Brexit deal: trading goods

11/01/21

Import duties, yes or no?

As of 1 January 2021, the Trade and Cooperation Agreement (TCA) between the European Union (EU) and the United Kingdom (UK) is applied on a provisional basis. This agreement ensures that the trade of goods between the EU and UK can take place without being subjected to import duties. However, it is important to note that the exemption of import duties only applies to goods that meet the prescribed rules of origin. As a result, when products do not comply with these rules, they may still be subject to import duties upon import. PwC expert Claudia Buysing Damsté discusses key issues.

Potential benefits from trading

When you are trading goods between the EU and the UK it is important to assess whether you can benefit from the preferential treatment under the TCA (i.e. exemption of import duties). Since the rules of origin from the TCA seem to be less stringent for a number of products than the rules in other trade agreements concluded by the EU, you may want to assess whether your goods comply even if your goods normally do not meet the rules of origin from free trade agreements (FTAs).

With respect to determining the potential benefits from trading under the TCA, there are two aspects that we would like to bring to your attention. The first point to keep in mind is that there are certain administrative requirements when you claim preferential treatment. As a second point, please take notice of the possibilities that the TCA offers with respect to cumulation, because it is not always clear what this exactly entails. Especially, when considering the possibilities for something similar to extended cumulation that follow from the other FTAs the UK has concluded so far.

The Brexit Deal ensures that the trade of goods between the EU and UK can take place without being subjected to import duties. However, it is important to note that the exemption of import duties only applies to goods that meet the prescribed rules of origin. As a result, when products do not comply with these rules, they may still be subject to import duties upon import.

Administrative requirements

The TCA provides importers with two options to claim preferential treatment. The import duties can either be exempted based on a statement on origin or on the basis of importer’s knowledge. In both cases, information and records must be available that support the claimed origin. As such, to successfully claim preferential treatment under the TCA it must be considered whether you can meet the administrative requirements.

The TCA prescribes that an importer must keep records of the statements on origin with which the preferential treatment was claimed. Alternatively, when the importer based his claim on the importer's knowledge, he must keep records of the documentation that supports the claim for the importer's knowledge (i.e. documentation supporting his claim that the goods comply with the rules of origin).

An exporter who has made out a statement on origin must keep a copy of this statement and have all other records in his administration that can demonstrate that the good satisfies the requirements to obtain originating status.

Furthermore, please note that from an EU perspective, a company needs to be a Registered Exporter (REX), in order to issue a statement on origin.

Possibilities for cumulation

Cumulation provides a level of flexibility to rules of origin with respect to production processes. It entails that material from one country can be further processed or added to goods that originate in another country, as if this material also originated from the last country. As such, due to the cumulation rules in FTAs, materials may be sourced from other countries or processes may take place in these other countries, without the consequence that the resulting product is non-originating for the relevant FTA.

Full and bilateral cumulation

The TCA provides for cumulation of materials and products that originate from the EU and the UK, as well as the cumulation of value added through processing. This means that full bilateral cumulation is applied in the TCA. As a result, all processing that takes place in the EU, as well as EU originating materials can be considered to assess the UK origin under the TCA when you are manufacturing a product in the UK. This is also applied the other way around, so EU producers may also source material from the UK or have processes take place in the UK and consider this for the EU origin of the resulting product.

Whereas the cumulation of originating products (i.e. bilateral cumulation) is commonly included in the FTAs of the EU, the possibility to take all processing into account that is carried out in the participating countries (i.e. full cumulation) is less common in the FTAs of the EU.

Extended cumulation

Although the TCA does not include the possibility for cumulation of materials or processes from other countries than the UK and the EU, several of the FTAs that the UK concluded with third countries do contain the possibility of someting similar to extended cumulation. It is not the traditional extended cumulation as it is included in the article which products can qualify as originating. Traditionally, extended cumulation is only applied to a certain product type, which is also not the case here.

This form of cumulation is not something that is often included in FTAs and, generally, as indicated above, it would have a limited application if it were included. However, these FTAs from the UK seem to provide a broad application of something similar to extended cumulation.

Extended cumulation can entail that, for example, the UK and third country X agree that materials originating from the EU can also be considered as originating in the UK or X when producing goods in the UK or country X. This will affect the assessment whether the produced goods comply with the rule of origin included in the FTA between the UK and X.

The previous is a description of an extended form of bilateral cumulation. The same can also apply in relation to full cumulation. In other words, the processing that took place in the EU can be considered as taking place in the UK or X for determining the origin under the FTA between the UK and X.

What the UK has done in its FTAs will in practice work out the same as extended cumulation and as such the UK has tried to keep any advantages that UK producers had (in relation to preferential origin) under the EU FTAs in place after Brexit. This way, UK producers can continue using EU materials/processing in their production and qualify under the FTAs that the UK agreed with other countries.

Questions in relation to extended cumulation

At first sight, this seems like a positive development. However, there are some questions that arise:

1. Based on which origin rules is it determined that the materials from the EU are of EU origin?

2. How do you prove this EU origin?

For the first question, the FTAs concluded by the UK need to be reviewed. You will see that these FTAs often refer to their rules of origin to determine whether a material from the EU is of EU origin. In other words, the FTA between the UK and country X prescribe when a material is of EU origin.

The second question will be more difficult to answer, because the FTAs from the UK do not seem to provide guidance on this topic. As a result, it can be uncertain what form of evidence will need to be requested from EU companies to ensure that the EU origin of the material can be substantiated. Furthermore, the EU is not a party to the FTAs of the UK, which raises the question how an EU company can be forced to maintain the necessary evidence.

This shows that there are multiple questions left unanswered with respect to the requirements to benefit from the possibility created by the UK in its FTA. As such, we strongly recommend having discussion with UK Customs on what they will expect in this respect and what will be regarded as sufficient evidence. The previous to ensure that you avoid wrongfully issuing statements of origin used to claim preference upon import in the other country.'

PwC's Brexit desk

PwC's Brexit specialists can help with determining the exact requirements that you need to comply with. In addition, we can help put processes/procedures in place to safeguard that your company complies. Furthermore, we can assist with determining whether your goods comply with the rules of origin included in the TCA or any other agreement.