Adv. Johan Benizri
Every exporter knows that determining the origin of a product is a central key when dealing with export, since the certificate of origin accompanying the product sets how high of the taxes that are levied by the import country in which the product is sold will be, and further more decides whether the specific product is subjected to other trade steps such as import quotas or dumping levies.
Tax planning for purposes of setting origin is a recognized way to avoid a high tax rate. However, the European Union Court of Justice has made it difficult to perform such planning. This short article proposes innovative ways to overcome these difficulties, at least for hi-tech products.
The Customs view on this subject is that when we examine a product, we must separate between its components, its production procedures, and the processing actions performed on it. If the product is not wholly acquired or produced in one single country, the customs authorities will determine the origin of the product according to the country in which the product underwent "the longest, most significant and most costly work or process, financially speaking. "For hi-tech products, the EU authorities will generally check the value of each component and the value of each aspect of the labor, and decide on the origin country of the product according to where most of the added value accumulated. In other words, if you are generally interested in a certain country of origin, you should add as much value as possible to your product in that particular country.
Obviously, changing the entire chain supply just for the purpose of achieving a certain country of origin, is practical only in rare situations. Therefore, value must be created in another way, but how?
A significant portion of the total value of hi-tech products is composed of intangible rights such as software, liability, trademarks, copyright, or patents. These values can help set the origin under EU law.
Something intangible has no origin within itself, nor is it defined as goods for the purposes of customs, but it does enter into the cost calculations. For example, if you export a VCR from Israel to the EU, and some of its parts came from China and then attached in Israel, the costs of production which accumulated in China will be added to the costs of purchasing the program that was installed in the internal memory of the VCR; and since the internal memory was already loaded in the system applications that came from China, the software (which is in fact the cost), will be considered part of the Chinese component, even if it was developed by an Israeli company. Other intangible parameters are subject to a similar, though not identical way of handling.
At the end of the day, the video device will be considered by the EU authorities to have a Chinese origin, unless the intangible part of it is separately used on purpose.
One of the innovative and easier ways optional for exporters to change the origin of a product is by using the intangible component at the right time during the supply chain. This increases the value of a certain processing procedure in the country they choose, in the same way that increasing the work budget costs in the chosen country does so as well..
Sometimes, it is possible to separate at least one of the intangible parts (for example by unloading software from the internal memory of the product). The moment this is done, the value of the whole intangible part becomes tangible. Another way to do this is to supply exclusive licenses for certain marketers operating in the chosen origin country. In the example discussed above, the Chinese components will be considered tangible (for example software)if the Israeli company can supply an exclusive license to make it possible to manage the intangible part in Israel and the EU. Since the Israeli company will pay a significant amount to acquire the license, the added value in Israel will grow significantly. The European Customs Authorities will recognize most of the product’s value as a value created in Israel and will probably approve a European origin for the product.
Using software in this way is beneficial as it lowers the rate of customs and thus the basic customs’ costs of the imported components are lowered too.
This approach requires detailed contractor arrangements and may require discussions with the Customs Authorities, but it may well be worthwhile the effort. After all, a large portion of products include intangible rights. This is the time to be creative.
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Johan Benizri is an attorney in the offices of Sidley Austin and Partners in Brussels. The opinions presented in this article are exclusively those of the author and do not necessarily reflect those of the Sidley Austen LLP. This article was prepared for academic purposes only and does not constitute legal counsel.
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