29 April 2016 The new Union Customs Code Q&A – Why it matters to global trade and potential opportunities 1 What is the Union Customs Code? The Union Customs Code (UCC) is a substantive update and modernization of the existing customs legislation across the European Union (EU). It will introduce an important number of revisions to existing requirements and will apply as of 1 May 2016. A number of transitional phases will follow until full implementation in 2020. 2 What is the vision behind the new UCC? The ultimate aim of the UCC is to facilitate legitimate trade to the maximum extent possible, simplify procedures and reallocate resources from transactional reviews to external border security. Increasing revenue is not a specific goal. On the contrary, the EU is negotiating trade agreements with various countries / regions aimed at reducing trade barriers (financial and other). However, individual countries may try to use some of the UCC features to increase their stake of taxes on international trade. Moreover, the amended rules on inclusion of royalty and fee payments may increase customs values. 3 Is the UCC relevant for non-EU operators? Any business / operator engaged in the import and or export of goods into and within the EU will be impacted by this new UCC. 2 4 What should we do as of 1 May 2016? The implementation of the new UCC will have a major impact on the customs aspects of the business. This includes, inter alia, the current import and export model, customs valuation methods applied and the current license authorizations. The existing customs authorizations and procedures of operators will be re-assessed by the authorities under the new UCC rules before 2020. At the same time, new rules/opportunities will become available, in particular the option of centralised clearance. Operator’s should therefore develop an integrated plan taking into account their overall business strategy, as well as the new obligations and opportunities under the UCC. As the year 2020 is rapidly approaching, it is time to take a pro-active approach to prepare for this new customs era. 5 What will be the biggest driver for the success of the UCC? The success of the UCC will be dependent to a large extent on the ability of EU Member States to implement the IT systems needed to fully benefit from the facilitations embedded in the UCC. 6 What is an AEO? The key words on Authorised Economic Operator (AEO) status are: “compliant and trustworthy economic operators, leading to less interference by customs authorities in the supply chain”. It is an internationally recognised quality mark which indicates that a business operates within a secure supply chain and their internal controls and procedures are efficient and compliant. AEO standards are linked throughout the UCC and will become the cornerstone for operating customs procedures and obtaining benefits. 7 Is AEO a totally new concept ? The AEO certification, as such, is not new (this system was introduced back in 2008), but under the UCC the conditions for obtaining a license (as compared to the certification under the Community Customs Code (CCC)) in the 28 EU Member States will be unified. Current AEO authorisation holders will be re-assessed (and licensed) by 30 April 2019. 8 Why should I choose to become an AEO? What are the (in)direct benefits? Applying for an AEO authorization remains voluntary. However, under the UCC any application for a customs authorization will be judged on the basis of the AEO criteria. The question will thus rather be: do you want to go through the scrutiny of a review each time you apply for a new license, or go through the review only once and get AEO certified. 3 Moreover, a number of selected simplifications and authorizations, including centralised clearance, will become exclusively accessible for AEO certified companies under the UCC. 9 What are the practical requirements for an AEO? An AEO should ensure that it has the technology in place that is capable of facilitating audit-based controls and can properly identify customs issues. Under the UCC, they should also be able to show that they have practical standards of competence or professional qualifications relating to the customs activities they carry out. 10 Will AEO status also be recognised outside of the EU? Globally more than 50 countries/regions have AEO like trade programs in place. The EU has agreed mutual recognition for its AEO program with many other trading countries/regions. Being part of global supply chains and having AEO certification will definitely facilitate cross border movement. More and more multinational companies require their suppliers or service providers to be AEO certified. 11 What will be the impact of the UCC for non-EU operators? In order to fully benefit of the facilitations and simplifications of the UCC, non-EU operators may wish to set up a central place of establishment in one EU Member State and register there as an AEO. In the near future (expected by 2020) centralized clearance will be implemented for AEO’s. This regime will mean a huge facilitation for operators active in multiple EU jurisdictions. Under the centralised clearance regime, an AEO may file its customs declarations with the customs authorities of its place of establishment, regardless of where the goods have actually entered the EU territory. It may thus be beneficial for non-EU operators importing goods into the EU to establish one central branch in a Member State of choice recognized as AEO that will perform all of the group’s import & export activities in the EU. 12 What will be the impact of the UCC on a ‘principal structure’? As such the provisions of the UCC do not have a direct impact on the principal structure. The definition under the UCC of a fixed establishment directly refers to an establishment from which customs activities are performed, which differs from the direct tax permanent establishment definition. On this basis a non-EU business could set up a dedicated customs centre of expertise in one of the EU Member States with no connection to the existing commercial structure of the business. However, the new conditions for royalty 4 and license fee payments under the UCC may impact principal structures (see below). Needless to say that also BEPS and subsequent national corporate tax reforms will have an impact on principal structures. 13 What will be the impact on royalty and license fee payments? This is potentially a very important aspect: the rules for including royalty and license fee payment into the customs value are significantly broadened under the UCC. Not only royalties and license fees that are paid as a condition of sale, but also royalties and license fees that are paid as a condition to purchase the goods must now be included in the customs value. Such inclusion of a royalty or license fee payment in the customs value may thus lead to higher customs duties. Operators should therefore carefully review their royalty and license fee agreements. 14 When will royalty and license fee payments be included in the customs value under the UCC? Under the UCC, royalties and license fees are considered to be paid as a “condition of sale” for the imported goods and included in the customs value when any of the following conditions is met: The seller or a person related to the seller requires the buyer to make this payment; or The payment by the buyer is made to satisfy an obligation of the seller, in accordance with contractual obligations; or The goods cannot be sold to, or purchased by, the buyer without payment of the royalties or license fees to a licensor. 15 Are there specific condition of sale requirements for intercompany payments? In case of intercompany payments the “condition of sale” requirement will be deemed to be met. The only test that then remains for such intercompany payments under the UCC will be whether the royalty or license fee payment is “related” to the imported goods, which is a very broad definition. For example in case of trademarks this condition will be met if the goods are marketed under the trademark. 16 Are there potential alternatives to limit the impact of royalty and license fee payments under the UCC? There may be alternatives available to limit the impact of the inclusion of royalty and license fee payments under the UCC on the customs value and potentially resulting 5 higher customs duties. However, such alternatives should be carefully reviewed due to not only the impact on the customs position of operators but on their overall supply chain and structure also from a direct tax, Value Added Tax (VAT) and legal liability perspective. 17 What will be the impact of the UCC on audit and control of an operator’s customs activities? Under the UCC, the audit and control activities of the customs authorities will move more and more towards administrative audits of AEO’s, rather than controlling individual transactions. As a result, the implementation of the UCC system automatically focusses attention on the central place of establishment of these AEO’s in the EU. This is potentially a huge benefit for operators since customs compliance could be centralized at one spot (in one EU Member State) instead of dealing with several different authorities. The customs authorities in the country of establishment will then be the main contact point for AEO’s for all their activities in the EU. 18 What are the benefits of operating via Belgium or the Netherlands? As in the past, it is expected that for the reasons mentioned above and since these countries account for a large part of the total physical entries of goods in the EU, non-EU operators would continue to choose their establishment in either Belgium or the Netherlands. These countries have a long tradition of customs compliance procedures equipped for international trade. Moreover, unlike some other EU member states, Dutch and Belgian VAT legislation provides for a VAT deferment system which allows importers to declare their import VAT in their periodic VAT returns instead of paying it upfront upon importation. This relieves importers from the burdensome pre-financing of import VAT. 19 What will be the impact of the UCC on an operator’s reporting system? The UCC will ultimately lead towards a fully paperless customs environment. Generally Enterprise Resource Planning (ERP) systems (are able to) already contain the majority if not all of the information needed to support customs processes, either directly or through the use of intermediate software. The changes in the UCC confirm that a well-organized ERP landscape is key. The integration of financial and customs processes into an ERP system avoids manual duplication of data, which is still one of the key causes of mistakes in filing customs declarations. The current and future changes create an ideal opportunity 6 for operator’s to integrate their customs data/processes into financial and other operational systems. 20 How will centralised clearance work under the UCC? As mentioned above, centralised clearance is a new procedure under the UCC where more than one customs authority is involved in the imports. It is expected to become operational by 2020 and it will allow businesses to declare their goods to a customs authority in one EU Member State but present the goods to customs in another Member State. To rely on Centralised Clearance the AEO status is mandatory. This new procedure will thus allow the centralization of customs processes into centres of expertise or shared service centres. Being the last procedure to be implemented under the UCC, it can be seen as the ultimate accomplishment of the vision of trade facilitation and paperless customs. 21 Are VAT rules already aligned with centralised clearance? No, the rules for declaring import VAT under the current VAT Directive are yet not aligned with the centralised clearance procedure under the UCC. Change is thus needed in order for operator’s to fully benefit from centralised clearance. The VAT action plan, announced in April 2016 by the European Commission, does include ideas that may facilitate centralised clearance such as broadening the one-stop-shop possibilities and full reverse charge application to licensed (legitimate) traders. Implementation of these ideas is expected in the years to come. 22 Will there still be differences between EU Member States? Yes. Firstly, the UCC Implementing and Delegated Acts will have to be translated in the national legislation of the different Member States, which may lead to different interpretations. Secondly, the impact is not the same for all countries, as it depends to what extent specific procedures are already aligned with the UCC. These differences, together with the language capabilities of customs authorities in the different Member States, may be decisive for foreign operators to choose their place of establishment in one particular Member State. 23 Will Free Zones still be available in the EU under UCC? Under the UCC Free Zones will still be available. However, please note that these do not exist in all EU Member States. 7 24 How will the change-over for existing customs licenses take place? Transitional rules apply for existing customs licenses with an expiry date beyond 1 May 2016 already held under the old CCC. Over a period of several years, the authorities will re-assess existing licenses under the new rules, which will create a huge burden on the resources of the authorities. It is therefore likely that the authorities will re-assess all customs licenses and authorizations of a business at the moment that one of the licenses expires and needs to be renewed. 25 What will be the effect of the UCC on (existing) Customs procedures The UCC reduces the number of customs procedures available. Under the UCC, imported goods may be released for free circulation, special procedures or export. Special procedures constitute transit (e.g. external, internal or intra-EU), storage (in a customs warehouse or free zone), specific use (temporary admission or end-use) or processing (e.g. inward processing relief (IPR) or outward processing relief (OPR)). Authorizations will be required for all kinds of special procedures. As mentioned, existing authorizations granted before 1 May will remain valid until they expire or until they are reassessed, whatever happens first before 1 May 2019. All special procedures will in principle require a guarantee. 26 What will change to the IPR-regime? Inward processing with duty suspended, inward processing with duty drawback, and processing under customs control will be merged into the IPR regime with duty suspension only. The UCC will not require re-exportation of processed products under the IPR-regime, and operators will be able to calculate the amount of duty payable for goods entered under IPR based on either the value of the imported goods or the final value of the processed products. 27 What are the rules to be recognised as exporter of record? Under a strict interpretation of the UCC only EU based businesses can act as an exporter of record (including non-EU businesses in case they have a fixed establishment from which customs activities are performed). This needs to be seen from the point of view that trade facilitation and paperless customs (e.g., the UCC vision) do require the need for customs authorities to be able to execute control. 8 28 Can non-EU companies depend on customs brokers when exporting from the EU? There is currently some uncertainty whether non-EU companies without a permanent establishment in the EU could still act as exporter of record. Informal contacts with customs authorities seem to indicate that the UCC still includes the possibility to make use of customs brokers when exporting from the EU. A non-established company can in principle not act as an exporter of record. However, there are ways to include wording in customs declarations to pinpoint the owner of the goods being exported (e.g. customs broker X, in the name of non-EU company Y). This terminology was already used in certain countries (in the periphery of the EU) where a non-EU principal wants to perform exports from the EU. A confirmation of this is expected in the Commission’s UCC guidelines which are expected soon. 29 What will be the impact of the abolition of the “first sale for export rule”? Under the UCC the so-called “first sale for export rule” will be abolished. Under the current regime of the CCC, an earlier sale can be taken as the basis for customs valuation, provided it took place with the intent to export the goods to the territory of the Community. Given that the customs value is the taxable basis for calculating customs duties, a duty savings can be made if one depends on the “first sale rule”. The UCC foresees a grandfathering clause allowing importers to apply the “first sale rule” until 2017 under the condition that a binding contract had been in place before 18 January 2016. Operators might thus want to consider alternative methods to reduce their taxable base for customs valuation purposes. The latter would in most cases imply changes in the supply chain. 30 What will be the changes to guarantees? Under the UCC, any known or potential customs debts must be secured by a guarantee. This includes not only known debts deferred for later payment, but any duties suspended (including special regimes such as Inward Processing, End use, Temporary Storage facilities and Customs Warehousing). Although mandatory guarantees will be introduced on 1 May 2016, under the transitional arrangements they will not apply until a company’s special procedure authorisation has been reassessed or reissued as a UCC authorisation. Companies with an AEO status, or that meet the certain criteria required to be an AEO, will be eligible to apply for a guarantee reduction or waiver under certain conditions. 9 31 How is the guarantee calculated? The guarantee amount will vary by country and circumstance. No guarantee will be required under €1,000 - the de minimis threshold. Under the UCC it will be possible to cover more than one transaction – a so called “comprehensive” guarantee if certain conditions are met. 32 What will be the changes to Binding Tariff/Origin Information? The validity of the Binding Tariff/Origin Information (BTI) will be reduced from 6 to 3 years under the UCC and the use will be made mandatory. The latter will apply both for BTI’s issued prior as well to BTI’s that are issued after the entry into force of the UCC. 33 What is meant by the ‘phased’ entry into force of the UCC? The UCC and its supplemental Commission Regulations will in principle apply as from 1 May 2016. Over a period of several years, existing customs licenses / authorizations need to be renewed under the conditions of the UCC. It is expected that a wide range of legislative changes will follow, covering procedural law such as legislation concerning Customs Economic Procedures, Customs Simplified Procedures and Transit as well as substantive law such as Valuation, Origin and Tariffs over the period until 31 December 2020. 10 Loyens & Loeff International Trade & Customs Team The Loyens & Loeff International Trade & Customs team assists its clients on indirect tax matters and regulatory issues attached to the international trade in goods and services. We advise our clients on issues including export controls, economic sanctions, the law of foreign investment, customs procedures, excises and VAT. Our team has a wealth of experience handling trade and customs issues on behalf of manufacturers, exporters, importers and end users. In addition to experienced attorneys our qualified team includes former officials and regulators as well as indirect tax and compliance officers with experience in multinational corporations. This enables us to better understand the concerns of our clients and at the same time to speak the language of the authorities we are dealing with. We assist clients with the filing of applications for all types of authorizations and licenses, the negotiation and drafting of appropriate contractual clauses and project documentation, drafting and implementing compliance programs, giving training courses and the performing of internal scans and audits. We represent clients before the Benelux authorities and courts as well as before the European Commission, its advisory committees and the Court of Justice of the European Union. 11 Contact our experts: Bert Gevers Office: Brussels T: +32 2 743 43 18 M: +32 496 12 53 57 E: firstname.lastname@example.org Jack Nuijten Office: Rotterdam T: +31 10 224 62 07 M: +31 612 91 47 84 E: email@example.com Kees Bouwmeester Office: Amsterdam T: +31 20 578 57 54 M: +31 622 22 54 91 E: firstname.lastname@example.org Jochen Vankerckhoven Office: Brussels T: +32 2 743 43 68 M: +32 499 43 46 45 E: email@example.com Yassine el Bojaddaini Office: Rotterdam T: +31 10 224 65 88 M: +31 653 59 80 46 E: Yassine.el.Bojaddaini@loyensloeff.com 12 Gerard Kreijen Office: Amsterdam T: +31 20 578 53 95 M: +31 651 79 96 73 E: firstname.lastname@example.org Olivier Coulon Office: Luxembourg T: +352 466 230 303 E: Olivier.Coulon@loyensloeff.com Thierry Charon Office: Luxembourg T: +352 466 230 510 M: +352 691 96 30 42 E: email@example.com Disclaimer Although this publication has been compiled with great care, Loyens & Loeff N.V. and all other entities, partnerships, persons and practices trading under the name 'Loyens & Loeff', cannot accept any liability for the consequences of making use of this publication without their cooperation. 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