Transport and logistics companies often act as customs agents for their customers (principals). The same applies for warehouses and other service providers. If they lodge tax declarations on behalf of their principals they may become liable for import duties. Import duties are normally custom duties and Import VAT. In general the Import VAT is significantly higher than custom duties. Therefore it is of commercial significance for customs agents whether they are able to reclaim import VAT as input tax. Recently the European Court of Justice (ECJ) had to decide about this question.
Most European tax authorities deny the right of customs agents to claim import VAT as input tax. The argument is that the goods are not imported for the purpose of the agent’s business. German custom authorities deny any claims by customs agents. British tax authorities deny claims but allow a claim if the importer has gone into liquidation and certain other criteria are met (Section 2.5 of HMRC VAT notice 702). For logistics service providers acting as customs agents this restrictive view results in a significant financial burden if their customers do not reimburse them import duties. This is often the case if the agent is responsible for any breach of customs obligations. This is especially the case if transit procedures or other customs procedures are not properly processed or closed.
For logistics service providers especially the following regulations are crucial:
Unlawful removal from customs supervision (Art. 203 (1) Community Customs Code / CCC)
An unlawful removal arises if an action or omission results in a situation where the competent customs authority is prevented, if only for a short time, from gaining access to goods under customs supervision and from carrying out necessary monitoring. In this regard it does not matter whether
- the removal was of temporally nature
- the company would be able to present the goods for monitoring or
- customs authorities planned to monitor the goods.
Unlawful intent or negligence is no necessary condition to incur import duties.
Non-fulfilment of customs obligations (Art. 204 (1) CCC)
Import duties will be incurred through non-fulfilment of customs obligation in regard to temporary storage or the use of customs procedures if no unlawful removal of goods from customs supervision took place. Import duties are not due if
- involved persons did not act with obvious negligence and
- all formalities necessary to regulate the situation are subsequently carried out
This will be the case for example if an agent misses the time-limit set by a customs office or customs formalities have been neglected but the customs procedure as a whole has been properly processed and closed.
In general import VAT is much higher than regular customs duties. This explains why especially shipping and forwarding companies acting as customs agent try to claim import VAT as input tax. The ECJ ruled in its decision dated 25 June 2015 (C-187/14) that a carrier of goods in an external transit procedure cannot claim import VAT as input tax. The following has happened:
The Danish transport and logistics company DSV carried goods from Copenhagen Freeport (Denmark) to Jonkoping (Sweden) under external community transit procedures. The goods were rejected by the recipient at presentation and consequently DSV carried the goods back to Copenhagen Freeport without presenting the goods to a custom office or cancelling the transit documentation.
The rejected goods were transported together with other goods to Sweden. A second external transit was opened. The second transit procedure was properly executed and closed. However, Danish tax authorities claimed import duties because the first transit procedure had not been properly closed. DSV paid import duties and claimed import VAT as input tax. This claim was rejected by Danish tax authorities. The case went to court. The Danish Eastern Regional Court of Appeal asked the ECJ various questions.
The ECJ ruled as follows:
If DSV cannot demonstrate the identity of goods of the first and second shipment import duties are due since the goods were not presented to a customs office and transit documentation had not been cancelled in the first transit procedure. Art. 203 (1) CCC is applicable.
If DSV can demonstrate the identity of goods in the first and second shipment the situation is different. The failure to miss the close of the first transit procedure does not lead to an unlawful removal of goods from customs supervision (Art. 203 (1) CCC). However the goods of the first shipment were not presented within the time limit set by the Danish customs office. Late submission of goods is a breach for customs obligations. In general this failure leads to import duties (Art. 204 CCC). However this can be avoided if DSV did not act with obvious negligence. The ECJ ruled that the close of the second transit procedure would regulate the customs situation of the goods in question.
The Danish court must now decide whether DSV can prove the identity of goods in the first and second shipment. It must also investigate whether DSV acted with obvious negligence. The concept of obvious negligence must take into account the complexity of customs provisions and professional experience and care taken by the acting person. Whether DSV can prove the identity of goods is questionable. However, even if DSV can prove it there is a second hurdle. A professional transport and logistics company should be aware of the fact that a transit procedure must be closed properly meaning that goods have to be presented to a customs office and transit documentation has to be closed before a second transit scheme is opened.
The ECJ also ruled that a carrier of goods who is neither the importer nor the owner of the goods cannot claim import VAT as input tax. The costs of imported goods and consequently the import VAT is not incorporated either in the costs of a particular output transaction or in the costs of goods and services supplied by DSV as part of its economic activities. DSV cannot claim VAT on imported goods of its principal as input VAT.
(1) The ECJ did not mention its own concept of fiscal neutrality of the VAT system in this decision. However this ruling breaches the courts statements that VAT shall not be imposed on taxable transactions of taxable persons. If customs agents cannot claim import VAT from their principals or from tax authorities VAT becomes a regular cost factor and has the character of a sanction.
(2) The ECJ also did not investigate the possibilities of a repayment or remission of import duties (Art. 235 to 239 CCC). Especially if the failures are minor this might be a possibility to avoid extensive tax burdens.
Authors: Peter Scheller, German Tax Adviser – Master of International Taxation, www.scheller-international.com / Susanne Zaczek, German Customs Specialist, www.zoll-service-kiel.de