Adv. Gill Nadel, Adv. Omer Wagner
Ones who deal in importing goods from countries with which Israel has trade agreements with, regularly enjoy a customs exemption, but are constantly exposed to the risk that the customs benefit will be revoked retroactively.
Many business-owners are unaware of the magnitude of the danger in retroactively revoking customs benefits. Many times, the demand from the Israeli Customs Authority is received several years after the importation and the sale of the goods in Israel, in circumstances in which sometimes there is no relation between the importer and the exporter, and the importer has no realistic opportunity to prove retroactively the origin of the goods.
In this article we will try to assess the dangers and examine how an importer could defend against retroactive customs demands for disqualification of the origin of the goods.
Trade agreements - background:
The state of Israel has signed free trade agreements with a long line of countries, including: the countries which are members of the European Union, the EFTA countries (Norway, Island, Switzerland, and Lichtenstein), Turkey, Canada, U.S.A., Mexico, the Mercosur countries (Brazil, Paraguay, Uruguay, and Argentina) and Jordan.
Recently, a new trade agreement was signed with Columbia but has yet to come into force.
In addition, it is known that the state of Israel is examining the possibility of signing additional free trade agreements, with India, South Korea, China, Chile, and the Ukraine.
From the importers' point of view, the main benefit embodied in these trade agreements is a customs exemption or reduced customs for the importation of industrial products from these countries to the state of Israel, and under the condition that the products are origin products.
How will we know what is an origin product?
The various trade agreements are not uniformed, but each agreement sets a different system of rules of origin, according to which it will be decided whether a product containing foreign raw materials will be considered from the origin of a certain country or not.
There are agreements which set unified rules of origin for all products, and there are agreements which set separate rules of origin for every type of product.
Technically speaking, in order to enjoy the customs exemption or the reduced customs, the importer needs to have a preferential document, also called a "certificate of origin", and submit it to the Israeli Customs Authority.
The entity which usually issues the certificate of origin is the exporter, but sometimes other entities could issue the certificate on the exporter's behalf, including the international freight forwarder or the customs agent.
In this document the exporter declares that the goods sold to the state of Israel withstand the rules of origin and are entitled to a customs benefit upon their delivery to Israel.
Usually, the customs authority of the importing country - Israel - relies on the certificate and provides the customs exemption in real-time, without conducting a punctilious examination whether the product withstands the conditions. The importer as well usually does not know whether the product withstands the conditions of the trade agreement or not, but relies on the exporter's declaration.
The danger begins with the origin's verification process
The Israeli Customs Authority tends to send certificates for origin verification retroactively, in the country from which came the exporter which signed the certificate. This process usually takes place several years after the importation and the sale of the goods in Israel.
In the condition in which the exporter still exists and collaborates with the verification process, there is not actual concern for the Israeli importer.
The real danger for an Israeli importer is when the exporter no longer exits (entered into receivership, insolvency), or when their business connections cease to exist and the exporter does not collaborate with the verification process of the customs authority in his country.
In these situations, in which the customs authority in the export country does not receive collaboration, it is expected that the authority will replay to the Israeli Customs Authority that from the examination conducted, it is not possible to verify the origin of the goods imported to Israel.
Then, the Israeli Customs Authority is expected to notify the importer that the customs benefit is revoked retroactively, and is expected to demand a retroactive notice of charge for the customs exempt.
Will the importer be able to prove the origin of the goods?
Usually, the Israeli importer does not have enough tools to positively prove the origin of the goods, because of the fact that all of the information regarding the raw materials, the production processes, etc. are the exporter's trade secrets which are usually not shared with the importer. Meaning that in regards of the origin of the goods, the importer is almost totally dependent on the exporter and his collaboration.
Will the importer be able to relay on Indirect Tax Law?
In addition, the importer's ability to claim for an exemption from his losses according to the Indirect Tax Law (tax paid excessively or scarcely) was significantly reduced in light of various verdict ruled by the courts, specifically the 'Tempo' verdict given by the Israeli Supreme Court in 2010.
In the 'Tempo' case, it was discovered retroactively that Bacardi Breezer drinks are not eligible for the U.K. origin title. The 'Tempo' Company's attempts to receive an exemption according to Clause 3 to the Indirect Tax Law was rejected in the verdict, reasoning that when a certificate of origin is found invalid, it is an incorrect notice provided by the tax-payer to the customs authority, and it is not a "legal error" (therefore it varies from a mistake regarding classification, which could be considered as a legal error).
Additional verdicts continued this harsh line towards the importer, despite the fact that they also included positive remarks from the importer's viewpoint.
For instance, in the Doron Rubin verdict which was recently ruled (Civil Suit 1001-10), the importer claimed that due to the customs authority's delay in sending the certificate for verification, the supplier/ exporter reached bankruptcy. The court ruled that factually there was no delay, but it is possible that if the court would have found that there was an unreasonable delay by the customs authority, a different result would have been reached.
In the verdict of Rozental Intimates which was recently ruled (Civil Suit 1048-07), the court noted that the Israeli Customs Authority is required to apply judgment whether to accept the decision of the foreign customs authority as is; it was also noted that the customs authority should assist the importer in his relations with the foreign customs authority in regards to origin verification.
Despite these consoling remarks and others, eventually the final result in both verdicts was similar to the 'Tempo' verdict, and the court rejected the importer's claim of withstanding the conditions of the Indirect Tax Law.
So what could the importer do?
When an importer receives a certificate of origin signed by the foreign exporter, it is recommended to add a clause to the contract between the parties, stating that the exporter obligates that the goods withstand the rules of origin, and whether it will be discovered otherwise, the exporter will compensate the importer for the customs fees which will be required retroactively.
In addition, despite the fact that the importer does not know for certain how the product is produced, it is recommended to discover from the exporter whether the goods withstand the rules of origin, and if required, it is recommended to consult with an expert in the field in order to prevent future surprises along the way. It is important to remember that not every product that went through production processing is automatically considered as an origin product of the same country in which the processing took place.
In our opinion, it will be best if the legislature would amend the Indirect Tax Law so that the submitting of information regarding the origin of the goods, received from the exporter, will not revoke the withstanding of the conditions of the law when the information will be revealed as false.
In addition, in our opinion it is appropriate to set a procedure for the verification of the good's origin retroactively, which will limit the possibility to send certificates for verification up to a year from the day of their submission to the customs authority, at the most.
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This document provides a general summary and is for information purposes only. It is not intended to be comprehensive nor does it constitute legal advice.If you are interested to obtain further information or wish to follow the legal developments on this matter, please contact Adv. Gill Nadel - Chair of the firm's Import, Export and International Trade Law Practice, Tax and Executive Compensation Department. Email: Gill.Nadel@goldfarb.com, phone: 03-6089848.