September, 2015
Initial reflections on the new Customs Code in the EU
Mark K. Neville, Jr.
To my mind, this has been the Summer of Political Economy, with political crises and instructive lessons galore in the United States and the European Union (EU). Many casual observers will see the EU as a European version of the USA in the making, referring to the EU as the “United States of Europe.” It is true that there is a supra-national frame within which the separate sovereignties of the 28 Member States are oftentimes submerged or pre-empted. But the analogy to the USA breaks down after even a little bit of scrutiny.
Unlike the USA, whose basic structure was formed in one stroke in 1789, after a short six-year experiment under the loosely stitched Articles of Confederation had shown the unworkability of that earlier model, the EU is still a work in progress almost 60 years on. The ongoing Greek drama and its implications for the Euro Zone and, in a real sense for the EU itsel, have no precedent in the US, which has enjoyed a single currency from the outset. To be clear, there is no lack of roiling turbulence in the USA, where debates still rage over the extent of federal (or “central” government) vs. the authority of the 50 individual states, and of course a bitter Civil War in the mid-19th century was fought over that issue. Hint: to understand the basic construct here, simply look at the name—United States [plural] of America.
Where one font of power starts and where the other leaves off, and where there are shared responsibilities, these are the stuff of many a spirited academic and political debate in the USA. They are also the stuff of many a court challenge, and as these words are being written in mid-July the US Supreme Court decisions on “Obamacare” and Same Sex Marriage are but two of the latest of those many intense debates over the federal/state boundary.
Beyond that federal vs. state balancing lies the intra-federal government debate over the power of one branch vs. another, typically the Executive (think the President) vs. the Legislative (think Congress) branch. Here, the design of the Obama presidency to extend the reach of Executive authority at the expense of Congress has been sharply criticized as a departure from the finely calibrated executive/legislative balance that is the hallmark of the architecture of the US system.
But leaving those open “separation of powers” questions aside, in many respects it is safe to say that Van Morrison’s words—“Everything looks so complete…”—are spot on when looking at the USA and the federal government powers, both as enumerated in the Constitution and in the “real world” exercise of those powers.
Nowhere is that more true than when looking at US customs and trade law. Indeed, some scholars have observed that Alexander Hamilton’s1 prescription for a levy of customs duty at the federal level only, and a ban on taxes on exports, which were baked within the Constitution from the very outset, were meant to both ensure a source of revenue for the nascent federal government and to promote and prevent the breakdown of interstate trade at a time when levies were being made on goods going from, say, my home state, Connecticut, to New York and to ensure that exports had unhindered access to foreign markets. In fact, the USA from its very inception was a fully operating customs union. One aspect of US customs and trade law is its transparency. That much is obvious from a reading at any level of the available literature or a review of the primary sources, the statutes and the implementing regulations themselves. Beyond that, on customs matters at least, there is a preponderance of administrative guidance in the form of binding rulings issued by Customs and Border Protection (CBP) as well as various Informed Compliance Publications, both of which sources are freely available on the CBP website. Of relevance to this discussion, the federal rule-making process in the USA imposes a requirement that all proposed regulations, such as the customs regulations, which implement federal statutes and which set the working rules by which the various federal agencies interpret the laws they are charged with administering, be subjected to publication in the Federal Register and open to comments. It’s all on the record and it’s all discoverable.
Another attribute of the US system is its insistence on uniformity, with the same set of procedures applied and the same administrative stance adopted across the entire country. There is a strong aversion by CBP to any hint of “port shopping,” the practice of entering goods through one of the 300-odd ports of entry after the customs officials at another port had directed the importer to make entry in a different manner. Trolling through a succession of different ports until the importer gets the answer it likes, perhaps because the customs officials there may not be as vigilant or as experienced, is frowned upon. Indeed, if the importer has been advised by CBP to enter its goods under one tariff classification at a port but the importer then re-routes its goods through another port rather than complying, it is quite likely that CBP will consider bringing a civil penalty action. One sign of the emphasis on uniformity, beyond the CBP reliance on directives to the field and its internal use of its own binding rulings, is the fact that the first enumerated criterion for a protest of a customs determination to be elevated from the port to consideration by CBP Headquarters is if there has been an inconsistency between ports, with Headquarters called upon to resolve the issue.2
While it is true that there are some minor variations in “local port practices,” such as what documents a particular port may insist upon for a particular issue, these tend to be inconsequential. It is safe to say that (i) there is a single, USA-wide platform of substantive laws, a single set of procedural regulations, and a single administrative interpretation and (ii) the transparency of the system guarantees their accessibility. Now we come to the EU, where as a matter of customs and trade law, everything is NOT so complete. There are wide divergences in practice, discordant approaches and competing agendas among the Members. In short, customs practices are not uniform. While there is a customs union, and an entry for free circulation into one Member should guarantee duty free access to and movement within the entire territory of the EU, the notion that there is a neutrality such that an entry could be as easily made in one Member, say the Netherlands, as any other Member, say Greece, is an illusion. There are wide-ranging differences in procedures and those differences are one of the primary motivating factors in the EU’s move to roll out the Union Customs Code (UCC).3
While there are geographic factors that drive many logistics decisions to enter the EU though Belgium or the Netherlands, for example, and while those factors are never going away, the UCC is intended to remove some of the discrepant procedures which have distorted trade flows. Beyond promoting a common procedural platform, the UCC is also meant to make long overdue changes to the organic customs laws, and some of those forthcoming changes promise to be controversial.
The UCC is the third iteration of a customs code at the EU-level. The first was the Community Customs Code (1992), with implementing provisions dating to 1993, which was followed by the Modernised Customs Code (MCC), proposed in 2008 but not enacted. The MCC was intended to usher in a “paperless” environment such as was introduced at the same time by the US with the 1993 Customs Modernization Act (the “Mod Act”). IT problems proved intractable, however, and the MCC timetable for implementation was not met. The UCC entered into force in 2013 and was directly empowering, which opened the way for the European Commission to draft an Implementing Act (IA) and a Delegated Act (DA). All of these instruments should enter fully into force as of May 1, 2016, the CCC expiring on April 30, 2016. To be clear, some of the changes will be implemented over the course of four years or so.
At the time of this writing the European Commission Inter-Services Consultation on the Implementing and Delegated Acts for the UCC is still on-going has just been completed and there are some open questions of interpretation. We can add some commentary about the proposed UCC and the IA, and specifically in regard to some highlighted areas of interest: customs valuation, rules of origin, the Authorized Economic Operator (AEO) program, the centralized clearance of customs and the binding tariff information (BTI) process.
Regarding subparagraph (c), after a close reading of the relevant Valuation Agreement, Interpretative Note to Art. 1, Price Actually Paid or Payable, para. 1, and Annex III, para. 7, we may conclude there is no textual authority to lever all payments to a person related to the seller, even if a condition of sale, into the definition of the PAPP. There must be a showing that the payment is “for the imported goods” or, to use the wider phrase, “related to the goods.” This subparagraph (c) text elides this equally important criterion in the same fashion that it posits that there need be no showing of any benefit to the seller. In this last regard, one can anticipate an argument from customs authorities that at some point—possibly that same point at infinity where parallel lines meet—any payment to a related party is a per se benefit to the seller.
As a matter of fact, there are clearly some instances in which a payment to a related party will form part of the PAPP, and that is when they fall within the text of subparagraphs (b) or (d) because the payment is for the benefit of the seller or satisfies an obligation of the seller. In such a case, whether the seller’s debt which is being satisfied is owed to a party related to the seller or not is of no consequence. This expansion of the Valuation Agreement with subparagraph (c) utterly disregards the separate legal entity status of persons, and it also neglects to note that the payment must be “for the goods,” i.e., related to the imported goods.
Another observation is that there is really nothing distinct about subparagraphs (b) and (d). A payment to a third party to satisfy the seller’s debt (d) is an example of a payment to a third party that is for the benefit of the seller (b). This point is explicitly made in the Interpretative Note to Art. 1, Price Actually Paid or Payable, para. 1. If the EU feels that the exemplar merits equal treatment, so be it, but it is redundant nonetheless.
As a final parenthetical thought, the reference here and elsewhere to “related party” calls to mind the definition of “related party” at IA, Art. 127, which includes the notion of a party controlled by another. Clarification of the meaning of “control” is offered at Art. 127.3: …one person is deemed to control another when the former is legally or operationally in a position to exercise direction over the latter.
This text may not match exactly with the standard of Explanatory Note 4.1 (EN 4.1) issued by the WCO’s Technical Committee on Customs Valuation, whereby we should look to an “exercise [of] restraint or direction in respect of essential aspects relating to the management of the activities of the other person.” If something less than EN 4.1-style management control is meant by IA text, that could be mischievous, with a broadened meaning of “control” leading to more parties being perceived as related.
The text of subparagraph (c) is similar to the criterion for “condition of sale” drafted for service by CBP in its royalty and license fee inquiries, i.e.,
For a third point, a close reading of subparagraphs (a) and (c) leads one to surmise that there must be no requirement to pay the royalty or license fee asserted by the seller that is embodied in subparagraph (c). Otherwise, subparagraph (c) is redundant. And if that is the case, then we must next ask who is requiring the payment of the royalty or license fee, because surely there must be a requirement to make such payment? If not the seller, then is it the licensor’s requirement?
That last rhetorical question leads to the final point, that the condition of sale should be interpreted to mean a legally enforceable right of the seller, such that a failure to make such payment will excuse nonperformance, i.e., will allow the seller to decline to make the sale to the buyer. In other words, it is the seller’s legally enforceable right. As a matter of enforceable legal rights, the buyer’s nonpayment of the royalty or license fee would not excuse a seller from performing, i.e., from concluding the sale. In such a case, the buyer could still force the agreement to be honored and the sale to proceed.
It would be unfortunate if we began to see a further expression of the amorphous notion of the “practical” case in these royalty and license fee matters. Some are prone to muse that, at the instance of the licensor, a seller might not or would not make a sale to the buyer in the event of nonpayment by the buyer of a royalty or licensee fee to that licensor. Engaging in such “real world” speculation should be discouraged.
The “last substantial transformation” test is retained in Article 60 (2), the text of which reads
Among its other effects, the DA introduces a generic list of minimal operations that will not be considered as incapable of conferring an origin-changing substantial transformation, among which disregarded operations are dilution with water, mixing of products, bottling and simple assembly.
One way to look at the AEO program is that it is the EU version of the WCO security scheme, at least insofar as the AEO status is for security and safety, AEO(S), as opposed to ‘customs simplifications,’ AEO(C).6 You should recognize that the Customs-Trade Partnership Against Terrorism (C-TPAT) program is the U.S. version. It is a voluntary cargo security program which confers certain benefits to participants in exchange for adherence to border security standards. In the case of the AEO, the benefits of certification should confer a competitive advantage, through a guarantee of waivers and fast-tracking of application processes a reduced number of inspections and expedited treatment at inspections with the result being fewer delays at the border. Another advantage is that AEO participants are exempted from the necessity of posting financial guarantees when seeking to take advantage of simplified customs procedures such as inward processing relief (IPR), customs warehousing, or temporary storage. Still another benefit is that certain programs such as centralized clearance (see below) or self-assessment7 are reserved to AEO participants.
Taking another page from the US book, the UCC introduces the notion of mandatory financial guarantees—surety bonds in the US context8—for those traders seeking to make use of simplified procedures. With AEO status, an economic operator may be able to get a waiver or a reduction in the guarantee level required. Arts. 95 (2) and 95 (3). Through a network of Mutual Recognition Arrangements (MRAs), benefits are extended by some authorities to the AEO participants in other countries’ AEO programs. The EU has MRAs with four countries (Switzerland, Norway, Japan and the US).9 The underlying principle of reciprocity is set forth at Art. 38 (7). The implication is that customs clearance in those countries for AEOs’ exports will be expedited. The UCC and the DA and IA will set forth some new standards for qualifications and competence. In this regard, the AEO (C) requires a showing of compliance, recordkeeping and solvency, and the AEO (S) insists on these same criteria plus an additional element of security and safety standards. But the UCC’s real thrust vis a vis the AEO program is to embed the AEO program throughout many of the simplified procedures, such that the AEO participants are indeed receiving favorable treatment because of their status. Art. 38 (5).
This is somewhat like remote location filing, an electronic entry program that the US has had since the 1993 Customs Modernization Act,12 but it is more limited in its scope. First, this process is not open to importers generally but is restricted to AEOs. Second, as noted, the clearance function is geographically restricted, “…the person [is authorized] to lodge [only] at a customs office responsible for the place where such person is established.” In other words, the importer can only file where you have an establishment, and he cannot simply elect to file in any Member at random.
It remains to be seen how this will work in practice, but this is obviously a step in the right direction. It reminds one of KPMG UK’s practice leader Terry Shaw’s campaign for a “virtual warehouse” ca. 1997-2002, which had garnered some support from the Members. Perhaps that was simply an idea whose time has finally come.
Jean-Marie Salva, the lead partner in trade and customs matters for DS Avocats in Brussels and Paris, points out the rippling effects of centralised clearance. That will be the competition between Member States for revenue. Duties are an important source of revenue both for the EU and for the individual Member States. Under a procedure adopted in 1970, the Member State where the entry is cleared retains 25% of the duty collected. The UCC will not change this rule or this percentage.
M. Salva points out that with the “big bang” of centralised clearance, a Member will lose out on the revenue if the goods are being cleared in another Member, even if that first Member must underwrite the administrative and physical infrastructure to support the physical entry of the goods. Of course, for the Member where the goods are being centrally cleared, the duty may be something of a “windfall.” We may anticipate that Members will want to be especially “user friendly” so as to attract customs clearance.
There is a compendium of BTIs maintained in a centralized database containing classification decisions issued by the EU Members. The BTIs are useful as a tariff classification tool as they provide details on the composition and functionality of goods (redacted to protect confidential information) and the justifications for classifications are provided. By reviewing the database, the importer is able to gain valuable insight that will be useful when classifying his own goods. They are also useful for the customs officers in the Members, who also have access to the database and who can be guided in their review of the tariff status of an entry. The BTIs are valid for six years and the BOIs are valid for three years.
Under the UCC, there are some surprising amendments to the BTIs, surprising in that from my vantage point they go both forwards and backwards. First, the BTI is now held to bind the economic operator. Article 33 (2) (b). Presumably, heretofore the “binding” effect of the BTIs was limited to the customs officials. Frankly, coming from a US perspective, this is startling. In the US, as a matter of strict application of the law, the importer is bound by the result of a ruling on all of its entries of goods embraced by the ruling made after the issuance of the ruling. As a matter of de facto legal effect, as well, all other importers are similarly bound by the results of a ruling on the tariff classification of identical or fundamentally similar imported goods. An importer who decided to ignore a classification ruling that is “on all 4s,” i.e., the product is fundamentally indistinguishable, would almost definitely have to respond for a civil penalty for having failed to take “reasonable care” precisely for not adhering to that ruling issued to another party.13
The importer into the EU who has received a BTI is required to refer to the BTI in his customs declaration. From the perspective of procedural fairness and due process, the BTI process seems balanced. The holder of the decision must be able to prove that the facts and circumstances as stated in the BTI or BOI still apply “in every respect.” Art. 33 (4).14 On the other hand, the customs authorities retain the right to annul or revoke the decision at any time under various circumstances. Arts. 33 (4), 33 (7) and 33 (11). In exceptional cases the effective date of the revocation of a BTI or BOI may be delayed for up to six months. Art. 34 (9).15 This allows for an economic operator showing of detrimental reliance on the BTI.16
Now for the really unsettling bits. First, the binding rulings will be issued for tariff classification (the familiar BTIs) and also for Binding Origin Information (BOIs). Art. 33 (1). That’s great, but what happened to customs valuation? I know that under the WTO’s Trade Facilitation Agreement (TFA) the original plan for Article 3 of Chapter 3 therein had been to reserve a place for advance rulings on valuation as well as on tariff classification and origin. That position was dropped because there was an inability to gain consensus, so that under the TFA advance rulings on customs valuation are merely “encouraged.” But in trade matters, the EU is a “Great Power” and, in any event, the UCC is an entirely internal instrument. In fact, the DA and IA are largely the product of the Commission, without much of the in-the-open Federal Register notice process we are used to seeing in the US for the promulgation of regulations. It is inexplicable why there is silence on valuation in the UCC, and why there is no species of Binding Valuation Information (BVI). And this is made more especially the case since there are so many major substantive changes to customs valuation in the UCC, as we have seen. This failure to set a process for customs valuation rulings is discouraging. The trade community expected, and deserved, much better. Perhaps the issue will re-emerge in the context of the negotiations with the US on the Transatlantic Trade and Investment Partnership (TTIP).
Second, under the UCC, the BTIs shall be effective for a reduced period of three years. Art. 33 (3), their lifespan reduced to that of the BOIs. I have seen references in commentaries to rapid changes in technology and to frequent changes in trade patterns as the rationale for this shortened period, but I am still mystified. In the first place, a change in the configuration of an imported article away from that described in a BTI would itself disqualify the good from the coverage of the BTI. There is simply no need to build in an earlier automatic expiry to a BTI’s shelf life. Similarly, where there is a deviation away from a production and sourcing pattern such that the facts are no longer embraced by a BOI, that BOI will no longer apply. In cases of changed circumstances, the economic operator cannot rely on the BTI or BOI. Full stop. Indeed to do so is to invite a penalty action by the customs authorities pursuant to Art. 42 because Art. 33 (4) mandates that the goods and production circumstances must remain the same “in every respect” in order for the BTI or BOI to apply. Of course that raises the question—should that clause be construed strictly or should only material changes be considered, with irrelevant or inconsequential changes simply disregarded as befitting “a distinction but not a difference?”
There is no magic to a three year point here—an unscrupulous economic operator is as likely to cheat before that point is reached, frankly is more likely to do so because it would have the “cover” of the BTI or the BOI.
But what of the cases, probably the majority of cases, where there are no such dispositive changes, where the fact patterns remain in place beyond three years? for five years? for ten years? What then? With the UCC, the economic operator will have to re-apply after the automatic expiry point of three years anyway. That seems a waste of time, money and effort, all of which are in short supply for both traders and for the customs authorities.
Third, I have a question about one instance in which a BTI or BOI will not be issued. Art. 33 (1) (a) tells us that the application will not be handled
Well, maybe not. It is often the case that a poorly drafted application for a ruling will lead to a decision that is skewed and incorrect. A one or two-page effort, with not more in substance than a “Dear Mr. Customs, Please classify this article. Thank you very much” inquiry—and trust me, they are far from rare-- will generate a binding ruling that will have binding effect for the importer/economic operator AND for all others as well. You see from the quoted text that the customs authorities will decline the issuance of a BTO or a BOI even when another person is the “holder of a decision.” In other words, exactly as in the USA, and disregarding the sub silentio nature of this effect, the binding BTI or BOI has an effect not only on the recipient but also on all other importers/economic operators. That means that the stated extension of the binding effect to the “holder of the decision”—as if the text stated the effect was binding only on the holder of the decision—at Art. 33 (2) (b) is disingenuous.
And of course that also means that, as a practical matter, any importer/economic operator is vulnerable to his competitors’ poorly conceived and poorly executed BTI requests. That vulnerability to the consequences of someone else’s shoddy work product is one consideration for an importer/economic operator to steal a march on the competitors and voluntarily submit a ruling request.
I know this is possibly making a very fine point, but what if the goods are indeed the same but the BTI never considered appropriate legal arguments? What if earlier precedents, central to the BTI or the BOI, were not properly discounted as distinguishable because that line of argument was never raised or considered? Should it not be possible to submit a request for a re-think and a new decision under these circumstances? And if all of these points are admitted, query whether the economic operator would have access to that other’s request, which led to the BTI or BOI, so as to discern whether all of these substantive points were raised and, if so, properly discussed? Parenthetically, in the USA, these requests are normally available under the Freedom of Information Act (FOIA).
Fourth, can BTIs be amended or not? Art. 34 (6) says they cannot be amended but Art. 28 speaks of annulment revocation or amendments of “favourable decisions.” If it is meant to make BTIs and BOIs an exception to a more general rule, and I believe that is the intention here, then better draftsmanship would dictate a specific prefatory note being made at Art. 28 or elsewhere in this section that these general remarks about “decisions” are not fully applicable to BTIs or BOIs. Indeed, a close reading of Art. 28 juxtaposed with Arts. 33 and 34 will reveal many “carveouts” in the latter. Precisely because BTIs and BOIs are only two specific types of “decisions” there should be a clearer early signal that many departures can be anticipated at Arts. 33 and 34.
Fifth, a subtle point about the primacy of the Harmonized System Committee at the World Customs Organization (HS Committee) is to be mined at Art. 34 (7). There, one stated reason for a revocation of a BTI is when the BTI is not in accord, not only with a change in the WCO’s Explanatory Notes or a court decision, but also with a tariff classification decision or opinion of the HS Committee of the WCO This text appears to give binding legal effect to these WCO opinions such that they automatically supersede the Commission and Member authority inherent in the BTIs.
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Unlike the USA, whose basic structure was formed in one stroke in 1789, after a short six-year experiment under the loosely stitched Articles of Confederation had shown the unworkability of that earlier model, the EU is still a work in progress almost 60 years on. The ongoing Greek drama and its implications for the Euro Zone and, in a real sense for the EU itsel, have no precedent in the US, which has enjoyed a single currency from the outset. To be clear, there is no lack of roiling turbulence in the USA, where debates still rage over the extent of federal (or “central” government) vs. the authority of the 50 individual states, and of course a bitter Civil War in the mid-19th century was fought over that issue. Hint: to understand the basic construct here, simply look at the name—United States [plural] of America.
Where one font of power starts and where the other leaves off, and where there are shared responsibilities, these are the stuff of many a spirited academic and political debate in the USA. They are also the stuff of many a court challenge, and as these words are being written in mid-July the US Supreme Court decisions on “Obamacare” and Same Sex Marriage are but two of the latest of those many intense debates over the federal/state boundary.
Beyond that federal vs. state balancing lies the intra-federal government debate over the power of one branch vs. another, typically the Executive (think the President) vs. the Legislative (think Congress) branch. Here, the design of the Obama presidency to extend the reach of Executive authority at the expense of Congress has been sharply criticized as a departure from the finely calibrated executive/legislative balance that is the hallmark of the architecture of the US system.
But leaving those open “separation of powers” questions aside, in many respects it is safe to say that Van Morrison’s words—“Everything looks so complete…”—are spot on when looking at the USA and the federal government powers, both as enumerated in the Constitution and in the “real world” exercise of those powers.
Nowhere is that more true than when looking at US customs and trade law. Indeed, some scholars have observed that Alexander Hamilton’s1 prescription for a levy of customs duty at the federal level only, and a ban on taxes on exports, which were baked within the Constitution from the very outset, were meant to both ensure a source of revenue for the nascent federal government and to promote and prevent the breakdown of interstate trade at a time when levies were being made on goods going from, say, my home state, Connecticut, to New York and to ensure that exports had unhindered access to foreign markets. In fact, the USA from its very inception was a fully operating customs union. One aspect of US customs and trade law is its transparency. That much is obvious from a reading at any level of the available literature or a review of the primary sources, the statutes and the implementing regulations themselves. Beyond that, on customs matters at least, there is a preponderance of administrative guidance in the form of binding rulings issued by Customs and Border Protection (CBP) as well as various Informed Compliance Publications, both of which sources are freely available on the CBP website. Of relevance to this discussion, the federal rule-making process in the USA imposes a requirement that all proposed regulations, such as the customs regulations, which implement federal statutes and which set the working rules by which the various federal agencies interpret the laws they are charged with administering, be subjected to publication in the Federal Register and open to comments. It’s all on the record and it’s all discoverable.
Another attribute of the US system is its insistence on uniformity, with the same set of procedures applied and the same administrative stance adopted across the entire country. There is a strong aversion by CBP to any hint of “port shopping,” the practice of entering goods through one of the 300-odd ports of entry after the customs officials at another port had directed the importer to make entry in a different manner. Trolling through a succession of different ports until the importer gets the answer it likes, perhaps because the customs officials there may not be as vigilant or as experienced, is frowned upon. Indeed, if the importer has been advised by CBP to enter its goods under one tariff classification at a port but the importer then re-routes its goods through another port rather than complying, it is quite likely that CBP will consider bringing a civil penalty action. One sign of the emphasis on uniformity, beyond the CBP reliance on directives to the field and its internal use of its own binding rulings, is the fact that the first enumerated criterion for a protest of a customs determination to be elevated from the port to consideration by CBP Headquarters is if there has been an inconsistency between ports, with Headquarters called upon to resolve the issue.2
While it is true that there are some minor variations in “local port practices,” such as what documents a particular port may insist upon for a particular issue, these tend to be inconsequential. It is safe to say that (i) there is a single, USA-wide platform of substantive laws, a single set of procedural regulations, and a single administrative interpretation and (ii) the transparency of the system guarantees their accessibility. Now we come to the EU, where as a matter of customs and trade law, everything is NOT so complete. There are wide divergences in practice, discordant approaches and competing agendas among the Members. In short, customs practices are not uniform. While there is a customs union, and an entry for free circulation into one Member should guarantee duty free access to and movement within the entire territory of the EU, the notion that there is a neutrality such that an entry could be as easily made in one Member, say the Netherlands, as any other Member, say Greece, is an illusion. There are wide-ranging differences in procedures and those differences are one of the primary motivating factors in the EU’s move to roll out the Union Customs Code (UCC).3
While there are geographic factors that drive many logistics decisions to enter the EU though Belgium or the Netherlands, for example, and while those factors are never going away, the UCC is intended to remove some of the discrepant procedures which have distorted trade flows. Beyond promoting a common procedural platform, the UCC is also meant to make long overdue changes to the organic customs laws, and some of those forthcoming changes promise to be controversial.
The UCC is the third iteration of a customs code at the EU-level. The first was the Community Customs Code (1992), with implementing provisions dating to 1993, which was followed by the Modernised Customs Code (MCC), proposed in 2008 but not enacted. The MCC was intended to usher in a “paperless” environment such as was introduced at the same time by the US with the 1993 Customs Modernization Act (the “Mod Act”). IT problems proved intractable, however, and the MCC timetable for implementation was not met. The UCC entered into force in 2013 and was directly empowering, which opened the way for the European Commission to draft an Implementing Act (IA) and a Delegated Act (DA). All of these instruments should enter fully into force as of May 1, 2016, the CCC expiring on April 30, 2016. To be clear, some of the changes will be implemented over the course of four years or so.
At the time of this writing the European Commission Inter-Services Consultation on the Implementing and Delegated Acts for the UCC is still on-going has just been completed and there are some open questions of interpretation. We can add some commentary about the proposed UCC and the IA, and specifically in regard to some highlighted areas of interest: customs valuation, rules of origin, the Authorized Economic Operator (AEO) program, the centralized clearance of customs and the binding tariff information (BTI) process.
Customs Valuation
As will be seen, despite some real improvements in customs procedures, as for temporary storage, some features of the proposed UCC and its fuller expression in the IA are flawed. The following texts are culled from the IA.Transaction value (TV) [IA, Article 128]
- The transaction value of the goods sold for export to the customs territory of the Union shall be determined at the time of acceptance of the customs declaration on the basis of the sale occurring immediately before the goods were brought into that customs territory.
Price Actually Paid or Payable (PAPP) [IA, Art. 129]
This all-important definition at the heart of TV is set forth as follows:- The price actually paid or payable within the meaning of Article 70(1) and (2) of the Code shall include all payments, actually made or to be made as a condition of sale of the imported goods by the buyer to any of the following:
- (a) the seller;
- (b) a third party for the benefit of the seller
- (c) a third party related to the seller, or
- (d) a third party where the payment to that party is made in order to satisfy an obligation of the seller.
Regarding subparagraph (c), after a close reading of the relevant Valuation Agreement, Interpretative Note to Art. 1, Price Actually Paid or Payable, para. 1, and Annex III, para. 7, we may conclude there is no textual authority to lever all payments to a person related to the seller, even if a condition of sale, into the definition of the PAPP. There must be a showing that the payment is “for the imported goods” or, to use the wider phrase, “related to the goods.” This subparagraph (c) text elides this equally important criterion in the same fashion that it posits that there need be no showing of any benefit to the seller. In this last regard, one can anticipate an argument from customs authorities that at some point—possibly that same point at infinity where parallel lines meet—any payment to a related party is a per se benefit to the seller.
As a matter of fact, there are clearly some instances in which a payment to a related party will form part of the PAPP, and that is when they fall within the text of subparagraphs (b) or (d) because the payment is for the benefit of the seller or satisfies an obligation of the seller. In such a case, whether the seller’s debt which is being satisfied is owed to a party related to the seller or not is of no consequence. This expansion of the Valuation Agreement with subparagraph (c) utterly disregards the separate legal entity status of persons, and it also neglects to note that the payment must be “for the goods,” i.e., related to the imported goods.
Another observation is that there is really nothing distinct about subparagraphs (b) and (d). A payment to a third party to satisfy the seller’s debt (d) is an example of a payment to a third party that is for the benefit of the seller (b). This point is explicitly made in the Interpretative Note to Art. 1, Price Actually Paid or Payable, para. 1. If the EU feels that the exemplar merits equal treatment, so be it, but it is redundant nonetheless.
As a final parenthetical thought, the reference here and elsewhere to “related party” calls to mind the definition of “related party” at IA, Art. 127, which includes the notion of a party controlled by another. Clarification of the meaning of “control” is offered at Art. 127.3: …one person is deemed to control another when the former is legally or operationally in a position to exercise direction over the latter.
This text may not match exactly with the standard of Explanatory Note 4.1 (EN 4.1) issued by the WCO’s Technical Committee on Customs Valuation, whereby we should look to an “exercise [of] restraint or direction in respect of essential aspects relating to the management of the activities of the other person.” If something less than EN 4.1-style management control is meant by IA text, that could be mischievous, with a broadened meaning of “control” leading to more parties being perceived as related.
Royalties and license fees [IA, Art. 136]
4. Royalties and license fees are considered to be paid as a condition of sale for the imported goods when any of the following conditions is met:- (a) The seller or person related to the seller requires the buyer to make this payment;
- (b) The payment by the buyer is made to satisfy an obligation of the seller, in accordance with contractual obligations;
- (c) The goods cannot be sold to, or purchased by the buyer without payment of the royalties or license fees to a licensor.
The text of subparagraph (c) is similar to the criterion for “condition of sale” drafted for service by CBP in its royalty and license fee inquiries, i.e.,
- Could the importer buy the product without paying the fee?5
For a third point, a close reading of subparagraphs (a) and (c) leads one to surmise that there must be no requirement to pay the royalty or license fee asserted by the seller that is embodied in subparagraph (c). Otherwise, subparagraph (c) is redundant. And if that is the case, then we must next ask who is requiring the payment of the royalty or license fee, because surely there must be a requirement to make such payment? If not the seller, then is it the licensor’s requirement?
That last rhetorical question leads to the final point, that the condition of sale should be interpreted to mean a legally enforceable right of the seller, such that a failure to make such payment will excuse nonperformance, i.e., will allow the seller to decline to make the sale to the buyer. In other words, it is the seller’s legally enforceable right. As a matter of enforceable legal rights, the buyer’s nonpayment of the royalty or license fee would not excuse a seller from performing, i.e., from concluding the sale. In such a case, the buyer could still force the agreement to be honored and the sale to proceed.
It would be unfortunate if we began to see a further expression of the amorphous notion of the “practical” case in these royalty and license fee matters. Some are prone to muse that, at the instance of the licensor, a seller might not or would not make a sale to the buyer in the event of nonpayment by the buyer of a royalty or licensee fee to that licensor. Engaging in such “real world” speculation should be discouraged.
Rules of origin
The UCC contains an exposition of the Commission’s proposed non-preferential rules of origin. The basic origin test in the EU is currently the country of “last substantial transformation”. This is a somewhat subjective standard and only for a limited number of products are there specific origin tests, such as for textiles.The “last substantial transformation” test is retained in Article 60 (2), the text of which reads
Goods the production of which involves more than one country or territory shall be deemed to originate in the country or territory where they underwent their last, substantial, economically-justified processing or working in an undertaking equipped for that purpose, resulting in the manufacture of a new product or representing an important stage of manufacture.
From a reading of this, one is prompted to ask, where is the change? The answer lies not in the text of the UCC itself but in the Delegated Act. The original idea for the DA was to move away from the “last transformation” test and to publish instead various “list rules” setting forth the mandatory origin criteria for a majority of products, but that idea was met with complaints from the trade as to the burden imposed. For products not in the DA annex, the rules provided rather vaguely that the principles of the last transformation test “will be applied on a case-by-case basis.”Among its other effects, the DA introduces a generic list of minimal operations that will not be considered as incapable of conferring an origin-changing substantial transformation, among which disregarded operations are dilution with water, mixing of products, bottling and simple assembly.
Authorised Economic Operator (AEO)
The UCC will bring about certain changes in the AEO scheme, which was developed under the WCO’s SAFE Framework. Arts. 38-41.One way to look at the AEO program is that it is the EU version of the WCO security scheme, at least insofar as the AEO status is for security and safety, AEO(S), as opposed to ‘customs simplifications,’ AEO(C).6 You should recognize that the Customs-Trade Partnership Against Terrorism (C-TPAT) program is the U.S. version. It is a voluntary cargo security program which confers certain benefits to participants in exchange for adherence to border security standards. In the case of the AEO, the benefits of certification should confer a competitive advantage, through a guarantee of waivers and fast-tracking of application processes a reduced number of inspections and expedited treatment at inspections with the result being fewer delays at the border. Another advantage is that AEO participants are exempted from the necessity of posting financial guarantees when seeking to take advantage of simplified customs procedures such as inward processing relief (IPR), customs warehousing, or temporary storage. Still another benefit is that certain programs such as centralized clearance (see below) or self-assessment7 are reserved to AEO participants.
Taking another page from the US book, the UCC introduces the notion of mandatory financial guarantees—surety bonds in the US context8—for those traders seeking to make use of simplified procedures. With AEO status, an economic operator may be able to get a waiver or a reduction in the guarantee level required. Arts. 95 (2) and 95 (3). Through a network of Mutual Recognition Arrangements (MRAs), benefits are extended by some authorities to the AEO participants in other countries’ AEO programs. The EU has MRAs with four countries (Switzerland, Norway, Japan and the US).9 The underlying principle of reciprocity is set forth at Art. 38 (7). The implication is that customs clearance in those countries for AEOs’ exports will be expedited. The UCC and the DA and IA will set forth some new standards for qualifications and competence. In this regard, the AEO (C) requires a showing of compliance, recordkeeping and solvency, and the AEO (S) insists on these same criteria plus an additional element of security and safety standards. But the UCC’s real thrust vis a vis the AEO program is to embed the AEO program throughout many of the simplified procedures, such that the AEO participants are indeed receiving favorable treatment because of their status. Art. 38 (5).
Centralised Clearance
Article 179 provides for a centralized customs clearance process, whereby an economic operator may clear goods not only where the goods actually enter the territory of the EU but also at a port within his home country.10 This allows a person to physically import the goods through multiple countries but to undertake the administrative process of customs clearance in one location. Art. 6 (1),11 implicitly in effect here, specifies that electronic-data processing is a requirement for all exchanges of information.This is somewhat like remote location filing, an electronic entry program that the US has had since the 1993 Customs Modernization Act,12 but it is more limited in its scope. First, this process is not open to importers generally but is restricted to AEOs. Second, as noted, the clearance function is geographically restricted, “…the person [is authorized] to lodge [only] at a customs office responsible for the place where such person is established.” In other words, the importer can only file where you have an establishment, and he cannot simply elect to file in any Member at random.
It remains to be seen how this will work in practice, but this is obviously a step in the right direction. It reminds one of KPMG UK’s practice leader Terry Shaw’s campaign for a “virtual warehouse” ca. 1997-2002, which had garnered some support from the Members. Perhaps that was simply an idea whose time has finally come.
Jean-Marie Salva, the lead partner in trade and customs matters for DS Avocats in Brussels and Paris, points out the rippling effects of centralised clearance. That will be the competition between Member States for revenue. Duties are an important source of revenue both for the EU and for the individual Member States. Under a procedure adopted in 1970, the Member State where the entry is cleared retains 25% of the duty collected. The UCC will not change this rule or this percentage.
M. Salva points out that with the “big bang” of centralised clearance, a Member will lose out on the revenue if the goods are being cleared in another Member, even if that first Member must underwrite the administrative and physical infrastructure to support the physical entry of the goods. Of course, for the Member where the goods are being centrally cleared, the duty may be something of a “windfall.” We may anticipate that Members will want to be especially “user friendly” so as to attract customs clearance.
Binding Tariff Information and Binding Origin Information
Binding Tariff Information (BTI) decisions are classification decisions issued by the Customs administrations in the various Member States. Binding Origin Information (BOI) decisions play the same role for origin of goods issues. They are legally binding throughout the EU. Art. 26.There is a compendium of BTIs maintained in a centralized database containing classification decisions issued by the EU Members. The BTIs are useful as a tariff classification tool as they provide details on the composition and functionality of goods (redacted to protect confidential information) and the justifications for classifications are provided. By reviewing the database, the importer is able to gain valuable insight that will be useful when classifying his own goods. They are also useful for the customs officers in the Members, who also have access to the database and who can be guided in their review of the tariff status of an entry. The BTIs are valid for six years and the BOIs are valid for three years.
Under the UCC, there are some surprising amendments to the BTIs, surprising in that from my vantage point they go both forwards and backwards. First, the BTI is now held to bind the economic operator. Article 33 (2) (b). Presumably, heretofore the “binding” effect of the BTIs was limited to the customs officials. Frankly, coming from a US perspective, this is startling. In the US, as a matter of strict application of the law, the importer is bound by the result of a ruling on all of its entries of goods embraced by the ruling made after the issuance of the ruling. As a matter of de facto legal effect, as well, all other importers are similarly bound by the results of a ruling on the tariff classification of identical or fundamentally similar imported goods. An importer who decided to ignore a classification ruling that is “on all 4s,” i.e., the product is fundamentally indistinguishable, would almost definitely have to respond for a civil penalty for having failed to take “reasonable care” precisely for not adhering to that ruling issued to another party.13
The importer into the EU who has received a BTI is required to refer to the BTI in his customs declaration. From the perspective of procedural fairness and due process, the BTI process seems balanced. The holder of the decision must be able to prove that the facts and circumstances as stated in the BTI or BOI still apply “in every respect.” Art. 33 (4).14 On the other hand, the customs authorities retain the right to annul or revoke the decision at any time under various circumstances. Arts. 33 (4), 33 (7) and 33 (11). In exceptional cases the effective date of the revocation of a BTI or BOI may be delayed for up to six months. Art. 34 (9).15 This allows for an economic operator showing of detrimental reliance on the BTI.16
Now for the really unsettling bits. First, the binding rulings will be issued for tariff classification (the familiar BTIs) and also for Binding Origin Information (BOIs). Art. 33 (1). That’s great, but what happened to customs valuation? I know that under the WTO’s Trade Facilitation Agreement (TFA) the original plan for Article 3 of Chapter 3 therein had been to reserve a place for advance rulings on valuation as well as on tariff classification and origin. That position was dropped because there was an inability to gain consensus, so that under the TFA advance rulings on customs valuation are merely “encouraged.” But in trade matters, the EU is a “Great Power” and, in any event, the UCC is an entirely internal instrument. In fact, the DA and IA are largely the product of the Commission, without much of the in-the-open Federal Register notice process we are used to seeing in the US for the promulgation of regulations. It is inexplicable why there is silence on valuation in the UCC, and why there is no species of Binding Valuation Information (BVI). And this is made more especially the case since there are so many major substantive changes to customs valuation in the UCC, as we have seen. This failure to set a process for customs valuation rulings is discouraging. The trade community expected, and deserved, much better. Perhaps the issue will re-emerge in the context of the negotiations with the US on the Transatlantic Trade and Investment Partnership (TTIP).
Second, under the UCC, the BTIs shall be effective for a reduced period of three years. Art. 33 (3), their lifespan reduced to that of the BOIs. I have seen references in commentaries to rapid changes in technology and to frequent changes in trade patterns as the rationale for this shortened period, but I am still mystified. In the first place, a change in the configuration of an imported article away from that described in a BTI would itself disqualify the good from the coverage of the BTI. There is simply no need to build in an earlier automatic expiry to a BTI’s shelf life. Similarly, where there is a deviation away from a production and sourcing pattern such that the facts are no longer embraced by a BOI, that BOI will no longer apply. In cases of changed circumstances, the economic operator cannot rely on the BTI or BOI. Full stop. Indeed to do so is to invite a penalty action by the customs authorities pursuant to Art. 42 because Art. 33 (4) mandates that the goods and production circumstances must remain the same “in every respect” in order for the BTI or BOI to apply. Of course that raises the question—should that clause be construed strictly or should only material changes be considered, with irrelevant or inconsequential changes simply disregarded as befitting “a distinction but not a difference?”
There is no magic to a three year point here—an unscrupulous economic operator is as likely to cheat before that point is reached, frankly is more likely to do so because it would have the “cover” of the BTI or the BOI.
But what of the cases, probably the majority of cases, where there are no such dispositive changes, where the fact patterns remain in place beyond three years? for five years? for ten years? What then? With the UCC, the economic operator will have to re-apply after the automatic expiry point of three years anyway. That seems a waste of time, money and effort, all of which are in short supply for both traders and for the customs authorities.
Third, I have a question about one instance in which a BTI or BOI will not be issued. Art. 33 (1) (a) tells us that the application will not be handled
where the application is made, or has already been made, at the same or another customs office, by or on behalf of the holder of a decision in respect of the same goods and, for BOI decisions, under the same circumstances determining the acquisition of origin.
At first glance, this is unobjectionable. Why should the customs authorities be put to the task of considering another application that is identical to one that led to a BTI or a BOI? Wouldn’t this result be entirely consistent with administrative economy?Well, maybe not. It is often the case that a poorly drafted application for a ruling will lead to a decision that is skewed and incorrect. A one or two-page effort, with not more in substance than a “Dear Mr. Customs, Please classify this article. Thank you very much” inquiry—and trust me, they are far from rare-- will generate a binding ruling that will have binding effect for the importer/economic operator AND for all others as well. You see from the quoted text that the customs authorities will decline the issuance of a BTO or a BOI even when another person is the “holder of a decision.” In other words, exactly as in the USA, and disregarding the sub silentio nature of this effect, the binding BTI or BOI has an effect not only on the recipient but also on all other importers/economic operators. That means that the stated extension of the binding effect to the “holder of the decision”—as if the text stated the effect was binding only on the holder of the decision—at Art. 33 (2) (b) is disingenuous.
And of course that also means that, as a practical matter, any importer/economic operator is vulnerable to his competitors’ poorly conceived and poorly executed BTI requests. That vulnerability to the consequences of someone else’s shoddy work product is one consideration for an importer/economic operator to steal a march on the competitors and voluntarily submit a ruling request.
I know this is possibly making a very fine point, but what if the goods are indeed the same but the BTI never considered appropriate legal arguments? What if earlier precedents, central to the BTI or the BOI, were not properly discounted as distinguishable because that line of argument was never raised or considered? Should it not be possible to submit a request for a re-think and a new decision under these circumstances? And if all of these points are admitted, query whether the economic operator would have access to that other’s request, which led to the BTI or BOI, so as to discern whether all of these substantive points were raised and, if so, properly discussed? Parenthetically, in the USA, these requests are normally available under the Freedom of Information Act (FOIA).
Fourth, can BTIs be amended or not? Art. 34 (6) says they cannot be amended but Art. 28 speaks of annulment revocation or amendments of “favourable decisions.” If it is meant to make BTIs and BOIs an exception to a more general rule, and I believe that is the intention here, then better draftsmanship would dictate a specific prefatory note being made at Art. 28 or elsewhere in this section that these general remarks about “decisions” are not fully applicable to BTIs or BOIs. Indeed, a close reading of Art. 28 juxtaposed with Arts. 33 and 34 will reveal many “carveouts” in the latter. Precisely because BTIs and BOIs are only two specific types of “decisions” there should be a clearer early signal that many departures can be anticipated at Arts. 33 and 34.
Fifth, a subtle point about the primacy of the Harmonized System Committee at the World Customs Organization (HS Committee) is to be mined at Art. 34 (7). There, one stated reason for a revocation of a BTI is when the BTI is not in accord, not only with a change in the WCO’s Explanatory Notes or a court decision, but also with a tariff classification decision or opinion of the HS Committee of the WCO This text appears to give binding legal effect to these WCO opinions such that they automatically supersede the Commission and Member authority inherent in the BTIs.
Conclusion
There are some real improvements and there are some questionable developments. After a review of the UCC and the related DA and IA, and especially when the behind-the-scenes processes are considered, we would certainly have hoped for more. After all, this has been years—decades, actually—in the making. We should all be cautiously optimistic as the UCC is rolled out and any needed de-kinking is undertaken........................................................................................................................................
1. The first Secretary of the Treasury of the USA.
2. 19 CFR § 174.24 (a).
3. Regulation (EU) No. 952/2013.
4. N.B. One cannot rely on the text at Annex III, para. 7 in isolation to define PAPP.
5. See, e.g., ruling no. H262685 (3/23/15).
6. Art. 38 (2) speaks of these two types of AEO only but the DA and IA speak of a combined AEO status, AEO(F). Consistent with this last point, Art. 38 (3) specifically notes that both types of authorizations may be held at the same time.
7. This refers to a simplified regime allowing AEO traders to make import/ export entries in their own records instead of submitting full import/ export declarations. UCC Art. 185 (1), IA Art. 230.
8. See generally 19 CFR § 113.0 et seq.
9. Parenthetically, at the time of this writing, the US has 10 MRAs in place, with others in the works.
10. See IA, Arts. 222-225.
11. All exchanges of information, such as declarations, applications or decisions, between customs authorities and between economic operators and customs authorities, and the storage of such information, as required under the customs legislation, shall be made using electronic data-processing techniques.
12. 19 USC § 1414.
13. The penalty would be sought pursuant to 19 USC §1592, the legal standard of “reasonable care” being lodged at 19 USC § 1484.
14. One question that arises is whether the general reporting requirement under Art. 23 (2) for the holder of a decision to inform the customs authorities without delay of any factor arising after the decision was taken, which may influence its continuation or content applies to BTIs and BOIs.
15. This is in contrast to Art. 28 which prescribes a possible one-year phase-out for decisions generally.
16. Cf. 19 USC §1625 (c) and 19 CFR § 177.12 whereby the CBP must provide notice and an opportunity to comment on any proposed modification or revocation of a binding ruling.
2. 19 CFR § 174.24 (a).
3. Regulation (EU) No. 952/2013.
4. N.B. One cannot rely on the text at Annex III, para. 7 in isolation to define PAPP.
5. See, e.g., ruling no. H262685 (3/23/15).
6. Art. 38 (2) speaks of these two types of AEO only but the DA and IA speak of a combined AEO status, AEO(F). Consistent with this last point, Art. 38 (3) specifically notes that both types of authorizations may be held at the same time.
7. This refers to a simplified regime allowing AEO traders to make import/ export entries in their own records instead of submitting full import/ export declarations. UCC Art. 185 (1), IA Art. 230.
8. See generally 19 CFR § 113.0 et seq.
9. Parenthetically, at the time of this writing, the US has 10 MRAs in place, with others in the works.
10. See IA, Arts. 222-225.
11. All exchanges of information, such as declarations, applications or decisions, between customs authorities and between economic operators and customs authorities, and the storage of such information, as required under the customs legislation, shall be made using electronic data-processing techniques.
12. 19 USC § 1414.
13. The penalty would be sought pursuant to 19 USC §1592, the legal standard of “reasonable care” being lodged at 19 USC § 1484.
14. One question that arises is whether the general reporting requirement under Art. 23 (2) for the holder of a decision to inform the customs authorities without delay of any factor arising after the decision was taken, which may influence its continuation or content applies to BTIs and BOIs.
15. This is in contrast to Art. 28 which prescribes a possible one-year phase-out for decisions generally.
16. Cf. 19 USC §1625 (c) and 19 CFR § 177.12 whereby the CBP must provide notice and an opportunity to comment on any proposed modification or revocation of a binding ruling.
Mark K. Neville, Jr., LL.M. is a Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School.