgen Frankfurt Tel: +44 20 7919 1381 bettina.mertgen@bakermckenzie.com
5.
Agenda © 2014
Baker & McKenzie LLP 5 • Customs Valuation • Basics and Valuation Methods • First Sale, Assists, Royalties and Licence Fees, Related Party Transaction • Case Study • Tariff Classification • Overview • Recent Cases • Parts and Accessories • Compliance
6.
Customs Valuation
7.
The basics
8.
Basic Rule “The
customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community, adjusted, where necessary, in accordance with Articles 32 and 33” © 2014 Baker & McKenzie LLP Art. 29(1) CC • Transaction value preferred to other methods of valuation where there is a sale and certain requirements are met, including: “buyer and seller are not related and, if they are, the transaction value is still acceptable” 8
9.
Where do the
rules originate from? • Based on WTO Valuation Agreement • WCO Technical Committee publishes WCO Valuation Compendium • Where can I find the rules? • EC Customs Code (CC) (Reg 2913/92, Article 28-36) • Implementing Provisions to Customs Code (IPCC) (Reg 2454/93, Article 141-181a and Annexes 23-29) • EC Compendium of Customs Valuation • National Guidance e.g. HMRC Notice 252, Belgium Instruction on Valuation DI 620 © 2014 Baker & McKenzie LLP 9
10.
What items should
be added? • Additions to the “price actually paid or payable” (where not already included in the price): (Article 32 CC) i. commissions and brokerage (exc. buying comm.) ii. cost of containers / packing iii. materials, components, tools, dies, engineering, development, plans, sketches etc (“assists”) - supplied by buyer to seller free of charge or at a reduced cost iv. royalties and licence fees - condition of sale v. proceeds of subsequent sale accruing to seller vi. delivery costs i.e. transport/insurance/loading and handling charges to the place of introduction into the EU © 2014 Baker & McKenzie LLP 10
11.
What items can
be left out? • Not added to “price actually paid or payable” where shown separately on invoice: (Article 33 CC) i. transport after arrival at place of introduction in EU ii. charge for construction, maintenance etc. after importation iii. interests under financing arrangement iv. charges for right to reproduce in EU v. buying commission vi. import duties • Retrospective repayment claims possible © 2014 Baker & McKenzie LLP 11
12.
Buying commission •
Fees paid by importer to agent for services representing him in purchase of imported goods (e.g. find suppliers, inspect goods, arrange insurance/transportation etc.) • Can be left out of customs value so long as it is shown separately from price (note, must be included in VAT value) • Customs office may ask for evidence of buying agency arrangement (e.g. contract, invoice) to ensure that it is a genuine agency agreement • Overland Footwear judgment (C-468/03) © 2014 Baker & McKenzie LLP 12
13.
Apportioning transport costs
• Can deduct EU transport costs where they are included in total freight charge if freight is charged separately and is distinguished → APPORTION value after EU border • Sea: can use rate in books or rates advertised by shipping line/ carrier • Rail/ road: use reasonable means e.g. distance • Air: % of air transport costs on airway bill to be included in customs value is set out in Annex 25 of IPCC (e.g. New York 70%; Switzerland 5%; Tunisia 33%); e.g. UK CHIEF automatically apportions this if air freight costs are entered into correct box on entry declaration © 2014 Baker & McKenzie LLP 13
14.
Value for VAT
purposes • Customs value + • Customs duty payable on importation + • Excise duty or other duties payable on importation + • Incidental expenses up to first destination in the EU (transport / packing / insurance / commission) © 2014 Baker & McKenzie LLP 14
15.
Example Facts •
Goods purchased on ex-works terms • Freight from seller’s factory in Hong Kong to port in Hong Kong – USD 50 • Freight from Hong Kong to Birmingham – USD 700 • Freight charge from Southampton to Birmingham – USD 60 • Invoice to be paid in £; transport company & buyer have agreed fixed rate of exchange © 2014 Baker & McKenzie LLP 15
16.
Valuation methods
17.
Valuation methods •
6 methods: • Method 1: transaction value • Method 2: value of identical goods • Method 3: value of similar goods • Method 4: equivalent selling price in EU • Method 5: (interchangeable with method 4) cost of production of goods • Method 6: fallback © 2014 Baker & McKenzie LLP 17
18.
Method 1 (transaction
value) © 2014 Baker & McKenzie LLP 18 • Applies to over 90% of imports • Price actually paid or payable for goods when sold for export to the customs territory of the EU (with possible adjustments) = total payment made or to be made by buyer to seller • Price review after import/ retrospective price adjustments mean invoice price is provisional – 2 OPTIONS: • Place duty on deposit/ goods released under “security arrangements”; or • Formal agreement with customs for periodic review/ reconciliation
19.
Method 2 (identical
goods) • Based on customs value of identical goods exported to EU at or about same time as goods to be valued • “Identical” = goods produced in same country as those being valued; same in all respects except for minor differences in appearance (physical characteristics, quality & reputation) • May use sales at different commercial level and different quantities but adjust accordingly if this affects price (e.g. quantity/wholesale discounts) • Evidence (e.g. invoice) © 2014 Baker & McKenzie LLP 19
20.
Method 3 (similar
goods) • “Similar” = differ in some respects to goods being valued but (i) are produced in same country; (ii) can carry out same tasks; & (iii) are commercially interchangeable • Same conditions apply as for Method 2 © 2014 Baker & McKenzie LLP 20
21.
Method 4 (equivalent
selling price in EU) • Also referred to as “deductive” method; does not have to be used before Method 5 • Based on unit price at which the imported / identical / similar goods are sold in EU, in the condition as imported, to customers unrelated to seller at or about time of importation of goods to be valued (Method 4(a)) • Based on unit price of actual sales of imported goods that take place up to 90 days after importation (Method 4(b)) • Unit price must relate to greatest aggregate quantity at time of entry • Deductions (profit, general expenses, transport/insurance within EU, EU customs duties/ taxes) • Need evidence e.g. sales invoice, price list and details of deductions based on trader’s accounts © 2014 Baker & McKenzie LLP 21
22.
Method 5 (cost
of production of goods) • Based on cost of production of goods • Difficult method so rarely used in practice • Usually can only be used where the importer and supplier are related • Customs value is a built up value based on i. cost or value of materials / processing ii. amount for producer’s profit & general expense; plus iii. cost of transport, insurance and loading or handling to order of EU • Need evidence based on producers’ accounts © 2014 Baker & McKenzie LLP 22
23.
Method 6 (fallback)
• Adapt Methods 1 to 5 to fit unusual circumstances • e.g. Methods 2 or 3 – transaction value for goods produced in country other than country of export • Method 4(b) – extend 90 days limit • Free of charge goods: if you can’t use methods 1 to 5, could base customs value on price would have paid if you had bought goods (e.g. supplier’s export price list) • Used goods: if you can’t use methods 1 to 5, value of goods when acquired less loss of value for usage • Rented/ leased goods: cash price is often artificially high. If you can’t use methods 1 to 5, multiply annual rental/ leasing cost by expected economic life of goods. Where costs includes interest, formula given by Customs. © 2014 Baker & McKenzie LLP 23
24.
Example Facts •
Company A established in a 3rd country has a branch B in EU through which it sells IT accessories to unrelated buyers in EU • B has no separate legal identity • B does not buy the IT goods but on receiving them from A, B enters them into free circulation and stores them at its premises • Customs value for identical or similar goods sold for export to the EU cannot be established • B claims that the customs value should be determined under Method 4 and that its actual profit and general expenses may be deducted from the selling price. Is this correct? © 2014 Baker & McKenzie LLP 24
25.
First sale
26.
First Sale in
the EU © 2014 Baker & McKenzie LLP 26 Article 147(1) IPCC • “Where a price is declared which relates to a sale taking place before the last sale on the basis of which the goods were introduced into the customs territory of the Community, it must be demonstrated to the satisfaction of the customs authorities that this sale of goods took place for export to the customs territory in question” • First sale for export to EU can be used as customs value of good → keeps customs value low • Generally is used for intercompany transactions as only related company can obtain necessary information – Can be used between unrelated parties as well
27.
Requirements for first
sale • First sale must: • occur prior to import into EU • clearly be for export to EU e.g. – Goods manufactured according to EU specifications – Goods manufactured specifically for EU buyer – Goods ordered from intermediary are shipped directly from manufacturer © 2014 Baker & McKenzie LLP 27
28.
Assists/ cost sharing
arrangements
29.
Article 32 (1)(b)
CC – “assists” • “the value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods, to the extent that such value has not been included in the price actually paid or payable: i. materials, components, parts and similar items incorporated in the imported goods, ii. tools, dies, moulds and similar items used in the production of the imported goods, iii. materials consumed in the production of the imported goods, iv. engineering, development, artwork, design work, and plans and sketches undertaken elsewhere than in the Community and necessary for the production of the imported goods” © 2014 Baker & McKenzie LLP 29
30.
How to reconcile
customs value • Assists are potentially dutiable – need to consider: • how to apportion their value to imports; and/or • best method to adjust customs value • Where importer is part of group of companies, not unusual for parent company to seek to recover R&D costs through “cost sharing” arrangement • Consider what benefit importer receives in exchange for payment • Not all elements are necessarily dutiable (e.g. merchandising, sourcing) © 2014 Baker & McKenzie LLP 30
31.
How to reconcile
customs value Apportionment • Apportionment can get very complicated, but possible savings opportunities... • What types of costs are dutiable? (Article 32 CC) • Exclude costs incurred in EU • Only costs relating to goods imported into the EU are dutiable • Apportionment is permitted based on the generally accepted accounting principles of the importing country (e.g. quantity imported vs. worldwide production) How do you make adjustments to customs value (in the UK)? • Add uplift to transaction value for each entry; or • Make retrospective adjustments to customs value (consider prior agreement with HMRC) © 2014 Baker & McKenzie LLP 31
32.
Royalties/licence fees
33.
Article 32(1)(c) CC
– Royalties & licence fees “Royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable” must be added to the customs value in order to be dutiable, royalty/licence fee must: • relate to imported goods; & • constitute a condition of sale of those goods © 2014 Baker & McKenzie LLP 33
34.
When are royalties/licence
fees dutiable? • Even if sales contract does not explicitly require buyer to make these payments, it can be an implicit condition of sale if buyer were not able to buy goods from seller without this payment • Country of residence of recipient of payment is irrelevant • Where you pay royalty/licence fee to seller of goods imported – highly likely that it is dutiable • Where you pay royalty/licence fee to a third party – look at facts carefully. Is it a condition of sale? © 2014 Baker & McKenzie LLP 34
35.
What constitutes a
“condition of sale”? • Royalty/licence fee payable to third party will be dutiable where the seller or person related to him requires the buyer to make that payment (Article 160 of IPCC) • Person related to the seller will be (Article 143 IPCC): • corporate relationship (i.e. company which is part of the same group as seller) • contractual or other relationship where some element of control © 2014 Baker & McKenzie LLP 35
36.
Concept of “control”
Commentary No. 11 of Customs Code Committee (Jan. 2007) sets out some examples of factors to be taken into account © 2014 Baker & McKenzie LLP 36
37.
Concept of “control”
(cont’d) Licensor charges Royaltiess © 2014 Baker & McKenzie LLP Export of the manufactured goods to the EU Examples of controls of the Licensor upon the Manufacturer on: • sourcing of materials and components used in the manufacturing process, • characteristics of the goods and technology used, • clients of the Manufacturer for the goods exported, • selling price of the exported goods, • Manufacturer’s accounting records. 37
38.
Concept of “control”
(cont’d) • A combination of such indicators, which go beyond purely quality control checks by the licensor, demonstrates that a relationship of control exists and hence the payment of the royalty would be a condition of sale • Certain indicators carry more weight and show more strongly than others that the licensor exercises restraint or direction over the manufacturer/seller • Where possible, avoid written records setting out control exercised by 3rd party licensor over manufacturer © 2014 Baker & McKenzie LLP 38
39.
How to reconcile
customs value • Similar issues to assists (apportionment etc.) • Remember that not all royalty/ licence fee payment is necessarily dutiable (e.g. 7% royalty may be specified as representing 3% for patent rights, 2% for marketing know-how and 2% for trade mark usage) © 2014 Baker & McKenzie LLP 39
40.
WCO Commentary 25.1
on 3rd party royalties & licence fees • Adopted in April 2011 • “relate to the goods being valued” = “incorporate the IP and/or are manufactured using the IP covered by the licence” e.g. “incorporate the trademark for which the licence fee/ royalty is paid” • “condition of sale” = where “the buyer is unable to purchase the imported goods without paying the royalty or licence fee” • Need to review all facts including linkages between the sales and licence agreements • List of factors to take into account © 2014 Baker & McKenzie LLP 40
41.
Related party transactions
42.
Customs issues to
consider Two main issues: 1. What is value of imported goods? Can you use TP price? 2. How do post transaction TP adjustments impact customs valuation? © 2014 Baker & McKenzie LLP 42
43.
Can you use
TP price for customs valuation? • Generally, customs value between related parties is the transaction value (i.e. TP price) provided relationship has not affected price i.e. arm’s length price • What is meant by “related”? (Article 143 IPCC) • Customs authorities in importing country may assess whether transaction value is acceptable – “circumstances of sale” test • WCO Commentary 23.1 re use of TP studies • Note, post transaction TP adjustments may impact customs value © 2014 Baker & McKenzie LLP 43
44.
Retrospective adjustments to
customs value (UK) • Security arrangements or individual arrangement with HMRC • Voluntary disclosure (avoid penalties) • Retrospective price increase – pay additional duties and VAT (blanket adjustment possible) • Retrospective price decrease – refund? Yes, where appropriate evidence © 2014 Baker & McKenzie LLP 44
45.
Other Member States
• Should TP adjustments be disclosed to customs authorities? • In most Member States, this is required where prices are adjusted upwards (note, failure to disclose this will be considered to be fraud in some countries, such as Germany) • Procedure for amending entries can very time consuming: may involve manually amending past entries • Advance pricing agreements may be available • Not all Member States will be prepared to issue refund of overpaid duties (unless provisional entries are made) © 2014 Baker & McKenzie LLP 45
46.
Case Study
47.
The Facts ©
2014 Baker & McKenzie LLP 47 $ Sale 1 Non-EU EU XYZ Sourcing Co XYZ Sales Co Customer XYZ Intellectual Property $ Licence fee for use of trademark Independent Manufacturer $ Sale 2 Mould and design work provided free of charge $ Sale 3
48.
Case Study ©
2014 Baker & McKenzie LLP 48 • You look at the facts and decide that the customs value should be based on the price for Sale 2 as this is “last sale for export to the country of importation”. What issues do you need to consider? a) Related party transaction • Is the sale price acceptable? • Any consequences if that price is retrospectively amended post importation? b) Are the licence fees dutiable? Would your assessment differ if the IP owner was not a related company? c) Assists • How should you value and report these? 1
49.
© 2014 Baker
& McKenzie LLP 2 Case Study 49 • You are looking for ways to reduce the potential duty liability for the company. You decide to look into using the principle of “first/ earlier” sale so that you can base the customs value on the price paid for Sale 1 instead of Sale 2 a) What conditions do you need to meet? b) Would the use of first sale have any impact on your assessment of whether (i) the licence fees; and (ii) assists, are dutiable?
50.
Case Study ©
2014 Baker & McKenzie LLP 50 3 • You’ve been informed that not all countries accept first/ earlier sale and that this principle may shortly no longer be available for imports into the EU. You attend an industry group where a few of the members are discussing moving to a “buying agency” arrangement as an alternative. a) What would the impact of this be for your supply chain (see next slides for flowchart)? b) What factors would you need to consider? c) Are there any other alternatives? Note, ‘buying commission’ = fees paid by an importer to his agent for the service of representing him in the purchase of the goods being valued (Article 32.4 Customs Code)
51.
Alternative Supply Chains?
© 2014 Baker & McKenzie LLP 51 Independent Manufacturer XYZ Sales Co Sourcing, Quality Control, etc. XYZ Sourcing Co (Agent) Buying Commission (Sale 2 minus Sale 1 – too high?) Sale Independent Manufacturer Sale 1 XYZ Sourcing Co IOR in Country of Importation Sale 2 XYZ Sales Co Sale 3 Customer IOR = Importer of Record
52.
Tariff Classification
53.
Importance of Tariff
Classification •Classification is • decisive for the determination of the applicable duty rate; • a matter of compliance. •Tariff duty rates are set line-by-line, and so in order to determine correct duty rate, one needs to establish the correct classification; •Classification cannot be ignored, even where the likely universe of classifications all result in 0% duty determinations; •Classification is very important, but can be very complicated. © 2014 Baker & McKenzie LLP 53
54.
Structure of HS
Tariff •21 Sections and 97 Chapters, basically moving from unmanufactured to manufactured goods; •Generally, tariffs tended to be higher on manufactured goods, and lower on industrial inputs since EU Member States wanted the industrial processing to be done in-country; •Chapter headings are very broad and not binding; wording of the tariff headings is decisive. © 2014 Baker & McKenzie LLP 54
55.
The Hierarchy of
Rules © 2014 Baker & McKenzie LLP 55 •WCO through the Harmonised System (HS) establishes the system for classification to a 6-digit level: • Organises tariff structure; • Establishes categories at 6-digit level; • Establishes Notes to Chapters; • Establishes the General Rules of Interpretation (GIRs); •The HS also publishes the Explanatory Notes (ENs). The effect of these is determined by national law, e.g. the EU see these as interpretative aids, which are not legally binding; •The EU is required to implement the HS. This is done through the Combined Nomenclature (CN) at a six digit level. The CN contains EU specific subheadings at an 8 digit level.
56.
The HS in
Practice: the EU © 2014 Baker & McKenzie LLP 56 •EU implementation of HS Tariff – Regulation 2658/87 •EU Tariff classification/Commodity Code = 10-digit number (imports); 8 digits (exports): • 1st 4 digits = HS headings (“Tariff Heading”); • digits 5+6 = HS sub-headings; • digits 7+8 = EU Combined Nomenclature (CN); • digits 9+10 = TARIC (covers EU Tariff and related measures; where no further breakdown is required, the 2 digits “00” are shown): → In EU, you will need 10-digit code to correctly classify your goods on import.
57.
The General Interpretative
Rules © 2014 Baker & McKenzie LLP 57 •6 broad rules: GIR 1 to 6; •3 broad techniques: 1. Classify according to the wording of the heading (i.e., obvious, no disputes) (GIR1); 2. Classify according to which the wording of the heading is more specific (GIR 3(a) and, where this is not possible, as if they consist of material/component which gives product its “essential character” (GIR 3(b)); 3. If nothing else works, then the alternative classification with the highest number will determine (GIR3(c)).
58.
Examples © 2014
Baker & McKenzie LLP 58 •heading 0702: “Tomatoes, fresh or chilled” • GIR 1 • heading 8517: • “Telephone sets, including telephones for cellular networks” • GIR 3(b) • heading 8471: “Automatic data-processing machines and units thereof” • GIR 1 + Note 5 to Chapter 84
59.
Recent Court Cases
60.
ECJ Vario Tek,
pending case C-178/14 © 2014 Baker & McKenzie LLP 60 • Matter of dispute are sport glasses with integrated videocameras • Dispute: Tariff classification under 8525 8091 (4,9%) “Video camera recorders only able to record sound and images taken by the television camera" or under 8525 8099 (14%) "others"
61.
Questions referred (free
translation): © 2014 Baker & McKenzie LLP 61 1. Does the fact that a video camera does not have a zoom option exclude its classification into subheading 8525 80 9 CN in the version of the Commission Regulations (EU) No 861/2010 of 5 October 2010 and No 1006/2011 of 27 September 2011, each amending Annex I of the Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff? 2. If no, does a video camera recorder already have an option to record the sound and image taken by the camera within the meaning of subheading 8525 80 91 CN if a video or audio file can be copied to the removable media device required for the operation of the camera by means of a USB port, without it being possible to listen to or view this file with the camera alone?
62.
Arguments: © 2014
Baker & McKenzie LLP 62 Pro 8525 8091 • Wording “video camera recorders” does not imply any zoom function; • recording of pictures and tones produced by the camera only; • recording data from other machines: • is a rather theoretic possibility, since no playing function exists; • for such recording the memory card is required rather than the camera; • camera cannot be used for playing functions, PC is required (no autonomus function as required in ECJ cases (C-208/06 and C-208/06). Contra 8525 8091 • No optical zoom as requested in explanatory notes 8525 8091 and 8525 8099; • Explanatory notes 8525 8099: • if data recording from other machines is possible, then tariff classifation under 8525 8099.
63.
ECJ Amazon's Kindle,
pending case C-58/14 © 2014 Baker & McKenzie LLP 63 • Matter of dispute is amazon's e-book-reader Kindle with, inter alia, dictionary functions • Dispute: Tariff classification under 8543 7010 (0%) "Electrical machines with translation or dictionary functions" or under 8543 7090 (3,7%) "others"
64.
Questions referred: ©
2014 Baker & McKenzie LLP 64 1. Is the description of goods in subheading 8543 7010 of the Combined Nomenclature 1 to be understood as covering only apparatus which have exclusively translation or dictionary functions? If no: 2. Does subheading 8543 7010 of the Combined Nomenclature cover also apparatus the translation or dictionary functions of which are secondary by comparison with their main function (in this case, a reading function)?
65.
Arguments: © 2014
Baker & McKenzie LLP 65 Pro 8543 7010 • Tariff classification rules: • Wording of the subheading 8543 7010, no interpretation required; • no classification in "others" possible as applicable subheading exists; • wording of the Regulation No. 763/2011 classifying e-book-reader without translation or dictionary functions in 8543 7090. Contra 8543 7010 • Statement of the EU Commission that there are no reasons to limit the Regulation No 763/2011 to e-book-reader without translation or dictionary functions; • Tariff classification by UK and Dutch authorities in 8543 7090.
66.
Classification of Accessories
and Parts
67.
Introduction © 2014
Baker & McKenzie LLP 67 •Classification of parts and accessories mostly relevant with respect to machinery and electronic devices (Section XVI) as well as to medical devices (Chapter 90); •Although many such machines are subject to a 0% duty rate, parts are not; •If not classified correctly, importation of parts (spares) can easily lead to underpayment of import duties.
68.
Challenges (1) ©
2014 Baker & McKenzie LLP 68 •Applicable Notes are very complexe, since they consist of exclusions, inclusions and references • Note 2 to Section XVI “Subject to note 1 to this section, note 1 to chapter 84 and to note 1 to chapter 85, parts of machines (not being parts of the articles of heading 8484, 8544, 8545, 8546 or 8547) are to be classified according to the following rules: a.Parts which are goods included in any of the headings of chapter 84 or 85 (other than headings 8409, 8431, 8448, 8466, 8473, 8487, 8503, 8522, 8529, 8538 and 8548) are in all cases to be classified in their respective headings; b.Other parts, if suitable for use solely or principally with a particular kind of machine, or with a number of machines of the same heading (including a machine of heading 8479 or 8543) are to be classified with the machines of that kind or in heading 8409, 8431, 8448, 8466, 8473, 8503, 8522, 8529 or 8538 as appropriate. However, parts which are equally suitable for use principally with the goods of headings 8517 and 8525 to 8528 are to be classified in heading 8517; c.All other parts are to be classified in heading 8409, 8431, 8448, 8466, 8473, 8503, 8522, 8529 or 8538 as appropriate or, failing that, in heading 8487 or 8548.” • Note 2 to Chapter 90 (follows same principles)
69.
Challenges (2) ©
2014 Baker & McKenzie LLP 69 •No definition of „accessories“ or „parts“ available, neither in the customs tariff nor in the Explanatory Notes •ECJ established definition in „Turbon International“ (C-276/00): • “‘Parts’ implies a whole for the operation of which the part is essential. • It is not sufficient to show that, without that article, the machine or apparatus is not able to carry out its intended functions. It must be established that the mechanical or electric functioning of the machine or apparatus in question is dependent on that article.” • “‘Accessories’ implies an interchangeable part designed to adapt a machine for a particular operation, or to increase its range of operations, or to perform a particular service relative to the main function of the machine.”
70.
Challenges (3) ©
2014 Baker & McKenzie LLP 70 Classification of parts is complex. The following questions must be answered: 1.Is the product essential for the operation of the whole? 2.Does the mechanical or electrical working depend on the product? 3.Is the product excluded on the basis of Note 1 to Section XVI? 4.Is the product included under heading 8484, 8544, 8545, 8546 or 8547? 5.Is the product included in heading 8409, 8431, 8448, 8466, 8473, 8487, 8503, 8522, 8529, 8538 or 8548? 6.Is classification in heading 8409, 8431, 8448, 8466, 8473, 8503, 8522, 8529 or 8538 appropriate? 7.Is the product included in any of the headings of Chapter 84 or 85? 8.Is the product suitable for use solely or principally with a particular kind of machine, or with a number of machines of the same heading (including a machine of heading 8479 or 8543)? 9.Is the product equally suitable for use principally with the goods of headings 8517 and 8525 to 8528?
71.
Challenges (4) ©
2014 Baker & McKenzie LLP 71 Answering these questions leads to the following classifications (in random order): 1.Classification on the basis of objective characteristics and properties; 2.Classification according to Note 1 to Section XVI; 3.Classification on basis of objective characteristics and properties under heading 8484, 8544, 8545, 8546 or 8547; 4.Classification under one headings of Chapter 85 or 85 (irrespective of the product they are intended for); 5.Classification with the machines of that kind or in heading 8409, 8431, 8448, 8466, 8473, 8503, 8522, 8529 or 8538 as appropriate; 6.Classification in heading 8517; 7.Classification in heading 8409, 8431, 8448, 8466, 8473, 8503, 8522, 8529 or 8538 as appropriate; and 8.Classification in heading 8487 or 8548.
72.
Examples (1) ©
2014 Baker & McKenzie LLP 72
73.
Ink Cartridge –
printer part or just ink? (1) © 2014 Baker & McKenzie LLP 73 •ECJ C-276/00 „Turbon International“ and C-250/05 „Turbon II“ •Is an ink cartridge “accessory or part” (0%) of a printer, or just “ink” (6.5%)? •ECJ held the ink cartridge is „ink“: • Turbon International: “While it is true that, without an ink-cartridge, a printer is not able to carry out its intended functions, the fact remains that the mechanical and electronic functioning of the printer in itself is not in any way dependent on such a cartridge. The inability of the printer, in the absence of an ink-cartridge, to transcribe on to paper the work produced with the aid of a computer is caused by lack of ink rather than a malfunctioning of the printer.“
74.
Ink Cartridge –
printer part or just ink? (2) © 2014 Baker & McKenzie LLP 74 •ECJ held the ink cartridge is „ink“: • Turbon II: “Even if an ink cartridge, such as that at issue in the main proceedings, is constructed in such a way that the printer does not function in the absence of that cartridge, the fact remains that the ink contained in the cartridge is the most important factor for the purpose of using the goods at issue. In fact, the ink cartridge is not inserted in the printer in order to make the printer itself function but specifically to supply it with ink. Therefore, the ink must be regarded as determining the essential character of an ink cartridge.“
75.
Examples (2) ©
2014 Baker & McKenzie LLP 75
76.
Stove Pipe Set
– stove parts or pipe connectors? (1) © 2014 Baker & McKenzie LLP 76 • ECJ C-450/12 „Hark“ • Is a stove pipe set, i.e. the tubular elbow component, a „accessory or part“ (2.7%) of a stove, or metal „pipe connector“ (3.7% and 58.6% ADD!)? • ECJ held the stove pipe set is „stove parts“: • “It is apparent from the factual findings of the referring court that the tubular elbow component at issue in the main proceedings, as well as the chimney connection and the surround, are intended exclusively for use with stoves. Furthermore, that component serves to connect the stove to the chimney flue. In the absence of such a connection, the stove could not be operated because flue gases would escape. Therefore, it must be concluded that the tubular elbow component is essential for the operation of the stove.”
77.
Stove Pipe Set
– stove parts or pipe connectors? (2) © 2014 Baker & McKenzie LLP 77 •ECJ held the stove pipe set is „stove parts“: • Moreover, it is apparent that “a tubular elbow component such as that at issue, is intended not to connect the bores of two tubes together or to connect a tube to some other apparatus, but to connect a stove to a chimney flue. Consequently, that piece cannot be considered to be a part of general use within the meaning of Note 2(a) to Section XV of the CN.”
78.
Examples (3) ©
2014 Baker & McKenzie LLP 78
79.
Parts and accessories
intended for programming systems? © 2014 Baker & McKenzie LLP 79 • ECJ C-297/13 "Data I/O“ • Are motors, power supplies, lasers, generators, cables and heat sealers intended for programming systems to be classified as parts in the sense of tariff heading 8471 (0%) or should they be classified under under headings 8501, 8504, 8456, 8543, 8544 and 8422 of the CN respectively?
80.
Parts and accessories
intended for programming systems? © 2014 Baker & McKenzie LLP 80 In ECJ C-370/08 "Data I/O“ the Court ruled that an adapter can only be classified in tariff heading 8536 if it is not classified under tariff heading 8471 or 8473. Do the latter tariff headings take precedence over tariff heading 8536? ECJ: no general rule giving precedence; the goods must be classified as individual goods under one of the latter headings, according to their respective characteristics and taking into account the applicable notes.
81.
Compliance Requirements
82.
ECJ C-378/87 “Top-Hit”
• In 1981 products were declared as “Other articles of wood” and declared under tariff heading 4428 (1981 version); • The customs authorities considered the products “furniture” in the sense of tariff heading 9403 (1981 version) and recovered the additional duties due; • The importer appealed the decisions and argued that the underpayment of import duties was the result of an error of the authorities in the sense of the current art. 221(1)b of the CCC. © 2014 Baker & McKenzie LLP 82
83.
ECJ C-378/87 “Top-Hit”
• The ECJ rejected the appeal stating that the importer did not “observe all the provisions in force concerning its customs declaration”; • This was the case since the importer had with the description of the goods as “other articles of wood” failed to declare “the particulars necessary for the identification of the goods and for the application of the import duties and any other provisions governing the release of the goods for free circulation”. © 2014 Baker & McKenzie LLP 83
84.
ECJ C-138/10 “DP-Grup”
• In 2007 “frozen turkey legs” were declared for free circulation. The customs classification was initially accepted by the customs authorities; • Afterwards, laboratory analysis proved that classification incorrect; • The importer wanted to have the import declaration annulled, but the goods were already released for free circulation; • In the appeal procedure the questions was addressed whether such an annullment is possible. © 2014 Baker & McKenzie LLP 84
85.
ECJ C-138/10 “DP-Grup”
• The ECJ considered that the provisions in force require that the “declarant will provide the customs authorities with complete and accurate information”; • The obligation on the declarant to provide accurate information also extends to the determination of the correct subheading at the time of the tariff classification of the goods; • The ECJ made reference to its Top-Hit ruling. © 2014 Baker & McKenzie LLP 85
86.
ECJ C-138/10 “DP-Grup”
• It also considered that in case of any doubt of the correct classification, the importer can request in advance a binding tariff information (BTI); • From this obligation it follows that, once accepted by the authorities, the customs declaration can not be revoked or annulled, unless one of the strict exceptions to this rule applies as defined in the CCC. © 2014 Baker & McKenzie LLP 86
87.
ECJ C-138/10 “DP-Grup”
• The ECJ ruled that when a declaration is submitted, the authorities must take a passive approach in the sense that “they confine themselves to monitoring compliance with the requirements laid down in Article 62 CCC”; • Consequently, the acceptance of the declaration by the authorities does not form a decision “on the accuracy of the information provided by the importer”; • Solely the importer is responsible for the accuracy of the information provided according to the ECJ. © 2014 Baker & McKenzie LLP 87
88.
ECJ C-138/10 “DP-Grup”
• Since the importer is solely responsible, it is up to him to demonstrate the accuracy of the information, should the authorities decide to verify it; • This is even the case if the goods are already released; • The requirement of the “passive approach of the authorities” confirms the applicability of the Top-Hit ruling. © 2014 Baker & McKenzie LLP 88
89.
Take away points:
1. The use of the correct customs classification is mandatory (obviously!); 2. Importers are only protected against post clearance recovery relating to the classification of the goods, if: a. The customs classification of the goods is confirmed in a BTI; or b. On the basis of the description of the goods, it should have been immediately clear that the classification could not have been correct; Example: products described as “prepared knots or tufts for broom or brush making” classified under sub-heading 1404 9000 – correct would be tariff heading 9603 on the basis of Note 3 to Chapter 14. © 2014 Baker & McKenzie LLP 89
90.
Best practice: 1.Many
3PL service providers use the wording of the Combined Nomenclature to describe the goods (e.g. for sub-heading 1404 9000 “Vegetable products not elsewhere specified or included; other”, rather than “prepared knots or tufts for broom or brush making”); 2.This practice may render the protection of art. 220(2)b CCC against post clearance recovery useless; 3.If changing the practice of using the wording of the CN is (practically) impossible, then the only way to obtain (any form of) legal certainty regarding the customs classification is obtaining BTI’s confirming the classification. © 2014 Baker & McKenzie LLP 90
91.
EU Anti-Bribery, Trade
and Customs Webinar Series 2014 How to classify and value your products Sophie Clocheret, Of Counsel, Brussels Jennifer Revis, Of Counsel, London Bettina Mertgen, Associate, Frankfurt Vanessa Dersch , Associate, Frankfurt The webinar recording for this presentation is available here: http://www.bakermckenzie.com/WBTCEUCustomsWebinarSeries/ 26 June 2014 Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2014 Baker & McKenzie LLP
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