United States Fashion Industry Association Proposed EU customs legislation Impact on First Sale for Export and Treatment of Royalties March 2014 Chris Young KPMG United States Bart-Jan A. Kalshoven KPMG The Netherlands
Today s speakers Bart-Jan Kalshoven Director, Trade & Customs Practice Bart-Jan is a Netherlands-based customs lawyer with extensive footwear and apparel experience both as outside counsel and as an in-house trade compliance director. He is frequently engaged by multi-national companies to assess and/or defend the customs value used upon importation of merchandise into the EU. Chris Young Managing Director Chris has fourteen years of experience in international trade, including seven years as a trade and customs professional with KPMG in the United States and seven years in the United Kingdom; he also spent time as the global customs manager of one of the world s largest retailers. 1
Agenda EU customs background and context Current EU customs legislation Proposed EU customs legislation Effects of proposed customs legislation Open questions and possible alternatives Conclusions 2
EU customs background and context
EU members Austria (1995) Belgium (1952) Bulgaria (2007) Croatia (2013) Cyprus (2004) Czech Republic (2004) Denmark (1973) Estonia (2004) Finland (1995) France (1952) Germany (1952) Greece (1981) Hungary (2004) Ireland (1973) Italy (1952) Latvia (2004) Lithuania (2004) Luxembourg (1952) Malta (2004) Netherlands (1952) Poland (2004) Portugal (1986) Romania (2007) Slovakia (2004) Slovenia (2004) Spain (1986) Sweden (1995) United Kingdom (1973) 4
Brief history EU customs legislation 1992 First Community Customs Code (EC) No 2913/1992 entered into force 1997, 1999, 2000, 2005 and 2006 the Code is revised and updated several times to keep it up to date with changing needs 2008 the Modernized Customs Code (MCC) is introduced with Regulation (EC) No 450/2008 and due to enter into force by 2013 once implementing provisions (MCCIP) were finalized (June 24, 2013 at the latest) 2012 proposal for a recast of the MCC is submitted i.e., the Union Customs Code (UCC) due to requirements set by the Lisbon treaty and delays in implementation of IT capabilities required to implement MCCIP 2013 UCC was adopted on 9 October 2013 by Regulation (EU) No 952/2013 with most provisions to come into effect on May 1, 2016 2014 the draft delegating acts and the draft implementing acts are published in January. Until May 1, 2016 the Community Customs Code and its implementing provisions continue to apply. 5
Current EU customs legislation
Current EU customs legislation First sale for export EU First Sale for Export concept codified in Article 29 Community Customs Code (CCC): The customs value of imported goods shall be the transaction value, that is, the price actually paid or payable for the goods when sold for export to the customs territory of the Community where necessary adjusted. Article 147 Community Customs Code Implementing Provisions (CCCIP) provides further guidance: In case of successive sales before valuation, only the last sale, which led to the introduction of the goods into the customs territory of the Community, or a sale taking place in the customs territory of the Community before entry for free circulation of the goods shall constitute such indication. Where a price is declared which relates to a sale taking place before the last sale on the basis of which the goods were introduced into the customs territory of the Community, it must be demonstrated tot the satisfaction of the customs authorities that this sale of goods took place for export to the customs territory in question. 7
Current EU customs legislation First sale for export What can be used by the importer as a Sale for Export? 1. Sale in the Community under bond (e.g., customs warehouses, inward processing) 2. Last sale before introduction in the customs territory and 3. Any sale if demonstrated for export to the territory (direct shipment, EU specifications, back-to-back ordering to manufacturer) 8
Concept of sale WCO advisory opinion 1.1 states that: in conformity with the basic intention of the Agreement that the transaction value of imported goods should be used to the greatest extent possible for Customs valuation purposes, uniformity of interpretation and application can be achieved by taking the term "sale" in the widest sense. Some examples where no sale can be distinguished: Goods are imported under consignment Goods imported by intermediaries, who do not purchase the goods and who sell them after importation Goods imported by branches which are not separate legal entities 9
Concept of sale In order to ensure the uniform application of WTO (and subsequently EU) customs legislation, the term sale is not governed by civil law EU customs administrations in practice use the following (informal) definition for the term sale : The obligation to supply and/or purchase goods In this concept the actual delivery of the goods is not required to identify a sale 10
Current EU customs legislation First sale for export (continued) Explicit First Sale for Export Purchase order 2 Manufacturer Sale 2 Buyer A Sale 1 Buyer B Purchase order 1 EU importation Customs valuation basis 11
Current EU customs legislation First sale for export (continued) Implicit First Sale for Export Purchase order 2 Manufacturer Sale 2 Buyer A Sale 1 Buyer B Purchase order 1 EU importation Customs valuation basis 12
Current EU customs legislation Royalties Article 32-1-c Community Customs Code: In determining the customs value, there shall be added to the price actually paid or payable for the imported goods royalties and license fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable Articles 157 through 162 CCCIP provide for additional guidance on dutiability of royalties: deemed conditions of sale in case licensor and seller are related parties (also see Article 143 CCCIP) exemption in case of trademark license and licensee may source the merchandise freely Based on free sourcing exemption most (intercompany) royalties are currently not dutiable 13
Proposed EU customs legislation and its effects
Proposed EU customs legislation First Sale For Export Draft provisions relating to the First Sale for Export concept: 2009 Draft MCCIP art. 230-02 In case of multiple contracts of sale, the transaction value is determined on the basis of the last sale in the commercial chain 2011 Draft UCCIP art. 230-02 In case of successive sales, the transaction value is determined on the basis of the last sale in the commercial chain before the goods are brought into the customs territory 2014 Draft UCCIP art. 1A-II-3-02 The value of the goods shall be determined at the time of acceptance of the customs declaration on the basis of the transaction occurring immediately before the goods are declared for free circulation Options for sale for export Options for sale for export Options for sale for export 1. Last sale before declaration for free circulation (including transactions under bond) 1. Last sale before introduction into the territory. 2. Transaction under bond 1. Last sale before declaration for free circulation (including transactions under bond) 15
Effect of draft customs valuation provision Explicit First Sale for Export Customs valuation basis Purchase order 2 Manufacturer Sale 2 Buyer A Sale 1 Buyer B Purchase order 1 EU importation 16
Effect of draft customs valuation provision Implicit First Sale for Export Customs valuation basis Purchase order 2 Manufacturer Sale 2 Buyer A Sale 1 Buyer B Purchase order 1 EU importation 17
Proposed EU customs legislation Royalties Draft provisions relating to the dutiability of royalties (Article IA-II-3-10 draft Implementing Regulation): Royalties and license fees are considered to be paid as a condition of sale for the imported goods when any of the following conditions is met: a) the seller or person related to the seller requires the buyer to make this payment b) the payment by the buyer is made to satisfy an obligation of the seller, in accordance with contractual obligations c) the goods cannot be sold to, or purchased by the buyer without payment of the royalties or license fees to a licensor Introduction of new concept: condition of purchase?? 18
Effects of proposed EU customs legislation First Sale for Export concept: First Sale for Export concept as currently applied throughout the EU will be abolished Abolishment does not only affect explicit First Sales but likely also implicit First Sales as also in implicit First Sale scenario s, a subsequent sale occurred prior to the submission of the customs declaration (e.g., even though buyer A acts as importer of record, it already entered into a sale with buyer B and as such that transaction must be used for customs valuation purposes) Dutiability of royalties: Free sourcing exemption is no longer applicable Likely that de facto all royalties become dutiable as license agreements tend to require a licensee to pay a royalty in relation to the purchased merchandise (whether or not calculated over their resale revenue) 19
Open questions and possible alternatives
Open questions Open questions at this stage: Can the EU actually abolish the First Sale for Export Concept (reference is made to the U.S. court cases E.C. McAfee Co. and Nissho Iwai America Corp.)? Is the condition of purchase with regard to royalties in line with the WTO valuation agreement, hence valid? Are there ways to avoid the adverse impact of both proposals (First Sale & Royalties)? 21
Potential alternative First sale Avoid the identification of a subsequent sale by using forecasts instead of purchase orders? Purchase order Manufacturer Buyer A Buyer B Purchase order Customer Forecast EU importation Alternatively a consignment based transaction should also avoid the identification of a subsequent sale 22
Potential alternative Dutiable royalties Ensure disconnection between importation (e.g., customs valuation) and royalty payment (different leg in the chain)*? Licensor royalty charge USD 100 USD 105 Manufacturer Company A Company B EU importation * In case of successive sales before importation the abolishment of the First Sale for Export concept may require companies to work with forecasts or consignments (e.g., between company A and B) in order to avoid customs valuation based on the transaction occurring between company A and B. 23
Conclusions
Conclusions First Sale for Export: Abolishment of First Sale for Export concept may not be possible in the EU, although this will need to be litigated up until the EU Court of Justice Consequences of abolishment of First Sale for Export concept likely to have a significant financial impact as also implicit first sales will be affected. Alternative structuring could avoid the negative impact of abolishment Royalties More often than not royalties will be subject to EU duties Legality of new royalty provisions remains to be seen Alternative structuring could avoid the negative impact of proposed provisions 25
What to do now? General: Actively participate in lobby efforts (AmCham Europe, Business Europe, etc.), although too little, too late? Review possibilities of class actions based on illegality of proposed legislation First Sale for Export: Determine whether any explicit or implicit first sales are currently used in the EU Assess financial impact of proposed changes Conduct feasibility analysis of alternative structures Royalties: Identify internal and external royalty flows Determine impact proposed legislation Conduct feasibility analysis of alternative structures 26
Your contact person(s) Bart-Jan A. Kalshoven Director Office : +31 10 453 6856 Cell : +31 6 2139 3136 Email : kalshoven.bart-jan@kpmg.nl Chris Young Managing Director Office : +1 312 665 3229 Cell : +1 312 342 0947 Email : christopheryoung@kpmg.com 27
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