Harmonization of procedures is still work in progressBy Anna Gayk, Enrika Naujokė and Borys Kormych
The authors of this article argue that harmonization should be high on the agenda both of those who make, and of those who enforce, legislation. To illustrate, they explain some of the issues faced by businesses due to the lack of harmonization of rules, or to the non-harmonized implementation of these rules. Three topics are addressed: the difficulty of identifying preferential rules of origin for a given HS code; the process to obtain a Customs registration number in the European Union; and the implementation of the AEO Programme in Ukraine.
The lack of technical updates of product-specific rules of origin (PSR) causes unnecessary efforts and uncertainty for businesses
Trade agreements and arrangements are made for businesses. It follows logically, therefore, that any provisions aimed at providing businesses with direct benefits (e.g. lower rates of Customs duties for certain goods) should be easy for importers and exporters to use and implement. In particular, the provisions of a trade agreement that relate to rules of origin have to be manageable, that is, understandable and workable in practice.
Whilst businesses have had to resign themselves to the fact that multilateralism is now on hold, they are still hoping for, and claim, simpler and more generous product-specific rules of origin (PSR),.
A major problem comes from the fact that the classification of goods, and determination of origin of goods, are closely interlinked. Typically, the requirements for determining origin are specified for individual products or product categories which are identified according to their respective Harmonized System (HS) code. Classification of goods is, therefore, of the utmost importance in establishing which Rules of Origin (RoO) apply to a good. Moreover, in many cases, the RoO to be applied will refer to a change in tariff classification (CTC) at chapter, heading or subheading level, a criterion which requires correct classification of the final manufactured product and the input materials used in its production.
When drafting the PSR, negotiators must therefore decide which version of the Harmonized System is being used. Sometimes, this information is explicitly contained in the agreement text itself. Usually, however, that is not the case, and importers and exporters are left to deduce which version is being used.
It is well known that the HS undergoes numerous changes – usually every five years – in order to ensure that it remains up-to-date and adapted to current trade practice. As a rule, these HS amendments are not reproduced within the PSR of trade agreements. There are only rare examples of such transpositions being made. A more probable situation is that PSR are updated in the context of the adaptation or revision of an existing agreement, and are then shifted to a newer HS version (sometimes not even the latest one). Usually, however, the PSR agreed at a particular point in time remain fixed and unaltered from then onwards.
If updates of the RoO are not provided by the parties to the agreement, traders have to refer to different editions of the HS for the purposes of origin determination when intending to claim preferential treatment. This is important as, following amendments to the HS, a product may not fall within the range of (sub) headings or the chapter indicated in an FTA text as being eligible for preferential tariff treatment, or it might fall under another origin criterion. The process can also impact on existing CTC rules. It is, of course, undisputed that the impact of an HS amendment varies depending on the granularity or level of detail of the agreed rules of origin: rules that refer to HS subheadings will be impacted to a greater extent than those referring to HS chapters or headings.
For traders who want to use an FTA, this poses a problem in terms of maintaining and updating their materials master data, which records all materials that they buy, procure, produce, and keep in stock. If the master data contains an identification code used to classify items for Customs purposes, every time the underlying nomenclature is amended, the changes have to be reproduced in the master data. However when claiming preferential treatment, the classification of the master data items will have to be aligned on whichever HS version is used in the FTA invoked. If a new type of good covered in an FTA is added to the master data, it will be necessary to check whether that good has to be classified differently depending on the HS version used.
Another possibility would be for the company to prepare its own correlation between the product-specific rules laid down in an FTA and the different HS versions. However, such a correlation would not constitute a legal text and would not be binding; this exercise would therefore have to be performed at the company’s own risk.
Both solutions require huge efforts, as well as staff who are well trained in classifying goods and who have detailed knowledge of the HS and its different versions.
It is astonishing that the majority of today’s trade agreements do not offer a solution to this serious problem. It is an issue that concerns not only economic operators, but also Customs authorities when conducting audits on preferential origin. Finding solutions would benefit everyone involved. It would be a real gain if technical updates of PSR were provided for in trade agreements by default. The current reluctance to update PSR might be caused by the parties’ fear that this would re-open discussions on the agreed rules themselves. But that need not happen, and could be avoided if technical updates were jointly agreed beforehand as a standard procedure.
In 2015, the WCO published the Guide for the technical update of preferential rules of origin. It was updated in 2017 and complemented with tables correlating different editions of the HS, indicating the necessity of, and applicable methods for, technical updating, according to origin criteria. Unfortunately, the Guide has not been widely used so far. Today, companies and Customs authorities worldwide still have to undertake complex updating operations to ensure compliance with preferential rules of origin. Such a situation is neither comprehensible nor sustainable from an efficiency and compliance point of view.
Obtaining a Customs registration number in the EU
In most countries, to be able to engage with Customs, it is necessary for importers, exporters and other actors in the supply chain to obtain a Customs registration number. This is sometimes called, for instance, an Import Export Code (IEC), as in India, a Customs Registration Number (CR Number), as in China, or an Economic Operators Registration and Identification (EORI) number, as in the European Union. Usually, but not always, the number is quite simple to obtain (in some countries the process may take only a few minutes). We propose here to take a look at the issues faced by some companies which need to obtain the EORI number in the European Union (EU).
The legal definition of the EU EORI number is set out in Article 1(18) of Commission Delegated Regulation (EU) 2015/2446: “‘Economic Operators Registration and Identification number’ (EORI number) means an identification number, unique in the customs territory of the Union, assigned by a customs authority to an economic operator or to another person in order to register him for customs purposes”.
A company needs an EORI number to submit a Customs declaration or when requiring a Customs decision in the EU. Economic operators established in the Customs territory of the Union should request the assignment of the EORI number to the Customs authorities of the EU county in which they are established. Economic operators not established in the Customs territory of the Union will get this number from the Customs authority of the EU country responsible for the place where they first lodge a declaration or apply for a decision. The EORI number is valid throughout the EU. It makes Customs controls more effective by enabling trade operators to be identified through a single a number, common to all EU Member States.
The EORI number itself may be the same in all EU Member States. However, what about the application process? The answer to this question is that application varies from country to country, and companies need to undertake some research to find out which country provides the most appropriate procedure.
Let us imagine that a Swiss company plans to supply raw materials to its processing sites located across several EU countries. The company sees an economic benefit in acting as the importer here, although it is not established in the Customs territory of the Union. When looking at the procedure to obtain the EORI number, it discovers that there are differences among EU countries,:
- In some EU Member States, the EORI number is assigned automatically when the first Customs declaration is submitted. There is no need to complete and submit an application. In others, submitting an application form is necessary.
- In some countries, in addition to the application form, additional documents are required. The nature and number of documents required varies. For example, a document certifying the registration of a business is usually required, but the requirement related to the legalization or certification (use of apostille) of this document differs.
- Member States that do not request additional documents usually ask the applicant to provide various identification numbers in order to access information stored in online databases.
- In some EU Member States, the EORI number can be requested by telephone, in others, in paper form, and in others only by electronic means.
- Applications must be completed in the local language only, but some countries accept English.
- The time required for obtaining an EORI number varies from 10 days to a few minutes.
- Economic operators not established in the Customs territory of the Union can request an EORI number, but some countries will ask the operator to prove the existence of activities in the Customs territory of the Union.
There are still many non-harmonized procedures in the Customs Union which oblige businesses to constantly adapt to different legal and procedural requirements. Will the situation change in the future?
In September 2020, the European Commission launched a new Customs Union Action Plan which covers the period up to 2025 and includes a number of initiatives in areas such as risk management, managing e-commerce, the promotion of compliance and “Customs authorities acting as one”. By “acting as one”, the Commission means only the rolling out of modern and reliable Customs equipment and the setting up of a new reflection group to help prepare for future crises and challenges, such as unanticipated global developments and future business models. Nonetheless, we quite like the choice of words. It could also set a new direction: in the future, businesses should expect the various Customs authorities to act the same way, as one Customs authority.
AEO in Ukraine
The introduction of the AEO Programme in Ukraine is used here to shed light on the significant gaps that exist between the way standards are conceived at the international level, and their practical application at the national level. It illustrates the fact that the implementation of standards at the national level depends, to a great extent, on the understanding of the standards by decision makers, on national constraints and concerns, and on national governance principles.
Ukraine introduced the AEO status in its Customs Code back in 2012. However, the AEO provisions of the Customs Code were never applied, and a law “On Amendments to the Customs Code of Ukraine with Regard to Certain Matters of Functioning of Authorized Economic Operators” was passed in 2019. It provides for two types of authorization:
- AEO with the Customs simplifications component (AEO-C); and/or
- AEO with the security and safety component (AEO-B).
AEO status can be granted to an entity established in Ukraine and participating in an international supply chain (manufacturer, exporter, importer, Customs representative, carrier, freight forwarder, or Customs warehouse authorization holder).
It is important to understand the motivations of the main stakeholders involved in the 2019 revision of the regulation. On the Government side, amending the AEO regulation was primarily motivated by the need to align it with the EU legislation. During the discussions on the AEO Bill, if Members of Parliament did talk about partnership, security and facilitation, they promptly shifted their attention to possible abuse of the law and to the protection of the State’s fiscal interests. In particular, they demanded the removal of discretionary rules that could lead to abuse of powers by Customs, and called for provisions to secure against the possible flow of illegal imports or exports through AEOs. Overall, they expressed a certain lack of confidence in the integrity of the Customs Administration and of traders.
Once the new law was adopted, a Resolution was drafted, detailing the procedural rules and the methodology for assessing the compliance of AEO applicants with the AEO Programme’s criteria and requirements, as well as the documents to be provided. The AEO Programme came into being at the end of July 2020.
This resulted in a very complex AEO authorization procedure and in the introduction of a three-year transitional period during which access to the AEO-C Programme (Customs simplification) was limited to exporters or importers that “are manufacturers of goods destined for export”. Moreover, the new law limits the number of applications that can be simultaneously under review to 10 for the first year, 20 for the second, and 30 for the third. The Customs Administration is to publish on its website depersonalized information on the number of applications received and on the status of assessment procedures for each applicant. Finally, during the transitional period, Customs is to respect specific time frames when assessing the compliance of an applicant. In contrast to typical procedural deadlines (which are framed in terms of not exceeding a certain number of days), the application review time is set directly (i.e. it cannot be less or more than a specific number of days). Accordingly, the pre-review of an application is to take 30 days, and the assessment procedure 120 days. Thus, an authorization can be obtained in five months.
Such rules seem to act as a deterrent to traders who are considering applying for AEO authorization. According to the information published by the Customs Administration, at the time of writing (February 2021), only one application for AEO authorization has been submitted.
The introduction of the AEO Programme impacts all traders, whether they are considering obtaining AEO status or not. Currently, Article 259 of the Customs Code of Ukraine provides declarants who meet certain criteria with the option of placing goods entering the Customs territory under a specific Customs procedure by lodging a preliminary Customs declaration (known as type EA). This allows them to take the goods to their premises directly, without having to present them to the Customs office. The same option exists for export. The new AEO regulation provides that this procedure will only be available to AEOs-C once the transitional period ends. Businesses benefiting from the simplification, but which are not manufacturers, cannot apply for AEO status during the transitional period and will lose access to the procedure for five months.
The value of international standards is not in question here. Rather, it is the possibility of harmonizing national regulations beyond a certain degree, when their practical implementation at the national level reflects the agenda and concerns of decision makers, as well as the level of resources of an administration. This calls for more exchange between administrations on the challenges related to practical implementation, and for the identification and promotion of best practices.
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 Handelsabkommen der EU: Potenzial noch nicht ausgeschöpft? Interview with Geraldine Emberger and Urszula Maria Stepkowska, DG Trade, European Commission, in: FOREIGN TRADE, 3/2020, p. 57ff., Mendel Verlag.
 EORI National Implementation. Available at: https://ec.europa.eu/taxation_customs/sites/taxation/files/eori_national_implementation.pdf.
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 Association Implementation Report on Ukraine. Joint Staff Working Document, European Commission, Brussels, 12.12.2019. SWD (2019) 433 final. p. 13. Available at: https://eeas.europa.eu/sites/eeas/files/swd_2019_433_f1_joint_staff_working_paper_en_v4_p1_1056243.pdf.
Ostrikova T. European instruments are good, but their good work requires a strong Customs service, 2019 [In Ukrainian]. Available at: https://samopomich.ua/ostrikova-yevropejski-instrumenty-dobri-ale-dlya-yih-dobroyi-roboty-potribna-sylna-mytna-sluzhba/.
 Status of conformity assessment and number of registered applications by enterprises for authorization of an Authorized Economic Operator. State Customs Service of Ukraine. Available at: https://customs.gov.ua/deiaki-pitannia-funktsionuvannia-avtorizovanikh-ekonomichnikh-operatoriv.
Anna Gayk is Managing Partner of Mendel Verlag GmbH & Co. KG, the leading European provider of global trade-related data content.
Enrika Naujokė is one of the founders of the www.customsclearance.net platform, which uses an innovative approach to building Customs expertise online.
Prof. Borys Kormych is the Head of the Maritime and Customs Law Department at the National University Odessa Law Academy. He is also the Editor-in-Chief of the journal Lex Portus.