As mentioned in previous editions of this Alert, the EU is in the process of developing Implementing Provisions for the Modernised Customs Code (MCCIPs). As part of this process, the current customs valuation provisions are being reconsidered. If the current draft version of the MCCIPs will be implemented, importers will have to base the customs value on the last sale. Furthermore, many royalties and license fees are expected to become part of the customs value.
EU customs value based on an earlier sale
Under the current EU customs legislation, importers are allowed to use an earlier sale for export in the supply chain rather than the sourcing price of the importer as the basis for the EU customs value. The earlier sales price (a so-called first sale) can be used as long as the applicable conditions are met, e.g. the sale should qualify as a sale for export to the EU, it should concern a real transaction, and the price may not be influenced by the relationship between the seller and the buyer.
X BV, a Dutch company, buys t-shirts, from X Hong Kong Ltd (X HK). X BV and X HK are related companies. X BV buys the T-shirts CIF Rotterdam and pays Euro 200 per to X HK. X BV customs clears the t-shirts in the Netherlands. X HK sources the t-shirts from various vendors in China. The manufacturers are neither related to X BV nor X HK. The vendors invoice X HK Euro FOB Hong Kong and charge Euro 100 for the t-shirts.
Based on the current EU customs legislation, it could be possible to base the customs value on the vendors - X HK transaction price (Euro 100) instead of using X BV’s sourcing price (Euro 200) as the basis for the customs value.
As a result of the draft version of the MCCIPs, it seems that only the X HK – X BV transaction price (Euro 200) can serve as the basis for the EU customs value. As in many other cases, this change would result in an increased EU customs duty burden.
Royalties and license fees
Based on the current EU customs valuation rules, royalties and license fees should only be included in the customs value if: 1) they relate to the imported goods and 2) payment is a condition of sale of the imported goods. If royalties or license fees are paid to a party that is not the seller or a party related to the seller, the royalties or license fees should only be included in the customs value if the seller or someone related to the seller requires the buyer to pay the royalties or license fees. As a result of this legislation and case law, many royalties and license fees are to be excluded from the customs value.
As a result of the draft MCCIPs, it is expected that many more royalties and license fees will have to be included in the customs value. In addition to the payments that should be included in the customs value on the basis of the current rules, payments that are made to satisfy an obligation of the seller or payments that are required in order to enable the buyer to sell or purchase the goods must also become part of the customs value. In combination with the proposed elimination of the first sale concept, the draft rules will certainly result in an increased customs duty burden for many importers.
Reference is made to the example of X BV and X HK. Besides the payment of Euro 200 to X HK, X pays a royalty of Euro 0,20 per t-shirt to Y Corporation (“Y”), a U.S. company. The royalty payment is required based on an agreement between X BV and Y. Neither X HK nor any of the vendors are a party to the X BV – Y agreement. Y is not related to X BV, X HK or any of the vendors of the t-shirts.
Based on the current legislation and case law, it is not likely that Customs will require X BV to include the royalty of Euro 0,20 per t-shirt in the customs value that is declared for the t-shirts. If the draft version of the MCCIPs were to apply, the conclusion could be that the t-shirts cannot be sold by X BV without paying the royalty. If so, there may be no other option than to include the royalty in the customs value.
If the current draft version of the MCCIPs would come into force, this will result in an increased customs duty burden for many importers. Many companies will have to reconsider existing, in many cases approved, valuation practices. The changes will complicate compliance and will create uncertainty. If the draft MCCIPs will not be amended and will be implemented in the EU legislation, importers will have to reconsider the determination of the customs value at import. At that stage, the potential (changed) saving options can be considered and, if applicable, implemented.