The Modernised Customs Code (MCC)   was adopted in April 2008 but the process of bartering and haggling over the Implementing Regulations is still continuing. However, it is anticipated that these regulations will be finalised at some point in 2010 for implementation by 2013.

The lull in between finalisation and implementation should give businesses time to acquaint themselves with the changes that are coming and to realign their practices and procedures accordingly. However, in our experience very few even know about the proposed changes and even fewer are planning to realign accordingly.
Therefore, this paper, whilst no means an exhaustive summary of what the new code is all about, will offer a brief synopsis of the changes that will be occurring and how they will impact upon your customs operations.

Why is the Customs Code Changing?

The MCC is necessary to bring the EC’s Customs Code and practices up-to-speed and in-line with modern trends and developments in international trade.  From a business perspective the current code is cumbersome, poorly structured and inaccessible. Add to this the pressure that HM Revenue and Customs is under from the EC institutions to correctly interpret the various procedures and itself undergo auditing to see if it has collected what it is obliged to have collected (also bearing in mind the recent damning reports regarding HMRC’s performance) and you end up with uncertainty and inconsistency in interpretation and application putting your business quite firmly in the firing line.

What is changing?

The MCC is part of a two-pronged approach to ‘modernise’ the EC Customs Union. The first approach is the computerisation of the customs union and the second (the MCC) is the streamlining and simplification of customs procedures.

Part One:  The Computerisation of Customs

The EU ambitiously set out its aim of a completely paperless environment for customs and trade in 2008   but what exactly does this mean and involve? For a start, this will include the electronic lodging of customs declarations and accompanying documents as the rule rather than the exception. The computerisation of customs is based upon the concepts of “Single Window” (information given by economic operators will be given to one single, electronic  contact point) and “one-stop-shop” (controls on goods are performed at the same time and at one place even if the data provided should reach different administrations and agencies).

Authorised traders  will be able to use ‘centralised clearance’ to declare goods electronically and pay their customs duties at the place where they are established irrespective of which Member State through which the goods will be brought in or out of the EC or in which they will be consumed. This would allow multi-national companies to conduct all of their EU-business within one customs office.

An example of the procedure is shown on the right.

Goods would therefore not have to be moved to the office of import/export but could be delivered direct to point of sale (including in another Member State or third country). Operators will not be required to be AEO authorised unless more than one Member State is concerned.

Faster co-operation between authorities

The computerisation of customs will enable a faster and more efficient exchange of data not only between national customs authorities but also between different agencies (such as police, border guards, veterinary and environmental authorities etc). What this could mean for you in practical terms is that if you are a business that is part of a group with different entities in different Member States, it will be easier for the authorities to notice any discrepancies between the entities (for example classifying the same product under different codes).

It is therefore advisable that different entities not only conduct a review of their customs procedures but also conduct a group-wide reconciliation to ensure that everyone is complying correctly and following the same procedures (where possible).

What are the conditions required for central clearance to be applied and what does this mean to your business?

The real detail for centralised clearance will be contained the implementing provisions and as of yet the IT requirements regarding customs clearance in an electronic environment are still being developed. However, in general terms, a UK operator will need to be authorised by HMRC to operate centralised clearance. If the operation involves several member states then the UK operator will need to be cleared as an Authorised Economic Operator (AEO).

The way that the EC Customs Union works is that national authorities receive 25% of the duties collected as a “handling fee” with the rest going to the EC. Under the new rules, the distance and disassociation between the place where the declaration will be lodged and the place where the goods will actually enter the territory of the EC may have consequences in terms of the sharing of the 25% or handling costs of individual member states.

Businesses may therefore find that national authorities will be even less lenient and more aggressive in their pursuit of errors and non-compliance thereby strengthening the case for a comprehensive review of your customs procedures. For those businesses seeking AEO status and/or for those that qualify under the Senior Accounting Officer provisions, the consequences may be significant.

Part Two: The Modernised Customs Code

The Modernised Customs Code had as its aim a number of changes:

• Simpler structure
• Fewer articles
• Simpler rules
• Fewer procedures (13 become 3) all with consistent rules.

The structure of the MCC is indeed simpler to follow and has a more cohesive flow than the current Customs Code where a person often ends up jumping back and forward through the chapters. The number of Articles has been reduced from 264 to 188. The rules and the procedures have been simplified and the main changes are highlighted below.

Simplification of Customs Procedures

There are currently thirteen procedures covered by the Customs Code. The MCC reduces this number to three, all with consistent rules:

1. Import and release for free circulation
2. Export
3. Special Procedures

Special Procedures

The biggest change in this part of the code is in the area of ‘Special Procedures’.  The former suspensive procedures, customs procedures with economic impact and end-use are grouped together and aligned with current provisions on free zones, destruction and temporary storage within four specific procedures:

• Transit (internal and external)
• Storage (temporary storage, customs warehousing, free zones)
• Specific-use (temporary admission, end-use) and;
• Processing (Inward Processing Relief (IPR) and Outward Processing Relief (OPR)).

IPR Suspension and Processing under Customs Control has been merged whereas IPR Drawback has been removed altogether.

Businesses should make themselves aware of the changes to procedures and to the requirements to gain authorisation and review how these changes will affect them in the future.  The merger of relief schemes will open up new cost saving opportunities for businesses, especially those with close working relationships with suppliers and customers. The MCC removes some significant obstacles under the current system that prevents the transfer of goods between different duty relief schemes.

Binding Tariff Information (BTI) and Binding Origin Information (BOI)

The procedures surrounding Binding Tariff (and Origin) Information are changing slightly though the changes are indeed significant.

Rejection

• Under the new provisions, a BTI/BOI application can be rejected if one has already been made at the same or another customs office (to avoid ‘forum shopping’).

This is an important change as it will stop businesses from making multiple applications for the same product. What this does mean though is that it is highly advised that any application for a BTI/BOI is drafted correctly to maximise chances for success as a poorly drafted application may well lead to an unsuccessful application.

Application

• A BTI/BOI will not only be binding on the customs authorities but also on the holder of the decision in order to avoid the system being used only if the applicant is satisfied with the result   though the applicant will still be able to appeal if he disagrees with a decision.
• A BTI will now only be valid for 3 years instead of 6.  A BOI will also be valid for 3 years (as it is at present.)
• The possibility for ‘amending’ BTI decisions has been withdrawn. Decisions must be revoked and re-issued if changes are made (for example, regarding the goods description or the tariff code etc).

In our experience, BTI are an essential tool of international trade as they provide clarity and certainty in difficult areas of classification. Drafting a correct BTI application with robust arguments is critical now but will become even more so in the future.

Self-Regulation

The MCC lays the foundations for system based controls in which transaction based customs formalities may as far as is practical and possible, be replaced by self-regulation (self-assessment) by authorised traders. Article 116 introduces the reduction of customs formalities as far as possible and if practical and appropriate, customs controls are replaced by self-regulation by authorised traders. Again note that if more than one Member State is involved, this will be restricted to persons holding AEO status. The detail once again will be contained in the implementing regulations.

The introduction of self assessment provides businesses with an opportunity to significantly reduce transaction costs and reduce reliance placed on third parties.  However, it is likely that an authorised ‘self-regulator’ will be subject to stricter and more in-depth audits and therefore possibly higher penalties should any issues arise. It is highly advisable that you not only have a robust system set-up for gaining authorisation for self-regulation but also you have procedures in place that allow for the maintenance of your system. Gaining an authorisation may well be easier than keeping one.

Changes to the Building Blocks

The MCC introduces a number of significant changes to the ‘building blocks’ of customs law and in particular to the rules of Origin and Customs Valuation.

Origin

Non-preferential origin

The definition of “goods wholly obtained” will be defined in the Implementing Regulations. However, the definition of goods that are produced in more than one country has been refined and aligned with Article 3 1994 WTO Agreement on Rules of Origin:

“Goods the production of which involved more than one country or territory shall be deemed to originate in the country or territory where they underwent their last substantial transformation.” (Authors emphasis)

The realignment of the non-preferential origin rule ties in to international negotiations which aim to introduce specific origin rules from as early as next year.

Interestingly, Article 25 (the anti-circumvention provision) has been removed altogether. The reasoning behind this is that subjectivity creates doubt and inconsistent interpretation and application of the rules of origin. Origin should arguably be concerned with origin. If the goods are substantially processed in country x then origin should (and will) be conferred on that country regardless of why they are being produced/processed there.

However, businesses should be aware that as a result of this, anti-dumping investigations, in our opinion, are likely to increase and there may be an increase in the future as to the number of anti-dumping duties initiated against non-EU exporters.

Preferential Rules of Origin

Article 39(1)-(5) of the Modernised Customs Code seeks to bind the various acts containing preferential tariff or non-tariff measures and the corresponding preferential rules of origin to comply with in order to benefit from these preferences. Origin rules will continue to be laid down in the implementing provisions where an autonomous preferential agreement has been negotiated.

Traders should be aware that regarding proofs of origin, Article 37 of the MCC allows for national authorities to be able to instigate investigations and reject proofs of origin if they have “reasonable doubt” rather than “serious doubt” as it is at the moment.
It is critical to ensure that your proofs of origin are valid. The ECJ has firmly laid down precedents that increase the liability of the importer and it is up to you to ensure your certificates meet all the requirements.

From 1 January this year, the ‘graduation mechanism’ has also been modified. This will trigger either a suspension of preferences or their re-establishment whenever an individual country’s performance on the EU market over three-years exceeds or falls below a set threshold.

Importers should therefore regularly review the Official Journal of the EU and/or HMRC updates to see if the country they are importing from has ‘graduated’ and therefore the goods not subject to preference anymore.

Valuation

The new Article 40 introduces the concept of primary and secondary methods of valuation. (Primary being “Customs valuation based on the transaction value” and secondary quite simply being “secondary methods of customs valuation”). A number of the provisions from the present code are being transferred across to the implementing regulations. The detail will once again be contained within the implementing regulation.

There are also proposed major changes envisaged with regard to First sale for export and royalties and licence fees but these changes will be governed by the implementing regulations rather than the code.  These developments have far ranging implications and lobby groups are busy trying to minimise any adverse impact or additional costs to business.

Businesses should ensure that the method of valuation they use is the correct one and that all the additions and deductions are correct.

Conclusion

This paper has highlighted a few of the changes that have been outlined in the MCC. It is not an exhaustive account but a ‘heads-up’ for businesses that major change is coming.  It is highly advisable that you make yourselves aware of these changes and realign your customs practices accordingly.

Please feel free to contact us to discuss how these changes may affect your business. Alternatively, browse through our knowledge space for free articles about all areas of customs law.