Article by Jeremy White, Pump Court Tax Chambers.
Published in the August 2001 issue of Tax Adviser.
This article introduces the legislation relating to the own resources of the European Community derived from customs duties.
Customs duties are charged on goods imported into the customs territory of the European Community.
The Treaties
The European Treaties contain the fundamental rules concerning the customs duties of the European Community. On 25 March 1957 the treaty establishing the European Economic Community (‘the EEC Treaty’) was signed at Rome. The EEC Treaty was amended by the Single European Act 1987.
The Treaty on European Union signed at Maastricht on 7 February 1992 amended the EEC Treaty with a view to establishing the European Community (the ‘EC’). The EEC Treaty became the EC Treaty.
The Treaty of Amsterdam signed at Amsterdam on 2 October 1997 amended the Treaty on European Union and the EC Treaty (renumbering articles of the EC Treaty).
The EC is based upon a customs union that involves the establishment, as between the Community and third countries, of a common customs tariff (‘the CCT’, see art. 23 (ex art. 9) of the EC Treaty).
In each member state, constitutional rules give effect to the treaties at the member state level. Accordingly, for the UK, the European Communities Act 1972, s. 5(1), provides that there shall be charged on goods imported into the UK such Community customs duty as is for the time being applicable under the treaties.
Rules of assessment
Customs duties are charged and assessed in accordance with rules of assessment relating to the classification, origin and value of the goods. Generally the classification and origin determine the applicable rate of duty. Usually the amount of duty is the product of the rate of duty and the value of the goods.
Tariff classification
The combined nomenclature
The EC customs authorities use a common nomenclature (system for the classification of goods) to operate the CCT. The nomenclature of the CCT was originally based on the Brussels Convention (adopted by Council Regulation (EEC) 950/68). However, in 1983 the Customs Co-operation Council adopted the International Convention on the Harmonised Commodity Description and Coding System (‘the HS’). In June 1994, the Customs Co-operation Council adopted the informal working name ‘World Customs Organisation (WCO)’. The HS classifies goods under subheading codes of six digits.
Council Decision (EEC) 87/369 approved the HS and Council Regulation (EEC) 950/68 was repealed and replaced by Council Regulation (EEC) 2658/87, which created a Combined Nomenclature (‘CN’), based on the HS, and an integrated tariff of the Communities (the ‘Taric’), based on the CN but including additional Community subdivisions, the rates of customs duty and other charges applicable and other information. The CN incorporates the six digits of the HS and further classifies goods for Community purposes using an additional two digits. The further Community subdivisions of the Taric are indicated by two extra digits.
The CN, the rates of duty and other relevant charges and the tariff measures included in the Taric constitute the CCT pursuant to art. 23 (ex art. 9) of the EC Treaty. The Commission adopts on a yearly basis, by means of a regulation published in the Official Journal, an updated version of the CN together with the corresponding rates of duty of the CCT. The Commission’s annual regulation amends Annexe I to Council Regulation (EEC) 2658/87. The last annual amendment was made by Commission Regulation (EC) No. 2263/2000 of 13 October 2000.
The CN contains columns for the codes, products, conventional rates and any statistical supplementary units. The conventional rates are those customs duties applicable to imported goods originating in counties that are Contracting Parties to the General Agreement on Tariffs and Trade (GATT) (or other most-favoured-nation countries). For other importations the autonomous rate may be given in a note.
Interpretation of the CN
General rules of interpretation, reproduced from the HS, are contained in Part I of the annual edition of the CN. These rules provide that titles of sections, chapters and sub-chapters shall be used for reference only and that classification shall be determined by the headings and the section and chapter notes (rule 1). Any reference in a heading to a product means a reference to that product even if incomplete or unfinished provided it has the essential characteristics of the complete or finished product (rule 2(a)). Any reference in a heading to a material or substance means also a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to products of a given material or substance includes a reference to products consisting wholly or partly of such material or substance (rule 2(b)).
If products are capable of being classified under two or more headings the final classification is made according to the provisions of rule 3 relating to concepts such as specific description, complete or precise description and essential character, and if all else fails, the goods are classified under the heading which occurs last in numerical order. Products which cannot be classified in accordance with the above rules are to be classified under the heading which they are most akin to.
The WCO publishes the Explanatory Notes to the Harmonised Commodity Description and Coding System (HSENs) indicating the scope and content of certain of the Harmonised System subheadings.
By virtue of Articles 9 and 10 of Council Regulation (EEC) 2658/87, the Commission adopts Explanatory Notes to the Combined Nomenclature (CNENs) following consideration by the Tariff and Statistical Nomenclature Section of the Customs Code Committee. Neither the HSENs nor the CNENs have the force of law. However, the European Court of Justice has found the HSENs and CNENs to be of authoritative assistance in the interpretation of the CN.
Origin of goods
The general criteria for the determination of the origin of products subject to the CCT are laid down by Council Regulation (EEC) 2913/92 establishing the Community Customs Code (‘the Code’). Article 23 of the Code provides that products ‘wholly obtained or produced’ in one country shall be considered as having originated from that country. If the production of a product has involved more than one country, the country of origin is deemed to be the one in which the last substantial process or operation, which is economically justified, has occurred (art. 24). More specific criteria may determine the origin by reference to different stages of production. Special rules are laid down in unilateral measures and agreements with developing countries establishing preferential tariff arrangements.
Valuation of goods
Customs valuation rules are derived from international agreements, i.e. the 1950 Brussels Valuation Convention and later art. VII of the GATT and the 1979 GATT Customs Valuation Code adopted partly in consequence of the Tokyo Round. Following the Uruguay Round and the Agreement Establishing the World Trade Organisation (Marrakesh, 15 April 1994), the rules are now contained in art. VII of the General Agreement on Tariffs and Trade 1994 and the Agreement on Implementation of Article VII of GATT 1994. Initially Council Regulation (EEC) 803/68 (repealed and replaced by Council Regulation (EEC) 1224/80) replaced the domestic systems of the member states and adopted the Brussels definition of value for the EC, the basis of which is the ‘normal’ price of products, i.e. the price they would fetch in the open market at the time when the duty becomes payable, the buyer and seller acting independently. The present Community valuation system (introduced by Council Regulation (EEC) 1224/80, repealed and replaced by Council Regulation (EEC) 2913/92), follows the GATT Customs Valuation Code of 1979, and is based on the transaction value (the price paid or payable for the goods, code art. 29). The transaction value is subject to adjustment in accordance with art. 32 and 3 of the code. In the event that the transaction value cannot be applied, art. 30(2) of the Code prescribes four valuation methods which are to be applied successively until an appropriate method is found.
These four methods are:
(1) the transaction value of identical goods sold for export to the Community and exported at or about the same time as the goods being valued;
(2) the transaction value of similar goods sold for export to the Community and exported at or about the same time as the goods being valued;
(3) the value based on the unit price at which the imported goods or identical or similar imported goods are sold within the Community in the greatest aggregate quantity to persons not related to the sellers (with certain deductions);
(4) the computed value, consisting of the sum of:
(a) the cost or value of materials and fabrication or other processing employed in producing the imported goods,
(b) an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to the Community,
(c) the cost or value of the items referred to in art. 32(1)(e) of Council Regulation (EEC) 2913/92.
Where the customs value cannot be determined under art. 29 (method one, transaction) or art. 30 (methods two to five, identical, similar, deductive and computed) then method six, the fallback method is prescribed by art. 31 of the code. Under this method the customs value is determined using reasonable means consistent with the principles of the code, the GATT rules and data available in the Community. Article 31 is derived from art. 7 of the Agreement on Implementation of Article VII of GATT. The Interpretative Note to art. 7 reiterates that the earlier methods ought to be used but with ‘reasonable flexibility’. In practice, when the reasonable means method is applied, the earlier methods are often applied sequentially in order but with appropriate flexibility.
Derogations from the CCT
In accordance with a common commercial policy (EC Treaty art. 133 (ex art. 113)), the Community may derogate from the CCT to fulfil its obligations under trade agreements negotiated with third countries, or to safeguard supply to its own markets and may protect Community undertakings from dumping or subsidies. Apart from the tariff reductions negotiated in specific agreements, the derogations involved consist of comprehensive reliefs, and either a total or partial suspension of the duties applicable for a given period with or a ceiling above which the normal CCT duty applies (tariff quotas and ceiling arrangement). The main protective measures are anti-dumping duties and countervailing duties.
Rules of Customs procedures
The rules on customs procedures are consolidated in the code and its Implementing Code. Goods entering the customs territory of the EC must be assigned a customs approved treatment or use (placing the goods under a customs procedure, entering the goods into a free zone or free warehouse; re-exportation or abandonment to the Exchequer (art. 49 of the code)). The customs procedures are release for free circulation, transit, customs warehousing, inward processing, processing under customs control, temporary admission, outward processing or exportation (Code Article 4(16)).
Technical Department
020 7235 9381
August 2001 by Jeremy White
