Gil Nadel, Adv As we know, the law allows the Customs Authority to issue importers retroactive demands for payment of import duties on import of goods conducted in the past. The notice of debt constitutes a serious problem for the importer, since it involves a rapid timetable to pay the deficit announced by the Customs Authority; a demand that can apply to releases done many years before; and a cancellation of all of the profit of the importer from the deal, since import duties are not levied on the profit that the importer derived from the transaction, but are generally calculated as a percentage of the value of the imported goods. Since this is a request for payment issued to the importer post facto, it is hard for the importer to predict the outbreak of the issue and to act preventatively to minimize the danger.
The Customs Authority uses its authority for invalidating certificates of origin as well. As we know, regarding movement certificates (Euro-1 or Euro-Med), the Free Trade Area Agreement between Israel and the EU allows for the post facto examination of the verity of the importer/exporter’s declarations on whose basis the movement certificates were issued. For this purpose, a number of arrangements were made which allow the state of Israel to refer to the exporting state with a request to examine and verify the movement certificates that accompany the imported goods. When such a reference is made, the foreign Customs Authority examines the certificates by referring to the importer/exporter on the basis of whose declaration the certificate was produced. If it becomes apparent that the certificate was issued based on an incorrect declaration, or is not supported by the necessary evidence, the Customs Authority of the exporting state sends notice to the Israeli Customs Authority invalidating the certificates, and the Israeli Customs accordingly issues notice of debts to the importer. Regarding certificates of origin under the treaties with the US, Canada, and Mexico, the procedure is different, and the Israeli Customs Authority has the authority to perform the verification for themselves, and according to the results- to invalidate the certificate.
The possibilities for defense by the Israeli importer against invalidation of the certificate of origin- are extremely limited, since the importer is completely dependant on the cooperation of the supplier. If the supplier cooperates and protects the goods’ eligibility for the origin status- great. In many cases we have dealt with, following the cooperation of the supplier, the European Customs Authority has cancelled the invalidation and issued a corrective document. However, if the supplier is not willing to cooperate with the Customs Authority and transmit the documents that support the goods’ eligibility for originating product status, the importer cannot cancel the invalidation. Sometimes, the importer has already become bankrupt or simply stopped operating, so that there is simply “nobody to talk to”.
From a preventative perspective, the range of options of the Israeli importer- is fairly limited. In many cases, meeting the rules of origin requires an accounting-based examination of the costs of the product, information which the supplier will refuse to reveal to the importer. In other cases, the importer will need to know the manufacturing process for the goods, and he won’t get this information easily either. Theoretically, the importer can stipulate with the supplier that if the certificate of origin is invalidated- then the supplier will be liable to reimburse the importer, but in practice such a condition is not practicable, and it seems unlikely that a foreign supplier would agree to such a reimbursement. “If you have a problem with the certificates- don’t use them!” the supplier will protest to the Israeli importer. At the same time, the import can request and receive indications that the products meet the rules of origin: for this, the importer must know the rules of origin ahead of time, and confirm that the supplier meets them as much as is possible. If, for example, regarding textiles from Europe, the rules of origin state that a foreign, non-European raw material must exist only at the level of the thread, the importer can confirm, at the very least, that the supplier is not using fabrics woven in China, and so forth. This will limit the importer’s vulnerability, although not completely eliminating it.
Allegedly, and only allegedly, it could be suggested that the importer use paragraph 3 of the Law of Indirect Taxes, which allows an importer to receive an exemption from payment of tax debts under certain conditions. According to the paragraph, an importer is exempt from payment of a tax-related debt if: (1) the tax debt does not result from incorrect information that the importer gave or from information which he should have given but failed to give; (2) the importer did not and should not have known about the tax deficiency; (3) the importer did not roll the tax over to the buyers.
However, the Customs Authority interprets paragraph 3 narrowly. In a disagreement resulting from the invalidation of a certificate of origin, the Customs Authority will claim that the certificate of origin that was invalidated constitutes an incorrect piece of information given by the importer.It makes no difference to the Customs Authority that when the goods were released the certificate of origin was valid and the importer relied on it in good faith. The test is completely objective, according to the Customs Authority, and an invalidated certificate is considered an incorrect piece of information.
This stance was upheld by the court in a number of instances, and recently received a comprehensive discussion in the decision of the District Court of Be'er Sheva, ת.א 7182/06 Tempo Beer Industries Ltd. V. State of Israel, decision issued 17.3.09). The court repeated the rule that a EURO1 movement certification that is invalidated constitutes an incorrect piece of information given by the assessee: "It has already been ruled that the condition should be given an objective interpretation, which means that, if it is ruled that the goods imported by the appellant were classified by him in the framework of its litigation with the Customs Authority in manner that was incorrect factually speaking, the condition does not apply and the appellant cannot enter the realm of the exception."
However, the court also ruled that the importer did not take all the steps necessary to ensure that the goods would meet the rules of origin and to ensure that the movement certification would be valid, since the importer did not manage to note the name of the supplier's representative who promised them that the goods were exempt from customs; did not clarify with the supplier whether the import of the goods by the previous importer had actually be exempt from customs; did not agree with the supplier, within the supply contracts, that the supplier undertook that the goods would meet the rules of origin (or even the opposite- it seemed that the supplier had complete freedom to change basic conditions affecting the rules of origin, with no sort of limitation); nor make any attempt to check with the supplier whether the goods met the rules of origin.
Accordingly, the court ruled that the deficits issued to the Tempo company- a sum of over 7.5 million NIS (!)- are completely valid, and even obligated Tempo in legal fees and attorneys' fees of 70,000 NIS (!). (Representing Tempo- Advs. Ziton, Dorot, and Kronfeld, for the State, Adv. Shila).
We have been informed that the Tempo Company intends to appeal the case to the Supreme Court, and rightly so. Without getting into the specifics of the case, it is hard to imagine that a situation in which the importer who took preemptive steps to ensure that the goods met the rules of origin and who relied on the movement certificates signed by the foreign Customs Authority, is considered to have given incorrect information and to be expected to have known about the deficiencies. We will wait for the Supreme Court’s decision.
But in the meantime, and according to the precedent handed down in a number of decisions in various instances, the importer must know that paragraph 3 to the Law of Indirect Taxes does not help him deal with the notice of debt issued when a certificate of origin is invalidated. The vulnerability, thus, remains the same, and the importer must try to take all the preventative steps that he can: ensuring the cooperation of the supplier in cases of verification; receiving a written guarantee from the supplier that the goods meet the rules of origin; getting information and clear indications that the goods meet the rules of origin; etc.
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