Further to our blog post on 4 May 2016 (available here) detailing some of the key changes to EU customs legislation taking place under the Union Customs Code (“UCC”), the European Commission (“EC”) has recently issued some valuation guidance (available here) concerning the interpretation of certain key provisions under the UCC. The guidance covers, inter alia, key valuation issues, namely:
- “Last sale for export“;
- Removal from customs warehouse; and
- Royalties and licence fees.
It should be noted that the EC guidance that has been issued is not a legally binding act. Rather, it is intended to be an explanatory resource with the aim of ensuring a common understanding for both the customs authorities and traders alike.
We set out below some of the key implications raised in the EC’s guidance.
- “Last sale for export”
As explained in our previous blog, under the UCC, the ‘earlier sale’ provisions will be removed and replaced by a ‘last sale’ rule. Based on the new wording of ‘transaction value’, it was unclear whether the transaction value could be based on the value of the sale between two EU-based entities (i.e., whether such a sale could be treated as the ‘last sale’).
The EC’s valuation guidance appears to have clarified the position. In particular, the guidance provides that “sales which are domestic sales within the EU do not qualify as sales for export to the EU.” A ‘domestic sale’ is defined as a sale “between two EU parties”. The guidance also provides a number of examples of various supply chains where the last sale in the chain is between two EU-based entities. The examples illustrate that the sale for the purposes of determining the transaction value cannot be the sale between two EU-based entities.
The guidance also states that where there is a valid ‘sale for export’, then Method 1 (i.e., the transaction value) should be applied. Consequently, where there is no valid ‘sale for export’, then the transaction value method cannot be used and an alternative valuation method must be used instead.
- Removal from customs warehouse
The EC’s valuation guidance has clarified how the customs value will be determined when goods that are placed in a bonded warehouse are subsequently entered into free circulation in the EU. In particular, the guidance provides that, where there is a valid ‘sale for export’ at the time when the goods are introduced onto the EU market (i.e., enter the bonded warehouse), then that sale will be used as the basis for the customs value upon removal from the warehouse. If there is no valid ‘sale for export’ at the time when the goods are placed in the bonded warehouse, in these circumstances, the customs value will be based on the transaction value of the sale that takes place during the warehousing operation. However, if there is no such sale (e.g., goods are sold to an EU customer after release for free circulation), then Method 1 cannot be used and the customs value will have to be determined in accordance with a secondary method of valuation.
- Royalties and licence fees
The EC’s guidance provides that royalties and licence fees are not subject to an automatic presumption that they must be included in the customs value. Rather, the guidance makes clear that the dutiability of royalties and licence fees will be examined on a case-by-case basis and will be determined by examining, inter alia, the commercial circumstances and the relevant contractual arrangements between the parties, including any royalty and licence fee agreements and/ or contracts of sale that are in place. The guidance is clear that existing case law, WCO guidance and the EC’s Valuation Compendium remain applicable and are valid interpretative resources for assessing the dutiability of royalties and licence fees.
One of the key factors in this determination is whether the payment is made as a ‘condition of sale’ of the imported goods. There remains some uncertainty in how the new ‘condition of sale‘ provision will be applied in practice and Member States are awaiting further guidance from the EC. However, the most recent guidance helps to clarify this matter, explicitly referring traders to WCO Commentary 25.1 which sets out a non-exhaustive list of factors to consider, including:
- There is a reference to the royalty or licence fee in the sales agreement or related documents.
- There is a reference to the sale of the goods in the royalty or licence agreement.
- According to the terms of the sales agreement or the royalty or licence agreement, the sales agreement can be terminated as a consequence of breaching the royalty or licence agreement because the buyer does not pay the royalty or licence fee to the licensor. This would indicate a linkage between the royalty or licence fee payment and the sale of the goods being valued
- There is a term in the royalty or licence agreement that indicates if the royalties or licence fees are not paid, the manufacturer is forbidden to manufacture and sell the goods incorporating the licensor’s intellectual property to the importer.
- The royalty or licence agreement contains terms that permit the licensor to manage the production or sale between the manufacturer and importer (sale for export to the country of importation) that go beyond quality control.
As noted above, notwithstanding the issuance of the EC’s guidance, there remains some uncertainty in respect to how the new provisions will be applied in practice. This poses an inherent risk that customs authorities across the EU may adopt differing interpretations of the provisions, preventing a harmonised approach to the UCC. We understand that the EC and Member State customs authorities will be issuing additional guidance on these matters.
The foregoing is intended only to provide an overview of some of the issues discussed in the EC’s valuation guidance.