Free Trade Agreements: Correct Calculation of Origin
Consideration of Rebates, Düsseldorf Fiscal Court, Judgment of January 11, 2023 - 4 K 1970/21 Z
The EU has concluded free trade agreements with many countries that allow goods to be imported at preferential rates of duty or even duty-free. The prerequisite is that the goods must originate from the contracting state. The respective free trade agreements determine when goods originate. These contain processing lists that define the requirements in more detail. Very often, the prerequisite is that an appropriate, percentage-based increase in value has occurred as a result of the processing. For example, in trade with Switzerland, input materials without EU origin in the manufacture of a passenger car may not exceed 40% of the ex-works price. In other words, if the vehicle is sold for €40,000, the value of the non-EU originating materials may not exceed €16,000.
In the above-mentioned decision, it was disputed how the ex-works price was calculated if the company granted discounts on the purchase price payments.
What had happened?
The applicant repeatedly applied to Customs for EUR.1 movement certificates for exports of its goods to Egypt.
For the original calculation to justify the application, the applicant used the "normal" sales price. However, discounts were agreed with the customer for the purchase of a minimum quantity. These discounts were in fact always granted and not only retroactively after the minimum purchase quantity had been reached. In other words, for each export, the purchase price to be paid was reduced by the "future" agreed discount amount.
The discounted purchase price meant that in many cases the conditions for achieving EU origin were not met (lack of value added or too large a proportion of non-originating input material). In the calculation used by the plaintiff with the non-discounted price, the conditions for achieving EU origin were fulfilled.
It was disputed whether the discounts had to be taken into account when determining the ex-works price. This was also in light of the Commission's Explanatory Note to the Pan-Euro-Mediterranean Origin Protocols (OJ EU 2007 No. 83 C), which excludes subsequently granted discounts from the calculation.
The Düsseldorf Fiscal Court ruled that the discounts taken into account here when the invoice was issued were to be included in the calculation. It justified its decision by stating that the discounts granted are not subsequent discounts. Rather, these discounts were already defined at the time of the purchase transaction and shown in the specific invoices for the goods. This would be supported by the fact that the customer had only paid the discounted prices. The discounted price was therefore the actual purchase price to be paid.
What does this mean for your practice?
If you submit declarations of origin, discounts must be critically examined in the calculation of origin. Please note that (long-term) supplier declarations as proofs of origin are also affected.
The origins stored in your ERP system cannot always be deemed correct should your sales department grant discounts. When granting discounts, the recorded origin must be checked and, if necessary, corrected.
Discounts can lead to the fact that despite a reduced purchase price for the customer, the product actually becomes more expensive. This is because the elimination of the EU origin generally also means that import at preferential customs rates is no longer possible in the country of destination. Consequently, the customs duties now incurred can lead the discount to the point of obsolescence.
If you have contractually assured the customer an EU origin, the discount may give rise to claims for damages by the customer if you do not achieve the assured EU origin as a result.
Incorrectly issued movement certificates are revoked by customs, as in the case at issue. There is an obligation to cooperate with customs in this regard.
We recommend that the sales department be made aware of this and that clear processes be created within the company in order to avoid applying for or issuing incorrect movement certificates. Communication between sales and the customs department/application for movement certificates must be regulated. The sales department should only provide discounts and commitments on specific originating status after prior consultation with the customs department.