What does the EU-UK Trade and Cooperation Agreement (TCA) mean for businesses that sell finished goods of EU origin to EU customers from the UK, and vice versa? This article addresses questions increasingly asked by businesses with distribution centre models. Specifically, questions relating to how to mitigate customs duty when trading originating goods between the UK and the EU in 2021.
Reader’s questions: Can finished goods originating in the EU benefit from the TCA once it has been exported to the UK and imported into the EU, and vice versa? What does the TCA mean for distribution centre models?
EU-UK Trade and Cooperation Agreement - rules of origin and evidencing origin
The CC&RM Journal for Practitioners in Europe previously covered what businesses must do to claim preferential treatment. Namely, the goods must meet the rules of origin as stated in the TCA, and that the preferential origin is evidenced. This can be through a statement on origin issued by the exporter, or the importer can claim importer’s knowledge subject to having in their possession all the necessary documents to evidence the origin of the goods.
Furthermore, the agreement allows full bilateral cumulation. But what does this mean for originatingfinished goods that cross the UK-EU border multiple times?
Questions are emerging as to whether finished goods produced in the EU (i.e. of EU preferential origin) by Supplier A can benefit from preference under the TCA upon reimport back into the EU by Customer A, once they have been shipped to a distribution centre in the UK by Supplier B.
Let’s break this down into two movements: EU to the UK, and then UK to the EU.
Movement 1: customs treatment of finished goods dispatched from the EU to the UK.
If these goods meet the rules of origin and the procedural requirements are also met, they can be imported into the UK claiming preferential treatment under the TCA, i.e. no customs duties. Whilst in the UK, no processing is done to the finished goods. They are simply stored in a warehouse.
Movement 2: customs treatment of finished goods of EU origin dispatched from the UK to the EU.
When Supplier B receives a purchase order from the EU Customer A, these finished goods are exported from the UK and imported back into the EU. Since no processing took place in the UK, these goods cannot claim preferential treatment under the TCA as having UK origin.
Given the goods were exported from the EU and imported into the UK, they may have retained their non-preferential EU origin, but Customer A cannot claim preferential treatment under the TCA, as the goods were exported from the EU and will be considered as non-originating (note: this interpretation of the TCA is based on the text and guidance as they stand as well as how trade agreements with similar wording are traditionally applied in practice).
As such, third country duty rate will apply.
Based on the current draft of the TCA and the related guidance documents, it appears that goods originally produced in the EU of EU origin will not be able to claim preference under the TCA once they have been exported from the EU to the UK and back with no processing done to them. It is also unlikely that Returned Goods Relief will be applicable in the case. Similarly, goods of UK origin exported to the EU and imported back into the UK will not be able to benefit from preferential treatment under the TCA.
While this is something known to users of traditional trade agreements, the standard wording which are also seen in the TCA will no doubt bring unexpected surprises and potentially disruption to existing trading patterns between the UK and the EU. Trade agreements have so far brought signatory parties closer, but in the case of the TCA, the starting point was a closer relationship under a Customs Union, which is now distanced by the TCA.
This will significantly impact Irish businesses in particular, where EU goods are supplied to the Irish market via the UK.
If this interpretation of the TCA is confirmed by UK/EU customs authorities, businesses currently operating this model should review the customs duty impact and reconsider their supply chains, or seek practical solutions.
This article first appeared in CC&RM Journal for Practitioners in Europe, Issue 6, December 2020 / January 2021 (https://www.customsclearance.net/en/articles/eu-uk-trade-customs-duty-impact-on-distribution-centre-models)