Presented in Shenzhen, China, 17/18 September
2014
By
Mr Raj Ganguly, CEO, RKG Consulting, London
Chartered Tax Adviser (UK)
Fellow in International Tax – IBFD International
Tax Academy, Netherlands
rganguly@rkgconsulting.com
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EU is a “single market”
 Currently 28 EU member states
 No internal trade barriers
 No customs duties on movement of goods between EU countries
 Common external tariff & harmonised trade measures
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VAT – Value Added Tax in the EU – some basics
 VAT is a tax that “sticks” with the end user (your customer for B2C e-commerce). VAT is designed
to be “neutral” to business as VAT-registered businesses can recover VAT on business costs.
 “Standard” rates of VAT in the EU vary between 15% (Luxembourg) and 27% (Hungary).
Germany is 19%, UK - 20%, France - 20%, NL - 21%, Belgium – 21% & Italy is 22%.
 There are also “reduced” rates of VAT, “super reduced” rates & “parking” rates that apply to
various goods & services.
 The Importer is liable to pay “import” VAT on goods imported into the EU. A VAT-registered
importer can recover import VAT suffered at the point of importation, provided the required
VAT certificates are obtained (e.g. C79 in UK).
 KNOW YOUR CUSTOMER
- B2C: If your customer is a EU “consumer” you need to take import VAT into your pricing.
- B2B: If your customer is a VAT-registered business, they should be able to recover import VAT.
HEALTH WARNING: As rates of EU VAT average 20% or more you CANNOT AFFORD TO GET IT
WRONG. Mistakes can wipe out your margins. Therefore PLAN AHEAD!
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Import VAT & customs duty
 Relief from “customs duty” if value of goods under euro 150.
 Relief from “import VAT” if value of goods under euro 22 (UK £15).
 If value of your goods is €150 or over, it will be liable to BOTH customs
duty as well as import VAT.
 If the value of your goods is under €22 it will be exempt from both
customs duty as well as import VAT. The VAT relief for the UK is £15.
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Relief from import VAT: Low Value Bulking Import concession
 There are various methods of shipping packets including “postal” & “non-postal” means. The goods will
travel from China as non-post or “freight” but after reaching Europe (Belgium) may continue to their
destination under either means of transport.
 Low Value Bulking Import (LVBI) concession is available for imports of e-commerce goods into the EU
provided the courier / freight forwarder has prior authorisation from customs. The goods will be imported
into Belgium and after “customs clearance” there are admitted into “free circulation”. That means the
goods can move freely thereafter to any destination in the EU without further customs formalities. The
goods can be injected into the postal system or continue as “freight” or ADS for some tracked products.
 Businesses, whether VAT-registered or not, should not be importing their retail stock using the LVBI
concession as use of LVBI is not appropriate for wholesale imports.
 The legal basis of LVBI is in accordance with article 27 of EC Regulation 918/83 as amended by Council
Regulation (EEC) No: 3357/91 which states the value of goods to be imported as consignments of negligible
value means the “intrinsic” value of the goods do not exceed €22 per consignment (UK – GBP 15).
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LVBI
 If regular importations of bulk low value items to several consignees are being made then an
application for authorisation under LVBI should be made.
 LVBI allows a single import entry declaration to be made which is supported by a manifest
identifying the individual items in the consignment in sufficient detail for customs control. The
parcel weights can be in various categories (below 2kg, 5kg or 30kg). Import VAT does not
depend on the weight, it depends on the value of the goods – UK:£15, rest of EU: €22.
 There can be multiple items in a consignment but the €22 / £15 relief only applies to a single
addressee within the consignment. For example if there are 2 separate packages valued at €16
within a consignment addressed to the same buyer, the total value will be €32 > the limit of €22
& no relief will be given.
 Ensure there is only one package / parcel within a particular consignment addressed to a
particular buyer and valued at under €22 / £15 to claim the import VAT relief.
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Main conditions of LVBI scheme in the UK but applicable across EU generally
 The de-minimis of €22/£15 applies to the “intrinsic” value of the goods. If the goods are valued at say €21.99
and P&P is say €5 the relief will still apply.
 The goods will be “customs cleared” in Belgium but the “final” consignee can be anywhere in the EU.
 The “consignee” – the LVBI approval holder – must be VAT registered, have an EORI no: and be an
approved economic operator.
 Up to 99 items can be shown on the manifest. If the shipment is say for 150 items then there needs to be
two separate manifests – one for the first 99 items and another for the remaining 51 items.
 Its important to note the goods in question cannot be liable to excise duty, any licensing requirement,
prohibition or restriction or infringement of Intellectual Property Right (IPR) on import.
 Each consignment must have been despatched direct from a “third” country (outside the EU) and must be
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addressed to a final consignee in the EU (not in a third country).
All the goods concerned arrive on the same vessel or aircraft.
All the goods are physically identifiable and separate from other non-bulked items.
All the goods must be identified on a manifest.
Records & accounts must be kept according to the EU country of importation.
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Importing into Belgium
There are primarily 2 customs entry processes for importing into Belgium:
1.
Low value shipments (goods value under €22).
2. High value shipments (goods value €22 and above)
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Belgium: low value importations ( goods value < €22)
For low-value shipments a consolidated manifest is presented to Customs. This is an abbreviated
listing of the cargo details for international shipments & usually contains:
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Consignee’s full name & address with phone number.
Shipper’s full name & address with phone number.
A complete description of the goods.
Total quantity, unit value & currency of the goods
Number of packages
Total weight of the shipment
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Belgium: high-value importations (goods value €22 & above)
The consolidated manifest is presented along with a formal declaration for each shipment listed in
the manifest. The Air Waybill and commercial invoice provided by the exporter must contain
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Air Waybill / Bill of lading.
Commercial invoice or pro-forma invoice
Any relevant import documentation required or supplied by the exporter.
Any import licences required.
Certificates of origin (EUR1, Form A or ATR form).
Health certificates, etc if required.
The customs broker feeds the above data onto the computerised import clearance system to
produce a customs declaration.
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“Landed” cost into Belgium includes customs duty & import VAT
 Belgium standard VAT rate is 21% but some products might attract 6% “reduced” rate of VAT.
 Customs duty (full duty, reduced or no duty) = (invoice value +% transport/other costs) x % duty.
 Import VAT = (invoice value + % transport/other costs + duty) x VAT rate (21% or 6%)
 Additional taxes that also might apply include:
- Eco or environmental tax: on some products such as packaging materials, disposable cameras,
batteries, solvents, glues, etc.
- Excise taxes
- Tax on controlled items such as veterinary or sanitary products, etc
- Ancillary charges for special handling or processing.
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Low Value Consignment Relief (LVCR) if goods despatched individually, not in “bulk”
 B2C: goods valued at under €22 shipped from outside the EU (e.g China) to a EU consumer
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attract relief from import VAT. The UK limits the relief to GBP 15 for exports from China/HK.
Note the LVCR is NOT to be confused with the de-minimis “customs” duty exemption of €150.
LVCR applies to high volume but low value goods such as computer/photographic accessories,
giftware, clothing, DVD/CDs, electronic/electrical items, cosmetics, contact lenses, health food
supplements. Low-value items benefiting from “repeat” orders would qualify. Many of these
items are shipped by post but other means of transport also qualify.
If the “intrinsic” value of the goods is under the LVCR limit then the P&P is ignored. If the
“intrinsic” value is equal or more than the LVCR threshold then VAT is charged on the entire
amount. Planning: keep the goods at €21.99 / £14.99 or under to attract the LVCR.
Retailer’s website: must have the appropriate clauses at “checkout” and the customer terms and
conditions must have the correct “customs & VAT” notification. GET THESE REVIEWED.
The importer is legally responsible to pay import VAT on items €22 & above. If VAT is not
mentioned on the website and comes as a nasty “surprise”, customers often return the goods
leading to credit card “charge-backs” & adverse reviews on the major sites (Google, Amazon,
eBay, Alibaba, JD.com, TenCent etc).
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Future developments on €22 VAT relief?
 Currently the LVBI or LVCR generally applies across the EU
 The UK abolished the LVCR relief for shipments from the Channel Islands to the UK on 1 April
2012 on the grounds UK businesses were “abusing” the concession by “round-tripping”
 Currently the UK still gives £15 relief for shipments from the rest of the world to the UK.
 The relief is an administrative concession and unless there is widespread abuse it is unlikely the
relief will be abolished in the short-term across the EU as a whole.
 However, EU law gives each individual member state the right not to exercise the relief in the
case of mail order sales in cases of abuse, avoidance or evasion.
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Key customs issues for exporters
For customs clearance of your goods into the EU focus on:
1. Classification
2. Origin
3. Customs Valuation / Transfer Pricing
4. Duty suspension regimes
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Classification
 Tariff classification of goods is an important and often neglected element of
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export
Duty rates in many countries are still high and import duties form a
significant part of state revenues
Many goods may still be subject to classification interpretation, particularly
involving new technologies
Tariff classification particularly relevant in countries that also levy some form
of duties on certain exported goods (e.g. China)
Discrepancy between the tariff code used by the exporter & the code used by
the importer often triggers investigation resulting in a higher duty bill
Exporters must develop global tariff classification policies
Classification in the Combined Nomenclature determines EU tariff
Possible to obtain EU-wide binding rulings on classification (Binding Tariff
Information)
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Classification case study (shoe imports into France – Homeau Beaupreau)
European Court of Justice (ECJ) ruling in February 2014 on Rule 2a of Combined Nomenclature
which prevents importers or manufacturers to split imports into parts to save on customs duty:
 Uppers, inner soles, outer soles & laces: imported separately from China to France by Homeau
 Identical amounts of the components were imported & put together after “roughening”
 French Customs deemed the post-import roughening was not “processing” but “assembly”
 French authorities classified the imports as “unassembled” sports footware under 6404 11 00
whose duty rate was much higher than those of the 4 constituent parts.
 ECJ held that under rule 2a, including a certain good in a tariff code does also include that good
in an unfinished state as long as it has the essential character of the complete or finished item.
 ECJ held character of the shoe is mainly the combination of the upper and outer sole since these
are the largest components of what goes to make a complete product. These components
enclose and protect the user’s feet and provide the main functions of a shoe. Therefore, the
import of an upper, outer sole and inner sole should be considered as a product with the
essential characteristics of a “shoe”.
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Origin of goods
Origin of goods is another factor which impacts on the customs duty payable in the
country of importation:
 Many agreements (e.g. FTAs) between the EU and other countries offering a favourable
duty rate on imports.
 Duty-free trade between partner countries is possible
 FTAs have complex systems of determining preferential origin (rules of origin)
 Failure to comply with these rules of origin on the exporting side could lead to costly
problems on the importing side – leading to reputational issues for exporters
 “Non-preferential origin” is often ignored to the detriment of exporters – rules to
establish origin for purposes unrelated to preferential duty rates e.g. anti-dumping.
 The EU and US have made extensive use of such measures for retaliatory purposes or
domestic manufacturers are becoming more aggressive
 Exporters should be familiar with potential problems in the importing country & have
risk management strategies in place.
 Importers may ask for EU-wide binding rulings on the origin of their products
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Customs valuation / transfer pricing
 Customs authorities are increasingly targetting valuation issues as the majority of
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global transactions occur between related parties
Tension between “transfer price” on the one hand and “customs valuation” on
other hand can lead to mutually contradictory results
Basic principle: taxable base equals the transaction value
Customs authorities increasingly investigating whether related party transactions
have led to the declared transaction value (sales price) affected by the relationship
Note: payments linked to the imported goods (e.g. royalties)
Tax planning: use of bonded warehouses, “first sale for export” regime &
unbundling of non-dutiable elements from the transaction price
Exporters should pre-arm themselves with a proper transfer pricing study prepared
by experts. Will prevent delays in shipments and will provide a competitive edge
over those exporters that have not taken any action
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Customs checklist for exporters
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Establish product classification & duty rate
Check the “origin” criteria
Check the consignment conditions
Prepare documentary evidence in advance
Ship product & submit documents to customs authorities or to the
importer in the EU
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Duty suspension regimes
 Bonded warehousing
 Transit procedures
 Inward processing relief
 Temporary importation
Duty suspension regimes can offer deferral of import duties. There is
obviously more compliance but the end result may justify using such
regimes.
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Import VAT – Your “competition” in the EU
 Many Chinese exporters wish to sell “direct” to a potential market of around 450
million consumers in the EU. Want to cut out the “middleman”.
 Your EU competitors have “local” presence, may feel the “pulse” of the market
better, know the VAT rules & rates better.
 Your B2C clients may be stuck with paying import VAT at “standard” rates of
20% or more. Your competitors could be selling the same products at “reduced”
rates of VAT – quite legally – via some tax planning.
EXAMPLE
Health food supplements (vitamin pills, sports energy products) sold in the
Netherlands attract a “reduced” VAT rate of 6% but elsewhere the rate is 20% or
more. Suppliers from other EU countries ship from NL in a certain manner so
the VAT “Distance Selling” regime does not apply. There are many other
examples.
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“Distance selling” rules for VAT
 The VAT distance selling regime applies when goods are shipped from one EU country to
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another EU country in a B2C transaction.
This will only apply if you have a warehouse in one EU country where your goods have been
released to “free circulation” and you are shipping to another EU country in a B2C transaction.
Up to a certain sales threshold (of the destination member state) you may charge the VAT rate of
the country you are shipping from but once that threshold has been reached you must VATregister & charge the VAT of the destination country.
Different member states have different sales thresholds and some may not have any thresholds
at all.
You may opt to VAT-register in the destination country from day 1 even if there is a minimum
threshold available.
LOTS OF SCOPE FOR ERRORS & TO AVOID THIS PROPER PLANNING IN ADVANCE IS
REQUIRED.
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VAT – “ DO’s and DON’T’s”
 Do NOT ignore VAT as something the importer will deal with. Be aware of the rules,
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rates & different interpretations of a system that’s supposed to be “harmonised”.
DO get your website terms and conditions reviewed from a VAT perspective.
If you are a fulfilment house DO ensure the correct documentation (CN22/CN23) postal
certificates are affixed to the package, the labels have correct analysis, description of the
goods, addressing, returns address etc.
One seller had 10,000 commercial shipments to the EU registered to an “apartment” in
HK as sending address. EU consumers paid an average of €9.99 for the products but
they were certified as 1 $HK “gifts” on the packages. Such actions give the entire
industry a bad reputation and your shipments will simply be held up.
Its possible to “pre-pay” import VAT for shipments £15 & above to the UK under certain
“arrangements” the UK government has with certain overseas P. O.s
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CASE STUDIES - China company shipping goods to the EU
 Direct shipments from China to the EU customer (First Sale For Export)
 Shipments via a EU warehouse.
 What are the “profits” tax issues if the sale to UK and EU customers is
executed via a UK company?
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Sale via a EU warehouse (UK scenario)
VAT analysis
 Chinese exporter ships goods to say a UK warehouse. The goods are “customs cleared” in the UK and entered for
“free circulation”. That means once import VAT & duties are paid the goods can be sold anywhere in the EU
without further customs formalities or checks being applied within the EU.
 The “import” VAT of 20% needs to be reclaimed. Therefore, a VAT registration in the UK is required.
 The China exporter can either VAT-register in the UK as a “Non Established Taxable Person” (NETP) or
incorporate a UK company and register that company for UK VAT.
 If sales to UK customers is conducted via that company, then output VAT must be charged to the customers at
the current standard rate of VAT which is 20%. The company will collect the output VAT , deduct the import VAT
and input VAT on UK allowable business costs and pay the difference to HMRC.
Corporate income tax on profits made in the UK
 The UK company will be expected to show a profit margin and to pay corporation tax on the difference between
its sales revenues and the imported costs of the goods. UK expenses & overheads can be also deducted. The
remaining profit will be taxed at the rate of 20% applicable from 1 April 2015.
 Normally under DTAs , a warehouse used only for the storage of goods is not a “Permanent Establishment” as long
there is no fixed place of business PE nor a “dependent agent” PE. If contracts with UK customers are habitually
concluded while the goods are in the UK it will be difficult to argue there is no PE given the tax treaty changes
and BEPS project being conducted by the OECD. If a PE exists “attributable” profits will be charged to CT.
 Our advice is not to engage in any “tax avoidance” scheme and to maintain a relatively simple structure by using a
UK company and paying the UK’s relatively low corporation tax on profits after deducting generous allowances.
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Case study: Shipping direct to EU customer (First Sale For Export scheme)
Scenario:
“A” is factory in China. “B” is the Hong Kong goods “sourcing” agent. “C” is e-commerce sales
website. “D” is the EU buyer.
Conditions of FSFE scheme:
 Goods are manufactured according to EC specifications or are identified as having no other use
or destination;
 Goods were manufactured specifically for a buyer in the EC; and
 Specific goods are ordered from an intermediary who sources from a manufacturer and goods
are shipped directly to the EC.
Some EU tax authorities deem that FSFE only applies to business or VAT-registered buyers not to
importers who are individuals but the EC legislation does not specify this
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EC Regulation on valuation of goods: basis of First Sale for Export
 Council Regulation EEC No: 1224/80 of 28 May 1980 (referred to as "the basic regulation")
Article 3(1) of Council Regulation EEC No: 1224/80 of 28 May 1990 on the valuation of goods for
customs purposes provides that:
 "The customs value of imported goods determined under this article shall be their transaction
value, that is, the price actually paid or payable for the goods when sold for export to the
customs territory of the Community, adjusted in accordance with article 8......".
 Article 8 (1)(a)(i) of the basic regulation provides that in determining the customs value under
article 3, there is to be added to the price actually paid or payable for the imported goods
commission and brokerage, except buying commissions, to the extent that they are incurred by
the buyer but are not included in the price actually paid or payable for the goods.
 The term "buying commissions" is defined in article 8(4) of the basic regulation as "fees paid by
an importer to his agent for the service of representing him in the purchase of the goods being
valued".
….. But the proposed Union Customs Code could change this to “last sale price”! So BEWARE!
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First Sale For Export: historic situation
Chinese
Manufacturer “A”
Sale 1: Price
€150
HK Sourcing
Agent “B”
Sale 2: Price
€170
E-com website
“C”
Customs value for import into EU
EU
Sale 3:Price
€200
EU Buyer “D”
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Sale 1 price €150 instead of Sale
3 price of €200
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Direct sales: FSFE – new landscape
 Getting increasingly difficult to persuade EU customs authorities that
FSFE price is sale price 1 as in the diagram in view of UCC proposals.
 Some authorities argue FSFE price is sale 2 price… when goods are loaded
by HK agent onto ship.
 Some authorities argue FSFE price is sale 3 price… unless it can be proven
conclusively that both “B” & “C” are agents within the “basic” regulation
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FSFE - imports into Germany: Hepp v Hauptzoll Karlsruhe C-299/90
 Hepp GmbH, a German company imported cutlery from a Far East supplier. Hepp used the
services of Novimex, a Swiss co, to act in its own name but on behalf of Hepp to procure the
goods. Novimex invoiced Hepp for the prices paid to the supplier and the commissions
(separately invoiced). In its customs declaration Hepp gave Novimex's name as "seller“.
 The German tax authority maintained where there was a buying agent acting in his own name,
there were 2 "sale" transactions. Manuf-Agent & Agent-Importer. ECJ disagreed on grounds that
no account was being taken on the buying agent's actual function. Since the agent acts on behalf
of the importer, his function is that of "representation" & he bears no financial risks of purchase.
Even if he acts in his own name his function is limited to participation as indirect representative
in a contract of sale between his principal & the supplier. The relevant transaction for art 3(1) is
that between the manufacturer or supplier & the importer if a buying agent has acted in his own
name but on behalf of the importer.
 The price in the transaction between the manufacturer/supplier and the importer constitutes
the customs value. The buying commission is not to be included in that value even when the
importer has described the agent as the "seller" and has declared the price invoiced by the agent.
 Will this analysis still hold good in view of the proposed UCC changes? Watch this space.
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FSFE – imports into Germany: Unifert Handel v Ht. Munster C 11/89
 Unifert Handels (Unifert) is the German subsidiary of the Brussels-based Unifert Group. Ferdis SA, another subsidiary, purchases
fertiliser for the group in non-EU countries and resold it uncleared and without payment of duty to the group's other European
subsidiaries. In its customs declarations Unifert stated that Ferdis was the seller & relied on invoices issued to it by Ferdis. The
customs declaration was a "reconstructed" price, calculated by multiplying the actual weight of the goods on unloading by the
price per ton agreed with Ferdis. Because this weight was less than the weight agreed in the contract, the value declared was also
less than the amount actually paid by the appellant to Ferdis. The cost-at-frontier transport & insurance was added to that price,
but not "demurrage" costs (costs incurred in keeping vessels in port beyond usual period).
 Unifert also excluded the 6% "buying commission" which it paid to Ferdis. The German tax authority raised an assessment by
including the demurrage charges and the so-called buying commissions in the customs value and replaced the lower
"reconstructed" price with the full price agreed in the contract.
 The ECJ held the location of the parties to the contract was irrelevant. "Sold for export" relates to the goods & not the situation of
the seller. It follows from that, for purposes of Reg. 1224/80, it is permitted to use not only the price of a sale concluded
immediately before export from a non-EU country, but also any of the prices relating to sales made after export but release into
free circulation in the EC, irrespective of the place where the parties to the contract of sale are established.
 Art 8(1)(a)(i) of Reg. 1224/80 does exclude "buying commissions" from the customs value. However, art 8(4) provides that the
term "buying commission" means a fee paid by an importer to his agent for the "service" of representing him in the purchase of
the goods. It does not include an amount paid by the buyer to the seller if the amount is calculated in such a way as to permit the
seller to cover his administrative & other general costs not directly related to the sale in question. The ECJ held that Unifert's
argument that the costs incurred within the EC may not in any circumstances be used to determine customs value, cannot be
upheld. The reply to this question is that a payment made by the buyer to the seller, invoiced separately and described as a
"buying commission" forms part of the price for the imported goods within art 3(1).
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Imports into France
 Goods are imported via a French warehouse: as in the UK case provided there is a VAT registration import
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VAT can be recovered. The buyers pay local VAT on sales arising within France. However, if there is no
intermediary involved for the import VAT recovery the buyers not registered for VAT can suffer a “double”
charge to VAT. Once on the “import” VAT and again on the domestic sales if the French authorities deem
the sales contracts with the end users were concluded in France.
Direct imports into France from China / HK are likely to cause even more problems because “import” VAT
is based on customs valuations & the French authorities are more resistant to the First Sale for Export
scheme than the UK & German authorities.
French authorities deem 2 separate sales: Chinese exporter to Agent and Agent to end-user.
If the end-users are shown as the “recipients” on the customs form SAD then the good news is the
transaction is not a French domestic sale but then all the import duty / VAT responsibilities fall on endusers and this may detract from customer experience.
If the sale is made via a website outside France (e.g. Alibaba, JD) then only a certified customs broker can
conduct the clearance formalities and the website can only be an “indirect” representative – higher charges
The French authorities will normally respect only the “last sale” price before the goods entered France. If
any sales price prior to that is to be used then the exporter or website must show clear evidence why that
earlier price is to be used.
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Conclusions
 The European Union’s VAT & customs laws are complex. & exporters need
to be aware of these laws. Non-compliance will result in hold-ups at best
or goods being returned with fines and penalties being imposed.
 Returns will result in credit card charge-backs & reputational damage to ecommerce websites.
 “Agents” such as commercial websites can be held liable for any unpaid
VAT / duty due if customer terms are not properly constructed
 Get your website customer T&Cs and supplier contracts reviewed &
institute a process of regular VAT/customs health checks.
 There can be profits tax exposure if a PE is created, even by accident.
 Take professional advice in advance, be compliant & watch your sales soar
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