Circular Economy and Customs
The concept of the circular economy means that raw materials are used again and again, resulting in virtually no waste. There are plenty of examples for the e-commerce market. Think of a coffee machine that is traded in when a new coffee machine is purchased. The traded-in machine can be repaired or stripped for its parts.
Suppose the best partner for these activities – trading in old coffee machine, and letting it be repaired or stripped, when buying a new one – are located outside the EU. Customs formalities are required for transport back and forth, and the question arises: what arrangements are available to you? And how can a customs agent support in applying facilities and/or carrying out administrative obligations?
Tax Rules
Both fiscal and non-fiscal rules apply to the import of goods into the European Union. The fiscal rules mainly relate to VAT and import duties, but other duties are also relevant. In the context of sustainability, the EU has additional obligations under the name CBAM from October 2023.
Customs legislation has various special customs regulations that can be used to modify goods without paying import duties, or with paying less.
Outward Processing
Under the outward processing customs regime, the coffee machine may undergo extensive modifications. Even a completely new product can be created after the modifications that took place outside of the EU. Upon return to the EU, the importer only pays import duties on the added value of roughly the labor and materials.
The outward processing customs regime is subject to a authorisation requirement. A company established in the EU can apply for this authorisation. This may be the owner of the product, but that is not necessary. Suppose you are a company established in the United Kingdom and sell to consumers in the EU. For various purposes, you have a partner who is established in the EU. In many cases, this partner can also facilitate the holding of the outward processing authorisation, so that the products can be brought into the EU from the EU seller under this customs procedure after repair in the United Kingdom. Points of attention for an authorisation are the obligations regarding administration and the provision of a guarantee.
Finally, goods that have been repaired free of charge - including repair within a warranty period – can be fully exempted from import duties under certain conditions. Labor and replaced parts are then not subject to import duties.
Returned goods
Import duties are exempt for goods that return to the EU if the goods return "in the state in which they were exported". Only certain modifications may be carried out on the goods outside the EU. Permitted modifications are those necessary to repair, overhaul or keep the product in good condition. This exemption is ideally suited for the product that is returned to the seller in the EU. A time limit of three years is included here. This means that the product can be imported under the exemption up to a maximum of three years after exported from the EU. There is no authorisation requirement applicable for returned goods. Therefore, the provision of providing a guarantee does not apply. However, administrative conditions apply to demonstrate that the product is actually "returning". Upon import, the customs declaration for import must refer to the export declaration.
VAT
VAT on import is levied in accordance with the provisions of the UCC. The vat base for vat due on the import of goods, is directly based on the customs value. There is an important difference between determining the customs value for the outward processing customs procedure and the exemption from import VAT under the returned goods procedure. In the first case, the customs value consists of the added value and import VAT is calculated on this basis at the applicable tariff rate of the product. In the second case, the customs value represents the product as a whole and import VAT is exempt.
In practice, if there is a zero rate of import duties, people also choose to postpone VAT to the VAT return without applying a special customs arrangement. This can be opportune for companies with full deduction rights but leads to unnecessary costs if this is not the case. If you are unsure about the right approach for your flows, please do not hesitate to contact us to discuss the best choice for your company.
CBAM
The newcomer to this list is CBAM. CBAM stands for Carbon Border Adjustment Mechanism and aims to tax the emission of CO2 during the production of certain products in third countres. Such a tax already exists for producers within the EU, this is the ETS system (see our other article about CBAM). At the moment, a limited number of products fall under the CBAM Regulation, ranging from raw materials such as cast iron to end products such as a bolt. In particular, end products may be relevant for companies involved in customs formalities for e-commerce shipments.
For e-commerce shipments, an important distinction has been made based on the intrinsic value of the products. If the intrinsic value is lower than EUR 150, the CBAM Regulation does not apply. For the other shipments, the CBAM Regulation does apply.
The importer, for which a definition is included in the CBAM Regulation, is designated to comply with the obligations under the CBAM Regulation. This means that customs agents – in principle – do not play a role in CBAM. However, if the customs agent applies indirect customs representation, the following applies:
- For indirect representation for a company outside the EU, the customs agent is considered an importer and must therefore comply with the CBAM-obligations
- For indirect representation for a company established within the EU, the customs agent can take over the CBAM-obligations of an importer after explicit consent
Conclusion
Tax legislation can contribute to your strategy for embracing a circular economy. The existing possibilities in customs legislation offer flexibility in choosing a (repair) partner within or outside the EU. However, one must take into account the necessary customs formalities and conditions linked to the customs arrangements. Finally, it is advisable to carry out an analysis of possible reporting obligations under CBAM.
Are you curious about which possibilities are interesting for you but are you still unsure where to start? Please do not hesitate to contact one of our specialists to discuss the possibilities together.