15 March 2022
The Court of Justice of the European Union (“CJEU”) remains competent to deal with cases arising from the United Kingdom’s EU membership before Brexit. Article 86(1) of the 2019 Withdrawal Agreement makes it clear that any cases pending before the CJEU at the end of the transition period (on 31 December 2020) remain within the CJEU’s jurisdiction until they are finalised.
In a judgment of 8 March 2022, the CJEU has declared that the UK failed to fulfil its obligations under EU law between 2011 and October 2017 by failing to apply effective customs controls to imports of textiles and footwear originating from the People’s Republic of China (“PRC”) and consequentially to account for the correct amounts of customs duties. The result of so doing was that it failed to make available to the EU Commission the correct amount of ‘own resources’ for the EU budget.
The Court did not agree with the Commission’s €uros 2.7 billion assessment of resulting losses, but it did find that the UK had failed to provide the EU Commission with all the information necessary to calculate the amounts of the outstanding customs duties and own resources.
INTRODUCTION
Abandonment of quotas on Textiles and Clothing imports
The Uruguay round of multi-lateral trade talks was substantially completed on 15 December 1993 and established the World Trade Organisation (“WTO”). The trade round was formally concluded in Marrakesh on 15 April 1994 at a ministerial meeting where the final act was signed.
The Textiles and Clothing (“T&C”) industry had been the only major manufacturing industry not subject to the rules of the General Agreement on Tariffs and Trade (“GATT”). Phasing out of the T&C import quotas maintained by major importing countries under the so-called ‘Multi-Fibre Arrangement’ (“MFA”) was one of the future work packages built into the Uruguay round outcomes. The MFA was ended on 1 January 2005. The PRC and Pakistan were among the countries expected to benefit most from the MFA phase-out.
In line with abandonment of the MFA, there have been no EU quotas on imports of T&C originating from the PRC since January 2005.
Valuation for Customs Purposes
Generally speaking, customs duties are based on the transaction value of imported goods. The EU looks at the price actually paid or payable for the imported goods supplemented by loading and handling charges and the costs of transporting and insuring the goods.
Customs Union and Free Circulation
The EU Customs Union is based on a single trading area within which all goods can circulate freely. Once goods have been imported from a third country, they are able to move freely throughout the territories of the EU’s customs union, from the port of entry, without being subject to further tariffs or quotas. (The principle of free circulation of goods.)
EU ‘own resources’
Two of the principal ‘own sources’ of revenue that support the EU’s budget are customs duties and member state VAT contributions (calculated as a percentage of the VAT revenues that they collect). Imports made at an undervalue may not only affect the calculation of customs duties themselves but also undermine the basis for the calculation of VAT contributions.
BACKGROUND TO THE 8 MARCH JUDGMENT
Anti-fraud Warnings
In 2007, 2009 and 2015 the European anti-fraud office (“OLAF”) informed EU member states about the risk of extreme undervaluation of imports of T&C goods imported from China by shell companies registered for the purpose of making fraudulent transactions appear legitimate. OLAF also developed a ‘lowest acceptable price’ tool to help the member states’ customs authorities detect undervalued imports.
UK became a hub for undervalued imports
In its application to the CJEU, the Commission stated that, notwithstanding repeated warnings and recommendations from OLAF and the Commission, the UK failed to adopt risk based controls to prevent the free-circulation of undervalued textiles and footwear originating from the PRC, resulting in high losses to the EU budget. Moreover, the failure to take appropriate action encouraged the use of the UK as a significant hub for undervaluation fraud.
Views from the UK
These issues were certainly subject to consideration by (the then) House of Commons Select Committee for European Scrutiny. In a summary of the documents considered by Committee on 24 January 2018, point 11 concerned UK customs controls and the EU budget. At paragraph 11.6 in the Committee’s summary and conclusions[1] it said:
11.6 We thank the Minister for her response to our questions on OLAF’s allegations. It still leaves questions unanswered about the scale of undervaluation fraud on imported goods at the UK border. We are also concerned that the European Commission by November 2017 was still of the view that widespread undervaluation fraud at UK ports had not been addressed. The Court of Auditors also found that HMRC’s approach to Chinese textiles imports had led to trade diversion, apparently to benefit from the opportunities to avoid duties when seeking customs clearance at UK ports.
JUDGMENT OF 8 MARCH 2022
Case C-213/19 European Commission v. United Kingdom
In its judgment the CJEU declared that by failing to account for the correct amounts of customs duties and failing to make the correct amounts of own resources available in respect of the C&T imports the UK failed to fulfil its obligations under article 325 TFEU (duty to combat fraud affecting the financial interests of the Union) and the provisions of the Community Customs Code. (Now replaced by the Union Customs Code.)
In addition, by failing to provide the Commission with the information necessary to determine the amount of customs duties lost and by not providing reasons for the decisions cancelling certain customs debts that had been established, the UK had failed to fulfil its obligation of loyal cooperation between Member States and the Union under article 4(3) TEU.
On the other hand, the Court found that the Commission had failed to establish the direct link between the customs value of the goods concerned and the taxable amount for VAT purposes of the C&T imports. In particular because, for most of the imported goods, only the customs duties were payable in the UK. VAT had to be paid in the member state of the destination of the goods concerned and the vast majority of the imported goods (some 87% in 2016 for example) were to be trans-shipped and sold on other member state markets.
A mere finding that the T&C imports had been undervalued for customs purposes did not necessarily lead to a reduction in the assessment base from which the VAT own resources are calculated. Moreover, the Commission had not shown that, in the case of the trans-shipped goods, the UK had prevented authorities in the member states of destination from calculating the VAT due correctly or from collecting the tax in full.
The CJEU has made clear that recalculation of the amount of the missing own resources is the responsibility of the EU Commission taking into account the Court’s findings.
[1] Available at https://publications.parliament.uk/pa/cm201719/cmselect/cmeuleg/301-xi/30115.htm
Disclaimer: This general memorandum may not deal with every important topic or cover all important aspects of the subject matter. It is not intended, and should not be used, as a substitute for seeking appropriate legal advice on specific questions.
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