EU Customs Classification

C5 Customs Compliance Boot Camp London, 16 October 2008Tim Hesselink – International Trade & Customs

tim.hesselink@twobirds.com

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Paulette vander Schueren - Mayer Brown

Customs Classification: assigning an accurate tariff heading

Paulette vander Schueren

Partner Mayer Brown International LLP

For private reasons unable to be here today

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Significance of Classification

Determination of the duty rate

Whether a product is subject to commercial defense measures

Whether a product is subject to duty suspension

Relevant origin test

Regulatory purposes

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Customs Classification: where & how

The determination of the classification of a product in a customs heading:In the Harmonised System (= the international tariff nomenclature common to WCO members consisting of more than 170 countries)In the WCO member of importation’s own tariff nomenclature with further breakouts from the Harmonised System; in the EC the ‘Combined Nomenclature’

5000 different headings identified by 6 digits and separated in Sections and Chapters by group of products

Example:Section XVIII: OPTICAL, (…) MEDICAL OR SURGICAL INSTRUMENTS AND APPARATUS; CLOCKS AND (…) AND ACCESSORIES THEREOF

Chapter 90 (HS and EC): Optical, photographic and medical equipmentHeading 9018 (HS and EC): medical and surgical equipmentSubheading 9018 50 (HS and EC): Other ophthalmic instrumentsBreak-out EC 9018 50 10: optical Break- out EC 9018 50 90: non-optical

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Customs Classification – large body of interpretative texts

The Combined Nomenclature and its notes (at Section, Chapter and heading level)

The General Rules of Interpretation (GRIs) (identical at EC and HS level)

The HS Nomenclature and Explanatory Notes and Classification Opinions

The EC classification regulations and Explanatory Notes

The discussions in the Nomenclature Section of the Customs Code Committee to the extent the minutes are made public

The EC’s database with the non-confidential versions of BTIs:

http://ec.europa.eu/taxation_customs/dds/ebticau_en.htm

The judgments of the European Court of Justice

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Rules for the Interpretation of the nomenclature

General rules for Interpretation (GRIs) – 6 rules:

Rule 1 and 6 provide that classification must be based on the wording of the headings and subheadings and the relative section and chapter notesRule 2 deals with incomplete and unassembled goods as well as with mixtures and combinationsRule 3 provides what to do when a good appears prima facie classifiable in two different headings ((a) most specific description, (b) essential character, (c) last numerical order)Rule 4 is the rule of last resortRule 5 deals with packaging

The GRIs and the (additional) Notes preceding each Section and Chapter are binding

Explanatory Notes and classification opinions are not mandatory but are followed in practice (= settled ECJ case law, e.g. “JVC France” d.d. 5 June 2008, C-312/07)

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Rules for interpretation - continued

EC classification regulations and explanatory notes. (Note : a recently published Commission paper on the effect of classification regulations will be discussed.) Classification Regulations are binding and explanatory notes are an important source of interpretation and binding in practice.

Judgments of the European Court of Justice. (Note: some recent judgments will be discussed.)

Binding Tariff Information (BTI)

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How to proceed when classifying a product

If a product is not immediately classifiable within a given tariff heading, one must carefully determine that product’s objective characteristics (composite material, function) at the time of import and then check:

Wording of the possible headings together with any chapter and section notes

Both HS and CN explanatory notes

Relevant classification regulations, classification opinions and judgments

Interpretative guidance issued by domestic or other customs authorities, such as BTI or other classification rulings, and then

Determine under which heading to declare the product

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Beware

Although customs authorities may for a long time accept a certain heading, there is always a risk for them to change their mind and re-classify, leaving your company possibly open to so-called post-clearance recovery. Note that this can be avoided by BTI.

The classification rules are applied by 27 different Member States and are interpreted by 27 national customs authorities, which may lead to divergences in classification even though at one point or the other, these are tackled in the HS Committee or Customs Code Committee.

If there is disagreement about classification, the importer must deal with administrative (customs) authorities and possibly that MS’s judicial authorities (to appeal in court the final decision by the customs authorities).

There is no quick EC-wide, out of court settlement procedure.

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How to prevent classification disputes

There is an instrument the BTI: legally binding advance written classification ruling issued by EU customs authorities on request, which is currently valid for 6 years (valid in entire EC, i.e. all 27 Member States)

This allows a trader to fairly rapidly get some certainty on classification and protects against eventual PCR claims.

But:The certainty is not absolute: a BTI can be revoked, amended or annulled. But, unless annulled, it protects against post-clearance recovery of customs dutiesConflicting BTIs sometimes exist for the same of similar products

ECJ case Timmersmans of 22 January 2004 (C-133/02)

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Auditors’ Report on BTI

In March 2008 the European Court of Auditors issued a Special Report on BTI based on an audit of the management of the BTI procedure in (i) the Commission and (ii) in a sample of 6 Member States (Denmark, Germany, Greece, Hungary, Slovenia and the UK), representing almost two thirds of all BTIs issued in 2005, which has taken up at least some of these points.

Although the conclusion was that the management of BTI both in Commission and MSs was adequate, a number of improvements were recommended/required to enhance overall functioning of the system.

Required improvements:1. The Customs Code Committee, which must resolve cases where two or

more MSs have issued conflicting BTIs, takes too much time and this period must be shortened, also because this may affect the collection of the traditional own resources.

2. The Commission must, as it has not done this before, assess the financial impact of a MS issuing incorrect BTIs, and where necessary make MSs responsible for any losses of traditional own resources.

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Auditors’ Report on BTI - continued

Instances were found where MSs did not check before issuing a BTI whether other BTIs (applications) existed for the same good, were slow in issuing BTIs or did not update in time the BTI database (which the Commission could easily monitor). The Commission must therefore – with the help of this key database which should be complete and up to date – exercise more control over the MSs so as to ensure that they respect the rules.

A trader that has obtained a BTI is today not obliged to present it at import. It is recommended that such presentation becomes obligatory, as it would allow the customs authorities to cross-check with the import declaration.

The conclusions of this report were examined in the Working Party on Customs Union; the Council is now adopting conclusions inviting the Commission to improve the BTI system.

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Modernised Customs Code (MCC) & BTI

MCC = Regulation (Ec) No 450/2008 (OJ EU No L 145 d.d. 4-06-2008)

Art. 20 MCC = BTI (Art. 20 (1) – (7) enter into force on date adoption Modernised IPCC (MIPCC)

Draft MIPCC = TAXUD/1717/2008 d.d. 30 juni 2008

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MCC & BTI - continued

Art. 20 MCC: 2 grounds for refusal customs of a BTI:1. the application is made, or has already been made, at the same or

another customs office, by or on behalf of the holder of a decision in respect of the same goods (NO BTI shopping!)

2. where the application does not relate to any intended use of the BTI or BOI decision or any intended use of a customs procedure

BTI is binding not only against customs but also against holder of decision (Art. 20 (2) MCC)

Validity BTI: 3 years (Art. 20 (3) MCC)

A BTI can only be revoked by MS, not amended (Art. 20 (6) MCC)

Commission decision re. expiration date / conditions validity / revocation / amendment (Art. 20 (8) MCC – into force 24-06-2008)

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What Can Importers Do in Case of Dispute – there is no quick EC-wide out-of-court procedure

What to do in case a dispute between the importer and the customs authorities nevertheless arises:

Other than going through the entire process of national administrative and judicial proceedings, the alternatives are:

Seek the support of the European Commission or MS for discussions in the CCC but the difficulties are

only Commission or MS can put items on the agenda, which makes importers reliant on the goodwill of the latter;

usual length of discussions (sometimes several years);

mot fully transparent nature of the discussions where there is no right of participation (only industry associations may be invited to make a presentation);

agenda’s and summary meeting notes are now made available post-fact.

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What Can Importers Do in Case of Dispute (Cont’d)

If ultimately the CCC adopts a uniform interpretation in the form of a Classification Regulation or an Explanatory Note – the legal consequences are not always clear and may vary depending on the MS.

A classification regulation should have prospective effect only as it is of a legislative nature, but some MSs have initiated or pursued PCR proceedings for recovery of the higher customs duties linked to the heading retained in the Regulation for the period preceding the entry into force.

A recently published Commission Paper has not really clarified matters.

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Commission Paper on the Legal Effect of Classification Regulations

Working Document d.d. 4-07-1007 (TAXUD/741/2003- DEFINITIVE)

In this document, which is very dense to read and not an example of legal clarity, the Commission attempts to argue that many classification regulations are in fact ‘interpretative’ rather than ‘normative’ (without providing a definition thereof) and can therefore have retro-active effect, i.e. MSs can proceed with post-clearance recovery of duties based on these Regulations.

The document is not a legally binding instrument, and whilst it might provide some guidance, it is not decisive and cannot overturn any case law of the ECJ, such as for example case Biegi (d.d. 28-03-1979, No 158/78), where the Court held that a regulation specifying the conditions for classification in a tariff heading or subheading is of a legislative nature and cannot have retro-active effect.

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Commission Paper on the Legal Effect of Classification Regulations (Cont’d)

Nevertheless, the document is not entirely revolutionary either in light of the practice existing in certain MSs.

The ultimate decision of whether a given classification regulation is “interpretative” or “normative” can only be given by the ECJ.

The paper is of particular interest in the context of post-clearance recovery.

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The Risk of Post-Clearance Recovery (PCR)

Customs authorities have a period of three years to recover import duties if they consider that a customs debt was underpaid due to reclassification.

The period can be longer based on MS provisions in case of fraud (The Netherlands: 5 years).

Note: Art 68 MCC: PCR in case of fraud 10 years !!

In addition penalties can be imposed.

Since PCR is triggered by re-classification, in particular by re-classification in a heading with a higher tariff, it is important to know if the re-classification was triggered by a classification regulation or an explanatory note, given their possible different legal effects.

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Recent Judgments ECJ - Canon

One of the most interesting judgments of last year was doubtlessly the Canon/Medion judgment d.d. 27-09-2007 (C-209/06). See also JVC France judgment d.d. 5 June 2008 (C-312/07).

It is a fundamental principle that “goods must be classified on the basis of the objective characteristics and properties of products which can be ascertained when customs clearance is obtained”, meaning that in principle, in the interest of legal certainty, changes or additions of devices to a product after customs clearance cannot be taken into account for classification purposes.

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Recent Judgments ECJ – Canon (Cont’d)

In Canon/Medion the German Court referred a preliminary question to the ECJ with regard to certain camcorders which at the time of import could not record externally incoming video signals (so-called DV-in function) but which after importation could be reconfigured in such a way as to add this function.

Heading 8525 40 91 ‘Other video camera recorders: only able to record sound and images taken by the television camera’ (4.9%) vs. Heading 8525 40 99 “Other video camera recorders: other” (14%).

The question that the ECJ was requested to rule on was whether this potential DV-in function, not present at the time of import, could nevertheless be considered for classification purposes.

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Recent Judgments ECJ – Canon (Cont’d)

The Court responded as follows:

The potential function could be taken into account if:

it could be activated subsequently by simple modification of the apparatus by a user not having special skills;

and without modification of the camcorder’s hardware, in other words, already at the time of import the camcorders have a structure containing the essential characteristics of that function and the ways of enabling it to be active do not involve additional external hardware”; (emphasis added)

once activated it functions similar to a “DV-in” camera and it functions independently.

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Recent Judgments ECJ – Canon (Cont’d)

Furthermore the ECJ ruled:

The national Courts must establish if these conditions are fulfilled. In the case at hand the German Court decided both in Canon and Medion that the potential function could not be taken into account because additional cabling was necessary for activation (Canon) and because it was difficult to do for an unskilled user (Medion).

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Recent Judgments ECJ – Canon (Cont’d)

Comments:

Whilst maintaining the principle that classification must occur on the basis of the characteristics of a product at the time of import,

The Court nevertheless departs from a strict application of this principle by providing that the potential function may nevertheless be taken into account if a number of very factual conditions are met.

As from now, inactive (‘dormant’) functions must also be considered.

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Recent Judgments ECJ – Canon (Cont’d)

Test inactive (‘dormant’) functions consumer electronic product:

1. If inactieve but embedded ‘dormant’ functions can easily be activated, without modifications of hardware, and,

2. the device subsequently operates with the activated function without requiring external hard- or software,

3. in a manner similar to such devices with (expressly advertised) a similar function,

the product has to be classified in consideration of the initially inactive function.

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Recent Judgments ECJ – Apple

Another interesting case re. the legal status of Classification regulations is the ECJ CFI Apple vs. Commission judgment d.d. 19-02-2008 (T-82/06).

Applied filed an appeal against a Classification regulation for LCD monitors

Is an appeal against a Classification regulation admissable?

Criteria for admissability: the person must be individually and directly affected by the regulation.

ECJ CFI case Sony-Playstation (d.d. 30-09-2003, T-243/01): due to the unique circumstances of that case, Sony's appeal against a classification regulation was admissable.

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Recent Judgments ECJ – Apple (Cont’d)

the ECJ held that Apple’s appeal was inadmissable:

"It must, however, be made clear that the single fact that the applicant is or is not the sole authorised importer of the product concerned into the Community constitutes a relevant factor for the assessment of the applicant’s individual concern ‘having regard to the other aspects discussed above’, but it is not sufficient, in itself, to establish that the applicant is individually concerned by the contested regulation (see, to that effect, Sony Computer Entertainment Europe v Commission, paragraph 75). In that regard, the applicant does not claim to be the exclusive importer of the LCD monitors in question and makes no mention of any right entitling it to have imports of those products into the European Economic Area prevented. It is concerned by the contested regulation solely in its objective capacity as an actual or potential importer of the 20” LCD monitors. As regards the description of the product which is the object of the classification in question, it is a very general description. In addition, no photography, no logo nor any other sign of an Apple trade mark appears in the table annexed to the contested regulation.“ (emphasis added)

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QUESTIONS?

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