Following the “Brexit” vote, there are questions concerning what the UK’s trade relationships will look like. Whatever those may be in the future, right now it appears to be clear that the goods produced in or coming from the UK will lose their status of EU preferential origin. Now is the time for companies to consider what this means for their business.
Preferential origin qualifies goods delivered under a free trade agreement (FTA) to receive certain tariff benefits. Essentially, the parties involved in the FTA pay a reduced or zero rate of customs duty.
Currently, according to article 101, the FTA applies to the territories included in the original treaty establishing the European Community (today the EU) and the South African territories as defined in their constitution. One part of the FTA addresses the trade of goods between these two countries. Goods having preferential origin under the FTA between the EU and South Africa are traded between the two territories at reduced customs duty. After Brexit, the UK will be excluded from this FTA and will be required to pay more export/import taxation.
Since companies in the UK can no longer apply for the reduced or zero (0%) customs duty rate set by the EU FTAs, goods either imported from these countries or exported to them will become more expensive. Companies in the EU that use goods from the UK in their products must be aware that doing so might jeopardize the preferential origin status of their products. If so, they will not be able to apply for the reduced duties associated with the FTA—making their goods more expensive to sell. Supply chains within the EU that include the UK might also be affected—losing the status of EU-origin and access to tariff benefits associated with the FTAs.
It’s already clear that UK products will lose their EU preferential origin once the UK leaves the EU. Companies can prepare for this by analyzing their supply chains and FTA (preferential) calculations on goods that will be affected. Once the analysis is done, companies need to decide whether further action is required to minimize the risk of duties becoming applicable or if the loss of EU preferential origin can be tolerated.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.