Combating undervaluation fraud is high on the EU customs enforcement agenda. We have witnessed increased activity of Member State customs authorities, questioning declared values upon import after comparison with statistical values. Investigations focus on products with a high duty burden – such as footwear and textiles – but also sectors where fraud is widespread, such as e-commerce. In their efforts to recover customs duties, the European Commission and Member States resort to approaches that are not always in line with EU customs laws. Companies should be aware of their rights and obligations under the Union Customs Code, to mitigate the impact of these investigations.
A brief history: from standard values to the real economic value
The introduction of the Common Customs Tariff required the European Communities (as the EU was named then) in 1968 to adopt a common customs valuation framework.1 Erasing differences between national provisions, this framework ensured a level playing field for importers throughout the Community. The starting point was the so-called ‘Brussels definition of value’,2 entailing a notional approach toward customs valuation by making use of standard values. Under the Brussels definition of value, the actual price paid for the goods was not of relevance.
With the conclusion of the Customs Valuation Agreement in 1980,3 the transaction value – that is, the price actually paid or payable for the goods when sold for export – became the primary basis for customs valuation purposes.4 The rules of this Agreement were incorporated into EU law and remain applicable today. The transaction price is to be adjusted whenever necessary to avoid the setting of arbitrary or fictitious customs values.5 If there is no transaction value, a number of consecutively applicable alternative valuation methods are at the disposal of the importer.6 The 1980 changes were adopted in order to foster international trade by creating a fair, uniform and neutral system of customs valuation excluding the use of arbitrary or fictitious values.7
Investigations into undervaluation upon import
The customs authorities do not always accept the declared value. Authorities in the EU have been scrutinising the valuation of textiles and footwear for quite some time now – not surprisingly, as these products still face heavy tariffs upon import (mostly between 8 per cent and 17 per cent).
This became acutely visible in 2018 when the European Commission initiated infringement proceedings against the United Kingdom for having failed to collect and transfer to the EU customs duties at the right amount.8 This followed a report from the EU’s anti-fraud office (OLAF) claiming that the UK was a hub for undervaluation fraud between 2011 and 2017. With the UK authorities allegedly unable to take appropriate action to prevent the fraud, the Commission aimed to recover a staggering €2.7 billion for the EU budget. This Commission action against the UK put considerable pressure on the other EU Member States and caused them to more aggressively tackle undervaluation. In doing so, Member States have tended to follow valuation methods prescribed by OLAF, which at times have a dubious legal basis.
We have witnessed an increasing number of investigations into customs valuation. The approach is always the same. The customs authorities test the declared value against the EU statistical value, or the retail price of products on online platforms. If they reasonably suspect that the declared value is too low, the authorities request the declarant to supply additional information to account for the value.9 If the economic operators involved do not dispel the existing doubts, the authorities will set a new, higher value and claim additional duties and VAT, either based on the average value for the tariff classification in which the declared product falls or a percentage of the retail price.
Compliance with EU law, and respect of importer’s rights
An investigation into the declared value has material consequences for a business. If the investigation happens upon import, the supply chain is disrupted as the customs authorities do not release the goods until the importer provides a financial security for the potential tax debt. Businesses need to be prepared to account for the value declared, and must have readily available the evidence necessary to demonstrate that the declared value is correct. If customs authorities decide to reject the declared value and substitute it with something higher (in the cases we have seen, up to 30 times higher), the financial impact resulting from tax and penalty claims could jeopardise the company’s future activities.
In practice, the approach of Member State customs authorities has often been shown to go against the letter and spirit of the EU rules governing customs valuation. Importers are always entitled to substantiate the declared value by supplying supportive information or documents and by explaining why the value is lower than the statistical value or the retail price. By definition, averages are derived from very different import prices, linked to the quality and properties of the imported products (the lower the quality, the lower the price), and profit margins in retail prices can be very significant. Furthermore, the customs authorities’ questions are often addressed to declarants who are customs agents and operators in the EU and, although possibly co-liable for the customs debt and penalties, unable to provide the detailed information requested by the authorities often years after the imports were made. Even if the declarant cannot dispel the authority’s doubts, the EU statistical value cannot automatically replace the import value, as customs authorities cannot rely on a price that has not been proved correct.10
With a lot of pressure on EU Member States to combat undervaluation fraud, customs authorities may resort to investigative approaches and valuation methods at odds with the rules and discipline of the Union Customs Code, with significant impact on legitimate supply chains. Declaring a customs value that is below the statistical value cannot in itself be a reason to reject the declared value and instead apply this statistical value. Companies should be aware of their procedural rights and be vigilant when facing authorities that doubt the value declared upon import. Such doubt is only the first juncture in a necessarily thorough and complex process of potential revaluation. Reed Smith and our Greenlane network of customs and trade lawyers are ready to support and represent businesses across the EU in their dealings with customs authorities.