As of May 1, 2016 the European Union will have a new, modernized union customs code (UCC). Several customs procedures and processes are set to change. But what is changing, exactly? And what will this mean for your business – and your ERP system?
In this article, we outline the major changes on the horizon and four ways this will impact the set-up of ERP systems such as SAP and Oracle.
Abolishment of the First Sale Rule
The main takeaway from the new legislation is that companies may have to pay more in customs duties than before. Here’s why.
The primary basis for determining the customs value of goods is the transaction value: the last sale where the goods are exported from a non-EU country to the European Union. Currently we often see many transaction flows involving at least three parties. The first two are usually part of the same company, and intercompany sales take place between them. The third is the customer. The values on the intercompany invoice tend to be lower than trade invoices. Before May 1 2016, the intercompany invoice could be used for the transaction value for import purposes, resulting in lower customs duties and VAT. A benefit for companies using this ‘first sale’ rule.
However, the new UCC determines that the transaction value will be based on the sale occurring immediately before the goods are brought into that customs territory: the trade invoice. This means the higher values on the trade invoice will be the basis for calculating customs duties.
More duties on royalty payments
This isn’t the only change introduced by the UCC, however: more royalty and license fees will be liable for customs duties.
Currently, this is only the case if the fee relates to the imported goods and is paid as a condition of sale of those imported goods. Before May 1, 2016 the seller would have to demand payment of royalties as a condition of sale, which is not common practice.
However, under the UCC the condition of sale is already fulfilled if the buyer cannot purchase the goods without paying the royalties and license fees. In other words, the definition of ‘condition of sale’ has become broader, meaning more fees are in scope of custom duties.
Does the UCC affect your company?
If your organization deals with a large volume of imports and/or exports, the UCC may have a considerable impact on your business.
There are several ways to deal with the abolishment of the First Sale Rule. You have probably already adjusted your supply chain for export sales, started sourcing locally, or adjusted your pricing model.
As for the changes to royalty fees, all companies that import goods under a sales condition will be affected. Many more royalties and license fees will be liable for customs duties. It will be challenging for importers to prove that royalties and/or license fees are not a condition of sale.
But what about the actual impact on your business? It’s not inconsiderable: both of these changes may result in adjusted customs duties. They can also negatively impact your cash flow because import VAT will increase due to higher transaction value.
There is a transitional provision available until 2017 to use an earlier sale to declare the import in the European Union. However, this provision only applies to the declarant bound by a contract. In practice, this will not be the case for many business flows.
4 key system changes
If the UCC affects your organization, it should obviously also affect the set-up of your ERP system. The exact changes of course depend on your unique business and system set-up. However, we have compiled four key aspects that need to be addressed at the very least.
- Pricing logic (e.g. SAP pricing procedures, Oracle advanced pricing): different pricing components for licenses/royalties and customs duties need to be implemented.
- Communication structures: the communication structure between two group companies will have different conditions and values. These fields need to be added to the current structure and mapped in the receiving company.
- Invoice layouts: a company other than the principal will issue the ‘pro forma’ invoice that will be used for export. This pro forma invoice layout needs to be created for this company code.
- Customs module configuration (e.g. SAP GTS, Oracle GTM, Sagitta): the system communicates with the customs authorities to electronically process import/export documentation. The configuration must be adjusted to make sure the correct company is submitting the right values.
Not sure you’re prepared?
With our experience in Indirect Taxes and Transfer Pricing, Tytho can help you tackle this issue. If you make changes to your current supply chain model or to your import/export processes, we can adjust your ERP system to reflect this. From a Transfer Pricing angle we can help make changes to your current pricing model and implement the new pricing procedure in your ERP system.
If you want to know more about how we can help with your specific situation, don’t hesitate to get in touch.