Impact of changes to Valuation under the Union Customs Code on Customs Duties: Removal of the First Sale Rule under the Current Implementation Legislation

Impact of changes to Valuation under the Union Customs Code on Customs Duties: Removal of the First Sale Rule under the Current Implementation Legislation Since the Union Customs Code (UCC) was adopted on 9th October, 2013, replacing the long awaited but never realised Modernised Customs Code, there has been speculation on how this new Regulation will impact importers operating within the European Union. The goals of the UCC are straightforward and noble; to simplify customs processes and procedures for companies and governments alike, to align the Member States customs practices, and to improve the efficiency of customs procedures. However, the means by which the European Union will achieve these goals has been somewhat less clear. This past January, the European Commission put forth an implementation proposal, which is currently under review by representatives of the EU Member States. Several key areas involving changes to valuation procedures have caused some concern for EU importers including changes to the ‘first sale rule’. History ofiStock_000014064210Large The first sale is linked to the World Trade Organisations Valuation Agreement which establishes general rules for establishing the customs values of imported goods. Under the Valuation Agreement, when goods are re-sold multiple times before importation to the country of sale, under certain conditions, customs may be valued under the first sale price, rather than the price paid on importation. In 2007, the World Customs Organization Technical committee analysed first sale rule using the Valuation Agreement and came to the conclusion that goods should be valued at the last sale of the goods before entering the country of sale, effectively invalidating the first sale rule.   International Response Historically, the US, EU and Japan have all accepted some form of the first sale rule, while emerging markets have not. Following the WCO’s findings and subsequent advice in this area, these countries have re-examined the use of the first sale rule. In 2008 US Customs and Border Protection agency looked to moving to a last sale rule. However, this was met with great opposition from key importers. Subsequently, through a series of court decisions, it was found that they US CBP could not move to final sale requirement without action by Congress. It appears unlikely that the US will do away with first sale anytime soon. In Japan however, in 2013 the rules under the Customs Tariff Act were tightened to make using the first sale rule increasingly difficult to use. The major changes include setting the definition of Japanese importer as a resident of Japan or having a headquarter in Japan and a shift to considering the sales price as the ‘last price in a chain of commercial transactions’. EU Response iStock_000007387570Medium[1] It has become clear that if the implementation legislation goes forward as planned, there are clear areas where importers can expect to see their customs duties go up, potentially significantly. Under the current implementation legislation, the ‘first sale rule’ will be abolished, which will not only raise customs duties, but will have a knock one effect, raising the customs duties owed through royalties and licences. Under the current legislation, if products are imported into the European Union, via a third country middle man, and those products have clearly been manufactured for the European market, then often the ‘first sale rule’ will apply, and the EU importer will only need to pay customs duties on the initial price that the middle man paid for the goods. However, if the implementation legislation goes through as currently written, the EU importer will have to pay customs duties on the increased price of the product that the middle man has added. This change will bring on increased customs duties not only on the middle man’s mark-up, but also on the royalties and licences that are added. What this Means for EU Traders Under the proposed implementation legislation, it’s clear that many EU traders should expect their customs duties to increase in 2016. However, it is still too early to tell the extent to which they will increase. The knowledge that customs duties will be increasing opens up a myriad of questions, from whether the UCC will be putting European traders at a disadvantage to those in other market, to how to make up for increased costs. Will it be better to pass the cost onto the customer, something that could very likely decrease the competiveness on EU sellers, or source goods from within the European Union, which is likely to come at a higher cost. It is likely that if EU follows the WCO’s guidance and does away with the first sale rule, it will be at a competitive disadvantage with key commercial trading blocs, most notably the US. This has the potential to deeply impact EU importers and could cause companies to re-think their trading routes and supply chains. However, if more countries decide to follow the EU’s example and move away from the first sale rule, it will even out the competitive advantages and create a more level playing field overall, not just for major trading blocs but also those still developing. While this is unlikely to help the EU fiscally, it would limit the damage. As the implementation legislations is finalised over the next several months, European importers will get  a more clear picture of what awaits on the horizon and will be better equipped to start planning strategies for neutralising or lowering the bottom line.