EU: Customs, supply chain considerations of “Brexit”

EU: Customs, supply chain considerations of “Brexit”

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.

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Why is the issue of preferential origin critical?

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.

A good example is the FTA between the EU and South Africa

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.

What are the consequences of losing preferential origin?

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.

Possible action steps

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.

 

Read a July 2016 blog posting prepared by the KPMG member firm in Switzerland

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