The European Court of Justice (ECJ) has recently ruled on the composition of certain chemicals and the level of purity required in order for them to benefit under ‘Pharmaceutical Relief’ accorded to importers under the European Customs Tariff. Pharmaceutical Relief allows certain products to be imported duty free provided that the goods fall within very strict definitions contained in the approved list in an Annex of the EC Customs Tariff.
Under Annex I of the Customs Code, there is a little known provision known as “Pharmaceutical Relief” that states that:
“Relief from customs duty is provided for pharmaceutical products of the following categories:
(i) Pharmaceutical substances which are covered by the CAS RN (chemical abstracts service registry numbers) and the international proprietary names (INN’s) listed in Annex III.”
In 2002 and 2003, “M” imported “absorbital powder” (“the goods”) under CN 3913.90.90 (the code no longer exists) which at the time attracted duty rates of 7.6% and 7.1% respectively. The goods are intended for use as the primary component in the manufacture of a slimming product.
The goods in question were composed of 96% chitosan, 3% ascorbic acid and 1% tartaric acid. The reason why the product was not 100% pure chitosan was because the other two substances were added in order to protect chitosan against oxidation and thus improve its storage life and in no way did the other two substances influence the effectiveness of chitosan. The life span of chitosan can also be improved by vacuum-packing.
M claimed duty-relief accorded under Annex I as the list of substances that qualified for relief from customs duty included the products in question in this case.
Following on from a customs audit, the officer in question considered that the goods, did not actually qualify for duty-free treatment because he considered that the relief from duty only applied to chitosan in its pure form. Therefore M was presented with a post-clearance duty demand.
M appealed against the imposition of duties and eventually the Dutch Tax Tribunal referred the following questions to the ECJ:
“1.Is the relief from customs duty for pharmaceutical substances…restricted to the pure form of the (chemical) substances referred to?
2. If other substances may be added to the pharmaceutical substance indicated, what restrictions should apply in that regard?”
The ECJ assumed four different lines of argument in rejecting M’s appeal.
(i) Strict interpretation of the Customs Tariff
The ECJ noted that the Annex to the Customs Tariff concerning pharmaceutical products did not provide expressly that in order to qualify for duty-free treatment, the products must be in their pure form. However, the court stated that in the absence of an express indication or another factor indicating that the duty-relief measures were supposed to include substances that were not in their pure form, the Tariff had to be interpreted strictly and thus impure substances were excluded from the relief measures.
The Court argued that substances that have been added cannot be regarded as constituting “residual impurities” and also argued the following in support of their judgement:
(ii) Guidelines on the use of INN’s for pharmaceutical substances
According to the guidelines, INN’s are, as a rule, selected for well-defined individual substances that may be designated unambiguously by a chemical name or formula since the principle behind the INN programme is not to allocate names to mixtures of substances. The ECJ noted that in the present case the INN attributed to chitosan does not cover the goods at issue since they contain too high a proportion of other substances.
(iii) CAS Numbers
The Court also noted that as regards the CAS numbers that are also referred in the Annex, all three substances at issue have their own CAS number and cannot be identified by a single CAS number thereby precluding the goods from duty-free treatment.
(iv) Legal Certainty
The Court argued that where suspensions and relief from customs duties are concerned, the principle of legal certainty must take into account the difficulties of the national customs authorities of policing the correct enforcement of the provisions. Although, the requirement that substances must be pure to qualify does not relieve the national customs authorities of the obligation to conduct a chemical analysis to establish, where necessary, if the product is indeed pure or not, the court believes that this is in effect simpler and easier to administer rather than a complex analysis of all of the different components followed by a check to see whether the these different components fall within a prescribed tolerance or not.
The court ruled that a stricter interpretation of the provisions would therefore ensure a uniform application rather than creating inconsistencies across the EU and therefore ruled that the second question referred did not need answering.
The implications of this case are wide-ranging for chemical and pharmaceutical importers. If you are not employing Pharmaceutical Relief and your products do indeed qualify for duty-free treatment, you are missing out on a significant cost-saving opportunity.
Alternatively, if you are importing products under Pharmaceutical Relief and in particular if you are importing products that are “impure” then you should contact us immediately as this issue will be a hot topic for Customs Authorities EU-wide.
Call us on (01905) 619229 or email us at firstname.lastname@example.org to discuss ways to mitigate any risks or alternatively to maximise your customs duty savings potential.