6 months to Brexit – and then? – The “day after” from a customs and foreign trade law perspective

By  Dr Bärbel Sachs and Dr Johannes Schäffer

After a surprising 51.9% vote for Brexit in June 2016, Prime Minister Theresa May on 29 March 2017 filed the application to leave the EU under Article 50 of the Treaty of the European Union; the two-year period until the exit will thus expire on 29 March 2019. For company owners and executives it is high time to think about the effects on their own businesses, even if many concrete consequences may still be unclear.

Background
Political London is currently in tatters. The “Chequers Plan” favoured by Mrs May is as good as buried. While Brussels constantly emphasizes the indivisibility of the fundamental freedoms (with the “Chequers Plan” demanding exactly the opposite), some 80 Tories under the leadership of Jacob Rees-Mogg are pushing for a Brexit without the validity of any “foreign” regulations (which is exactly what the “Chequers Plan” demands, however). There is a chance that a second referendum will be held, that the British will say yes to the EU and that we are all unnecessarily wracking our brains about “the day after”; yet a hard Brexit without a customs union, without membership in the European Economic Area and maybe even without any agreement is far more likely.

Leaving without any agreement is not quite correct, though, because there is already one: the WTO rules. However, the “option”, sometimes referred to as the WTO option, is not an option at all when examined more closely. It is merely a consequence of the exit, because the UK was already a party to GATT 1947 and also an original member of the WTO in 1995 as the umbrella organisation of GATT, GATS, TRIPS, and others. For this reason alone, it can be assumed that the EU will not grant the British any “rebates” or vice versa, as otherwise the most-favoured-nation clause would apply and ultimately all WTO members would be entitled to the advantages granted.

But what does this mean from a customs and foreign trade point of view for importing and exporting companies? Let us take a brief look at this:

Customs consequences
If we assume the UK’s exit, there will be new customs borders. The UK will then, from one day to the next, become a “third country”. Of course, the regular third-country rates of duty will apply, e.g. 10% on the import of cars into the EU. Corresponding regulations in UK customs laws are to be expected. It is likely that, for the time being, directly applicable EU law (such as the Union Customs Code) will continue to apply as UK law. In any case, this is what the European Union (Withdrawal) Bill proposes. Also in terms of (import) turnover tax, the UK will be treated as a third country. Let’s illustrate this with the following example: if 50 passenger cars with a total value of €1m are to be shipped from London to Bremen at a customs rate of 10%, customs duties of €105,000 (the relevant customs value may also include supplements, inter alia transport and insurance costs up to the border, e.g. 5% of the invoice price as can be seen here) as well as €228,950 import turnover tax could be due in future (the taxable amount is based on the customs value, customs debt and any further transport costs in the customs territory, here e.g. €50,000). In addition, non-tariff trade barriers will apply from one day to the next. In addition to these obvious consequences, the following should also be considered:

  • Goods may only be brought into the customs territory of the Union on certain routes and vice versa. This holds true for all modes of transport, and will lead to delays. Shipping companies are expected to increase their ferry capacities in order to reach Ireland more quickly. All this must be taken into account when planning projects that extend beyond 29 March 2019.
  • The administrative burden associated with trade between the UK and the EU will increase enormously, and will cause corresponding costs that need to be priced in.
  • As a consequence of the increased administrative burden, documentation obligations with regard to customs documents (for imports: customs declarations, invoices, freight documents, possibly  proof and certificates of preferential origin) will increase at the same time.
  • Where contracts relate to the period “thereafter”, particular attention must be paid to the delivery terms usually agreed in accordance with Incoterms. It is possible that British companies will find themselves in a more defensive negotiation position.
  • With respect to “origin of goods and preferences”, primary materials from the UK can no longer lend an EU origin under the value rules. Therefore, very fundamental considerations regarding possible restructuring with regard to supply chains are likely to arise, in order not to unnecessarily lose economically useful preferential rights and, on the other hand, not to run the risk of making false preference or supplier declarations. In addition, there is an increasing risk that has to be factored in: preference certificates are often ticking compliance time bombs.
  • Brexit may also include questions of classification into the customs tariff: for example, companies sometimes might not have classified certain goods under customs tariff law that have so far been shipped only within the EU. This means that the master data will have to be supplemented, which usually requires a considerable amount of time.
  • In addition, it is likely that customs departments in companies will require more effort than usual to manage foreign trade, since in this turbulent relationship between the EU and the UK, even multiple changes in procedural law cannot be ruled out in the initial phase.

Export control consequences

Exports of listed dual-use goods would require authorisation overnight, as would goods covered by the EU’s Anti-Torture Regulation. Companies should schedule this and check whether all goods so far affected by trade with the UK have also undergone an export control audit.

The same applies to the no longer possible “transfer” of listed weapons or armaments. Also, General Licences may no longer be applicable, e.g. General License No. 26. It is very likely, however, that a General License filling these gaps will soon be in place.

Outlook

While the outcome of the vote certainly came as a surprise and was a shock for many, Brexit will probably not be sufficient as a reason to terminate long-term contracts which are or have become unfavourable due to supply conditions, by arguing that the basis of the transaction has been interfered with. Specific “Brexit clauses” should, however, always be included in current and future contracts. These clauses must also take into account the effects of Brexit under customs and export control laws.

Compliments of Noerr, a member of the EACCNY