Union Customs Code: VAT Alert

As of May 1, 2016, the Union Customs Code (UCC) came into effect, replacing the prior Community Customs Code (“Community CC”). The UCC has direct effect in all 28 Member States of the European Union (EU).

The UCC addresses a broad range of customs matters and also has significant implications for import VAT, says Daan Arends, a tax partner with DLA Piper in Amsterdam. In particular, it is relevant to the taxable base of imports for VAT purposes. Businesses that engage in imports and exports should be aware of the new “last sale” rule for valuing imports, and the broader circumstances pursuant to which customs value includes licensing fees and royalties.

Last Sale Rule

Customs value is relevant for determining customs duties and calculating import VAT, both of which are generally imposed on the entry of goods into free circulation within the EU.

Under the prior Community CC, importers could use the value of an earlier sale in a supply chain as a basis to determine customs valuation if the sale was destined for the EU under the so-called “first sale for export” (FSFE) rule. This was a useful rule, since the price of a transaction earlier in the supply chain is generally substantially lower, as profit margins of transactions further down the supply chain are excluded. As a result, considerable customs duty savings could be achieved. 

Now, under the UCC, the relevant value is the value of the supply "immediately before the goods were brought into the customs territory”. The relevant sale for goods brought into the EU is the sale when crossing the border, i.e., the ultimate sale taking place at that time, in performance of the contract of sale. This rule can dramatically increase the importer’s liability for customs duty and import VAT in cases where the FSFE was previously used.

The exact implications of this new rule remain unclear as strict interpretation would lead to a situation where profit margins of transactions between EU-established traders need to be included in the customs value. Although recent Commission guidance (TAXUD B4/ (2016) 808781) suggests that such EU domestic sales “do not qualify as sales for export to the EU", uncertainty remains as to when traders are effectively established in the EU and how to deal with branches of non-EU established businesses.

To comply with the last sale rule, customs agents responsible for importation into the EU should now be aware of all sales transactions occurring before the moment of release for free circulation.

License Fees and Royalties

Under the Community CC, royalties and license fees were generally only taken into account in the customs value if they related to imported goods and were paid by the seller as a condition of their sale. Because of the way the rule was applied, royalties and license fees were often not subject to customs duty or VAT. 

Under the UCC, royalties and license fees are assumed to be paid as a condition of sale under a broader set of circumstances, including if the goods cannot be purchased by the buyer without payment of the royalties or license fees to a licensor.

Specifically, royalties and license fees are assumed to be paid as a condition of sale, in the absence of evidence to the contrary, if any of these conditions are met:

  • The seller or a person related to the seller requires the buyer to make the payment;
  • 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.

Note that the licensor is not necessarily the supplier of the imported goods.

Additionally, the special conditions for the adding trademark royalties to the customs value have been deleted.  While such trademark royalties were generally not treated as subject to VAT and customs duty under the Community CC, they are also now treated as dutiable under a broader set of circumstances.

This rule could trigger import VAT and duty on license fees, for example, if a Dutch wholesaler imports shoes from Vietnam for a low price, and must pay a license fee for the rights to distribute that brand of shoe. If the condition of sale requirement is met, the royalties should be added to the customs value.

Planning in Light of the UCC

In light of these developments, Arends advises businesses engaged in imports and exports to review their supply chains to consider how they may be affected by the new rules. Various steps may be taken to mitigate their impact. For example:

  • Certain transitional rules apply with respect to contracts concluded before January 18, 2016. Under these rules, importers may continue to value imports by reference to the FSFE rule until December 31, 2017.
  • It may be desirable to import goods into the EU at an earlier phase of production, where their value is lower.
  • It may be feasible to amend royalty or licensing fee agreements so that that the basic conditions (i.e., that the agreements are related to the goods and are a condition of sale) are not met. Although there can be various situations where payment of royalties or license fees are considered a condition of sale when paid to an unrelated third party, there is no assumption that royalties and license fees are automatically includible in the customs value.

More proactive planning may also be feasible, although taxpayers should bear in mind that this is an area of increased surveillance by revenue authorities.

Postscript: The Implications of Brexit

Supplies between EU Member States are not subject to the UCC, because these supplies are Intra-Community dispatches and acquisitions, rather than imports or exports. 

Further to the U.K. Brexit vote on June 23, 2016, the U.K. is in the process of terminating its EU membership. Once the U.K. renounces its status as a Member State, the UCC will no longer be directly applicable to imports into the U.K. – whether from EU Member States or from third countries – unless the U.K. opts to include the UCC in domestic legislation. On the other hand, supplies of goods from the UK to EU Member States, which are currently treated as intra-Community transactions, will be treated as imports subject to the UCC from the standpoint of the importer.

By Joanna Norland, Technical Editor, Bloomberg BNA, with contributions from Daan Arends, author of the Netherlands chapter of the Bloomberg BNA VAT Navigator

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