There are developments taking place in the US to kill off one of the classic customs planning arrangements that allows you to strips any intermediaries' profits out of a charge to duty. If successful, there is a risk of this approach spreading to other countries and impacting your landed costs.

Background

Customs duty is charged as a percentage of the value of imported goods. The percentage duty rate is set by the customs classification of your imports and typically ranges between 0-14% and averages 5.4% in the EU.

The customs regulations set out various methods for determining the value of imported goods but this is usually the price paid or payable for the goods when sold for export. The sale between a UK importer and his overseas supplier is by default taken as the sale for export.

However, the regulations (Article 147.1 of Commission Regulation 2454/93) allow an earlier sale in the supply chain to be used as the customs value providing the parties can show the intermediary intended to send the goods to the EC and the importer can attest to this value. When successful this planning legitimately strips out any intermediaries profits from a charge of duty.

All our valuation rules flow from the internationally agreed GATT VII text. Like the EU, the US has adopted this position for a number of years and this is evidenced in two key US court decisions McAfee (1988) and Nissho Iwai (1992).

The Latest Challenge

US Customs proposed the end of this planning in its release of 7 February 2008 (73 FR 4254). The good news is that this move was spotted by the appropriate interest groups and alternative measures are proposed under the Farming Bill. Congress overwhelmingly approved of the counter measures proposed in the Farming Bill but these were vetoed by President Bush. It looks likely that the Senate will reverse the President's veto soon.

The following is an extract of the Senate Finance Committee Fact Sheet dated 12 May 2008 outlining the proposed measures:

"The longstanding practice of "first sale" allows an importer to assess the value of imported goods based on the first sale of goods destined for the United States, regardless of when that sale occurred. Without consulting Congress or the importing industry, U.S. Customs and Border Protection (CBP) has proposed regulatory changes to assess duties on the "last sale" rather than the "first sale" value of goods.

Such a change could increase significantly the duties paid by American importers. The farm bill (1) requires CBP to collect information on the number of importers that value imports using the "first sale" methodology; (2) requires the United States International Trade Commission to provide Congress with a report on the number of importers using "first sale" methodology, and the value of those imports; and (3) expresses a sense of Congress that CBP should not implement its change in interpretation until at least January 1, 2011. This provision is estimated to have no revenue effect."

The Impact

If successful, the Farm Bill secures Prior Sales planning in the US until at least 2011.

It will be interesting to see the impact of any US measures on our own imports given that the Prior Sale planning is based on International Law signed up to by all EU Member States.

There are measures importers can take to offset any loss of savings under Prior Sale such as stripping other specifically deducted elements like buying commissions, finance charges, quota costs etc. from the customs duty value

Our Recommendation

Our recommendation is that you should be taking advantage of this planning to minimise your duty costs if:

1. You buy non EU goods from intermediaries;
2. You can show the intermediaries sales were entered in to for sale to the EU; and
3. These intermediaries will disclose their purchase price.

If you are using or thinking of using Prior Sales planning then let us know and we will put you on our specific warning list to keep you abreast of any developments in the US that threaten the use of this planning.

If you are not using Prior Sales planning but think you could benefit from this planning then please contact us for an initial free of charge assessment.