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Customs Valuation Case Studies

In this article I shall describe 2 areas which show how the Customs Valuation Code is being misapplied resulting in the overpayment of import duty. The first of these is a situation affecting possibly millions of importations by sea into the EU every year.

1. Rocking the Boat

Customs valuation ie in effect the value of goods for import duty purposes is detailed in Council Regulation 2913/92, Articles 28 – 36 (The Customs Code). The usual way imported goods are valued is by reference to the price paid or payable for those goods with additions made to that price to cover a variety of other costs as incurred by the buyer. Both of the areas to which I refer are found in Article 32 and indeed if the additional cost being considered is not described therein it is not a dutiable item.

Article 32(1) (e) (i) says that “the cost of transport and insurance of the imported goods to the place of introduction into the customs territory of the Community” is to be included for duty purposes.

To underline matters Article 33(1) confirms that “charges for the transport of goods after their arrival at the place of introduction into the customs territory of the Community” shall not be included in the customs value.

The Implementing Provisions of the Code are contained in Commission Regulation 2454/93 and state at Article 163(1) that “the place of introduction into the customs territory of the Community shall be:

(a) for goods carried by sea, the port of unloading

(d) for goods carried by other means, the place where the land frontier of the customs territory of the Community is crossed.”

However what happens in practice for sea freight is that shipping lines charge importers the cost of the movement to the EU (of full containers loaded with goods) and the cost of movement back to (say) China of empty containers – charging the whole movement as one total figure. For instance in a simple example the cost could be shown as $300 when in fact a breakdown would show that the cost to the EU (when full of goods) is (say) $280 and the cost back to China (when empty) is $20. Unfortunately the shipping lines refuse to provide a breakdown of these costs and in consequence the full $300 is added to the dutiable amount. Over many containers the duty being overcharged is very considerable.

No-one seems able to change things; the principle is clear but the evidence is unobtainable. HMRC are collecting more duty than the amount to which they are entitled ( and paying most of that to Brussels),  and the shipping lines have little interest in helping because they are (already) getting fully paid and a detailed breakdown as would be necessary for duty purposes is no doubt onerous to provide. Therefore the importer suffers the full dutiable weight of the overcharge.

Yet this unhappy position need not continue. The general rule is that valuation principles must be “fair, uniform and neutral”, and specifically that the higher of two alternative values is unacceptable for duty purposes with the use of arbitrary or fictitious values in a duty calculation being absolutely prohibited.

It is worth contrasting the situation facing sea traffic with goods arriving by air freight where the EU has agreed pre-set percentages to cover that portion of the journey made outside the EU ie 22% of the freight cost from Los Angeles to Heathrow is deemed to be within the EU and is not included in the dutiable value. The importer has nothing to prove, the percentages have been determined by Customs and are automatically applied by computer to the total freight cost declared. The airlines carrying the cargo are not required to evidence their costs to the land frontier of the EU.

Yet with sea traffic under the current arrangements importers are being made to overpay duty because costs beyond the port of unloading are being included in a duty calculation; they have every right to do something about it.

A European Court Case (ECJ) in 1984 (Mainfrucht - Case290) concerned a subject which need not affect matters directly, “weighing costs in the EU”, but it does contain some helpful/useful remarks.

“16. It is also apparent from the wording of Article 3 (and all legal references shown here are from the forerunners to the current provisions with no relevant changes to the text concerned – my insertion), that only the cost of transport to the place of introduction into the customs territory of the Community is to be added, under Article 8 (1) (e) (i), to the value for customs purposes. A contrario, the intra-Community transport costs must not be included in that valuation.

17. As regards the origin of and background to Regulation No 1224/80, and in particular Article 3 thereof, Mainfrucht states that, as is apparent from the recitals to the said regulation, the regulation was adopted for the purpose of incorporating into Community law the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (GATT) (see Council Decision 8/271/EEC of 10 December 1979, Official Journal 1980, L 71, p. 1, and in particular the text of the above agreement, at p. 107), Article 8 (2) of which provides:

'In framing its legislation, each Party shall provide for the inclusion in or the exclusion from the customs value, in whole or in part, of the following:

(a)   the cost of transport of the imported goods to the port or place of importation;

NB – My insertion, “importation” is used here, not “introduction”.

22. It should be noted that, as Mainfrucht and the Commission have rightly pointed out, it is clear from the very terms of the relevant provisions of Regulation No1224/80 as well as from their context that intra-Community transport costs are in principle not included in the transaction value referred to in Article 3, and therefore are also not included in the customs value.

23. By laying down the principle that the transaction value is 'the price actually paid or payable for the goods when sold for export to the customs territory of the Community', Article 3 (1) indicates that that price may be adjusted only in accordance with Article 8.

24. Since, as far as transport costs are concerned, Article 8 merely provides that only the cost of transport 'to the place of introduction of the goods into the customs territory of the Community' is to be added to the price actually paid or payable, it follows that the cost of transport from the place of introduction into the customs territory of the Community to the place of destination within that territory is not to be added to the price in question and therefore is not part of the customs value.

31. It would not be consistent (with ensuring uniform application of the Common Customs Tariff and equal treatment of Community importers – my insertion) as meaning that intra-Community transport costs were to be included in the customs value.

32. If they were to be included, the customs value would depend on the distance between the place of introduction of the goods into the customs territory of the Community and the place of destination within that territory, with the consequence that the customs duties levied in respect of the same goods imported into the Community through the same customs office would be of a different amount according to how far the place of destination of the goods was from that customs office. Because such a result entails unequal treatment of imports, notwithstanding the fact that the import transactions carried out were identical, it cannot be accepted.”

The ECJ remarks confirm that the duties to be levied in respect of the same goods imported into the same EU port must receive the same treatment for duty purposes yet that is clearly contrary to current customs procedures. As an example, if 100 containers full of textiles arrive at Southampton from China and all are offloaded for a UK destination then the import duty calculation will include the possible cost of returning the containers (empty) from Southampton to China at (say) $20 each. However if the next time the same ship arrived carrying identical goods but with a further 100 containers destined for (say) Stockholm the shipping line may undertake a different calculation covering containers (empty) returning to China via Stockholm incurring additional movement costs and make a charge of (say) $25 for every container on the incoming voyage concerned. The import duty payable into Southampton will thus vary. The way in which individual shipping lines calculate such charges seems to be a very dark art and varies from shipping line to shipping line but it is clear that the consequence for the paying customer is the overpayment of duty.

In the UK the customs position in respect of dutiable freight charges seems to have been influenced by a case in which a trader hired a ship to bring oranges from South Africa. The cost incurred was of course a total journey cost of (say) £100,000 including the passage of the empty ship back to Capetown, and it was deemed that the cost of bringing the oranges to the UK for duty purposes was therefore the full cost of the “total” journey i.e. the full amount the importer needed to pay in ship hire to receive the oranges. However that is a false application of the valuation law because it does not affect the fact that as soon as the oranges were unloaded in Southampton any further transport costs should escape the dutiable net. After all, if intra community transport costs are duty free then movement costs away from the EU are also not dutiable. The notion that import duty can be levied on an export movement cannot be sustained.

There is thus a strong argument that legally the shipping lines must break down the shipping costs into a “to the port /place of introduction” and “transport costs thereafter” in order to properly identify the dutiable figure. If they are unwilling to reveal the figures then, in accepting the non-dutiable nature of so-called repositioning/evacuation/export costs as above, it means that HMRC are unable to take duty on the “full” amount indicated because duty would be taken on the basis of a duty calculation the elements of which are contrary to the GATT intentions. In such circumstances, if the transaction method is to remain the primary basis of customs valuation, then HMRC may need to consider requiring the shipping lines to comply with a breakdown request in order to charge the correct dutiable figure.

No-one in official circles has worried overmuch on all this before because HMRC receive more duty than the amount to which they are actually entitled.  So Customs are content with extra money, the shipping lines are content with an easy life and it is only the importer who is being disadvantaged.

As an alternative it might be prudent for importers to firstly confirm with shipping lines what sort of evidence and/or procedure is available and acceptable to HMRC in demonstrating (only) the costs of importation. The evidence to prove the non-dutiable figure is absolutely vital but surely if the shipping lines are charging money based on moving a container to the EU and from the EU then the customer is entitled to see the breakdown. It’s not as if anyone is seeking to pay a lesser amount to the shipping line but rather to only pay duty on the due total.

On this evidential point there is a different ECJ judgement (Olivetti Case 17/89) which considers how to establish non-dutiable transport costs. The actual case was about identifying such costs within the EU but it should be possible to use the same reasoning to identify non-dutiable transport costs outside the EU. The Court ruled that the dutiable cost of transport……….

“must be calculated either by deducting the cost of transport within the Community, determined on the basis of the rates normally applied, from the price paid or payable, or by determining the cost of transport to the place of introduction of the goods into the customs territory of the Community directly on the basis of the rates normally applied. It is for the national authorities to choose the criterion which is more likely to avoid arbitrary and fictitious values”.

Therefore, with regard to the first sentence quoted above, traders may be able to utilise the shipping rates normally applied over a period ( as opposed to an actual shipment by shipment consideration), or perhaps explore with the shipping lines how to best identify the transport cost of  goods (only) to the place of EU introduction. Alternatively they could confirm the cost normally applicable in moving an empty container back to (say) China or India. Certain importing business actually own (directly or indirectly) the shipping line carrying the goods and so it must be possible for the necessary figures to be obtained and widely applied. The amount could simply be used or deducted from the value otherwise declared and duty recalculated on the lower amount.  The emphasis remains on a requirement to avoid arbitrary or fictitious values for duty purposes and, of course, at the moment the trade is using such values because they include non-dutiable costs.

The second sentence in the judgement means that HMRC cannot wash their hands of the responsibilities they bear in this matter. They  must pick the best way forward to avoid the use of fictitious and arbitrary values in the dutiable calculation and importers should be able to apply those “procedures” forthwith and possibly even use them as the basis for a duty reclaim over a back 3 year period.

The first step is (always) to try and provide the evidence confirming the actual costs of EU importation. If that proves to be impossible, then importers can refuse to pay duty on the cost of moving empty containers back to China and in response to Article 32 .1. (e) (i) from HMRC invoke Article 32.2 which states that “Additions to the price paid or payable under this Article can only be made on the basis of objective and quantifiable data”. This would mean that, without resolution, the transaction method of customs valuation, which is meant to be used “to the greatest extent possible” as the primary basis of valuation, becomes unavailable.

The importer would justifiably claim that the actual dutiable value (of incoming freight) is unknown and the duty due cannot therefore be determined; in such circumstances an alternative approach to establishing a dutiable value is necessary. For instance many (though not all) importers could substitute a “spot” transportation rate and smaller businesses especially could sometimes benefit from this approach.

Alternatively, Customs could oblige the shipping lines to provide the necessary detail by which the correct elements within the dutiable value can be declared. Certainly they could not insist on a situation where the importer was obliged to include non-dutiable costs for duty purposes and shipping lines are, at least, willing to admit that they are including charges for container transport away from, and not just into, the EU port of introduction. Perhaps the Customs authorities in Brussels should simply instigate arrangements for sea traffic which mirror the percentages available to air freight?

A case of doing nothing because it suits the Exchequer is not envisaged by the valuation laws.

2. Waste not and want not for duty reductions.

The next possibility concerns waste; the biggest scope would seem to be in textiles.

Rolls of cloth are provided to overseas manufacturers and a portion of cloth is unused ie waste! However if it can be proven that the value of the roll was (say) $100 but $10 “worth” is not “used” in the manufacturing process then is the dutiable value $100 or $90?

It seems clear that it must be $90 but duty is consistently declared on the basis of $100. The relevant Articles 32 (1) (b) (i) and (iii) state respectively that only goods and services which are incorporated in the imported goods or consumed in the production of those goods are dutiable. Obviously cloth left on the Far Eastern cutting room floor cannot be claimed as incorporated in T-shirts arriving at Felixstowe; equally that cloth cannot be described as consumed in the process when it is available in (say) China for all to see.

The best way to appreciate the reality of the situation would perhaps be if the EU trader (who owns the cloth by virtue of having paid for it), sold the waste cloth to a business in (say) Australia. Upon arrival in Sydney the duty would be due on that cloth and it cannot be the case that the value will already have been declared and used for duty purposes in the UK. 

In both the above cases duty is being overpaid and the practice should stop. Further, in principle the importer is able to claim a retrospective duty refund for 3 years of the duty amounts concerned; in practice this is likely to be contentious without a strong evidential basis for the claim and importers liable to be affected should speak with a customs consultancy practice before proceeding in this regard.

Alun Davies – Managing Partner

Bell Davies - August 2014

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