The Harley Davidson Origin case delivers a very hard decision for businesses. It has an impact on supply chain restructuring, relocation of production and duty optimisation. In some organisations, the Customs strategy and compliance records must be reviewed to meet the new obligations.
What is the Harley Davidson Origin case about?
In Case T-324/21, Harley-Davidson Europe Ltd, Neovia Logistics Services International (the applicants) v
European Commission (the defendant), the court was asked to look at:
- non-preferential origin,
- the revocation of decisions relating to binding origin information,
- the concept of ‘processing or working operations which are not economically justified’.
What’s the context?
In June 2018, the US government (Trump administration) introduced additional custom duties on certain EU goods. In particular, it introduced 25% additional duty on import of steel and 10% on import of aluminium from the EU. The objective was to promote the US domestic production of those products.
The EU retaliated with a Regulation (2018/886). It provides for the application of additional custom duties on the importation of certain US products. The products affected by these additional duties are identified by commodity codes and listed in the annex of the regulation.
What’s Harley Davidson role?
Among the list of US products affected by the regulations there is commodity code 8711 50 00. This is the code for Harley Davidson motorbikes. As a result, Harley Davidson motorbikes are subject to the first stage of additional custom duties at a rate of 25% duties from June 2018.
The EU retaliation regulation provides for another stage of additional duties to take effect in 2021. Harley Davidson motorbikes are also caught by the second stage of additional duties at a rate of 25% that is due from June 2021.
The import duties for Harley Davidson motorbikes are therefore:
- 6% for the standard import rate, plus
- 25% additional duty in June 2018, plus
- 25% of additional duty in June 2021.
A total amount of duty of 31% in June 2018 and of 56% from June 2021 of the value of the motorbikes.
Facing this new trading environment, Harley-Davidson considered moving productions away from the US. They issued a ‘Form 8-K’ to the United States Securities and Exchange Commission. That form informs its shareholders of the application of the additional custom duties. It also explains the consequences for its business. In that form, Harley Davidson stated its intention to transfer production of certain motocycles produced for the EU market, from the US to one of its international facility. This in order to avoid EU commercial policy measure at issue. They later choose their factory in Thailand as the production site for some of his motorcycle for the EU market.
Meanwhile, in the EU, Harley Davidson wanted to obtain assurances regarding the determination of the country of origin of the motorcycles produced in its factory in Thailand for the EU market. In January 2019, Harley Davidson and their agent providing them with logistics support services (Neovia Logistics Services International) in Belgium applied, to the Belgium customs authorities, for a Binding Origin Information (BOI) for the motorbikes made in Thailand.
What’s the EU Commission role?
June 2019, the Belgium Custom authorities adopted to Binding Origin Information (BOI). They state that the goods were of Thailand origin.
After several discussions between the Belgium authorities and the European Commission, including discussions at the Customs Experts Group – Origin Section, the EU Commission decided, in October 2020, to revoke the Binding Origin Information. In March 2021, the EU Commission adopted a formal decision. In this decision they requested that the Belgium authorities to revoke the Binding Origin Information (BOI).
Following the adoption of the EU Commission decision, the Belgian authorities informed Harley Davidson and Neovia in April 2021 that they were revoking BOI decisions they had previously issued.
For the EU Commission, the shift of the production of motorbikes toThailand was decided for the avoidance of the EU commercial policy measure. This, even if the avoidance of the commercial policy measures may not necessarily be the only purpose of the decision.
So what’s the rule?
The rules are found in the EU Customs Code (UCC). Here we are looking at Non-Preferential Rules of Origin. This is the type of Rules of Origin used for trade defence mechanisms and other commercial measures. Preferential Rules of Origin apply to Trade Agreements.
Article 60 of the Customs Code covers the acquisition of the non-preferential origin of goods. It provides:
“1. Goods wholly obtained in a single country or territory shall be regarded as having their origin in that country or territory.
2. Goods the production of which involves more than one country or territory shall be deemed to originate in the country or territory where they underwent their last, substantial, economically justified processing or working, in an undertaking equipped for that purpose, resulting in the manufacture of a new product or representing an important stage of manufacture.”
On the face of it, the motorbike produced in Thailand could fit in paragraph 2. However, In addition to the Union Customs Code, the Delegated Regulation provides rules of how the goods obtain this origin.
In this Delegated Act, Article 33 gives details of processing or working operations which are not economically justified as follows:
‘Any processing or working operation carried out in another country or territory shall be deemed not to be economically justified if it is established on the basis of the available facts that the purpose of that operation was to avoid the application of the measures referred to in Article 59 of the Customs Code….”
OK, but there is a binding decision issued by the Belgium Customs authorities right? Yes, well Article 34(11) of the Customs Code provides:
‘The Commission may adopt decisions requesting Member States to revoke BTI or BOI decisions, to ensure a correct and uniform tariff classification or determination of the origin of goods.’
This provision is designed to provide legal certainty by ensuring that there is a uniformity of decisions across the EU.
And here we are, the EU Commission overruled Belgium authorities and cancelled the Binding Origin Information.
What did the defence say?
The applicants put forward six pleas in law in support of their action alleging:
- Infringement of the obligation to state reasons and of the advisory procedure prior to the adoption of the contested decision.
- A manifest error of assessment.
- Misuse of the power of revocation in that it is based on an incorrect interpretation and application of Article 33 of the UCC-DA.
- Article 33 of the UCC-DA is invalid.
- Breach of general principles of EU law and of the Charter of Fundamental Rights of the European Union.
- Abuse of powers by the Commission for political ends.
What was the General Court decision?
All pleas have been rejected. The General Court dismissed the action and orders Harley-Davidson Europe Ltd and Neovia Logistics Services International to pay the costs.
What can we learn from this case?
- The concept of ‘processing or working operations which are not economically justified’ has been clarified. Although perhaps not in the way we would have liked. The decision has an impact on supply chain restructuring and relocation of production for duty optimisation. Strategy is at the heart of the decision, some business may need to review their Customs strategy.
- Regarding the relocation of activities, it is for the business to prove that the “principal” or “dominant” purpose of a relocation of operations was not, at the time of the decision, to avoid the application of EU commercial policy measures. It can’t be a search for evidence after the event.
- Check the rules! Cross-border transactions are governed by legal frameworks. It is crucial for importers and exporters to stay updated with applicable laws. They need to have a comprehensive understanding of customs regulations to manage their global transactions more effectively.
- Keep up to date with the possible trade disputes, sanctions, prohibitions that can affect your transactions. Political factors can have a substantial impact on global trade.
- Seek advice. In cas of doubt, ask for advice.
For those of you interested in the subtleties of the decision, here is our analysis.
Alegrant Analysis
We’ll looks closer at some positions submitted by Harley Davidson and the EU Commission. We also look at the decision from the court because the decision has an important impact on traders.
Definition of “Purpose”: What happened to Brother?
In the third plea, the applicants (Harley Davidson & Neovia) argued that the avoidance must be an “single dominant purpose’ or an “essential aim” for article 33 to be applicable.
Harley Davidson referred to the decision in Brother International (C-26/88) which was a benchmark until now.
In 1984 and 1985 Brother imported electronic typewriters from Taiwan into the Federal Republic of Germany and declared them to originate in Taiwan.
Following an inspection carried out at Brother’ s premises in September 1986 the German authorities concluded that electronic typewriters must be regarded as originating in Japan stating inter alia “that the operations carried out in Taiwan were not sufficient to confer Taiwanese origin on the products“.
The product therefore came within the scope of the anti-dumping regulation on imports of electronic typewriters originating in Japan. Accordingly the German authorities, by a post-clearance recovery, claimed from Brother arrears totalling DM 3 210 277.83 as anti-dumping duty .
Brother brought proceeding and in support of its application, it essentially stated that there was a fully equipped factory in Taiwan in which separate parts manufactured mainly in Japan and imported into Taiwan had been assembled into ready-to-use typewriters. It considers that the typewriters in question must therefore be deemed to originate in Taiwan. In its view there can be no question of evasion of the law if only because the factory in Taiwan had already been in existence before the rules laying down anti-dumping duties entered into force and typewriters manufactured in that factory had been exported to the Federal Republic of Germany since 1982 .
The German authorities, on the contrary, considered that Brother’ s factory in Taiwan was a “screwdriver factory” and “the transfer of the final assembly from Japan to Taiwan fully justified the presumption that the sole object of the transfer was to circumvent the rules on anti-dumping duties”.
One of the questions put to the court was whether the transfer of the assembly from the country of manufacture of the component parts to a country where use is made of already existing factories in itself justifies the presumption that the sole object of the transfer was to circumvent the applicable provisions, and in particular the application of anti-dumping duties. The Court held that:
“The transfer of assembly from the country in which the parts were manufactured to another country in which use is made of existing factories does not in itself justify the presumption that the sole object of the transfer was to circumvent the applicable provisions unless the transfer of assembly coincides with the entry into force of the relevant regulations . In that case, the manufacturer concerned must prove that there were reasonable grounds, other than avoiding the consequences of the provisions in question, for carrying out the assembly operations in the country from which the goods were exported”.
Could there be other purposes undermining the Harley Davidson decision? Did the antidumping decision accelerated a decision in the making?
One purpose or several purposes?
The applicants claimed that the Commission did not give them the opportunity to prove the existence of other purposes. They claim that the decision for relocation was based on a “range of strong and genuine commercial drivers and was not an artificial decision whose essential aim was to circumvent the additional customs duties” (at 49). They maintain that the Commission should have checked the background of the transactions.
To support this argument they proceeded by analogy between the concept of ‘avoidance’ for the purposes of Article 33 of the UCC- DA and the concepts of ‘avoidance’, ‘abuse’, ‘manipulation’ and ‘circumvention’ as clarified by the case-law in tax law or anti-dumping law.
This is an interesting approach. There is a proximity of justification here that had already been put forward in Brother International. It is regrettable, in our view, that the Court has not taken the opportunity to explore this argument.
One “principal”, “dominant”, “decisive” purpose
The Court observed (at 57) that where the purpose of a particular operation was to avoid the application of commercial measures, the condition relating to economic justification cannot be satisfied. In the next paragraph (at 58), the Court takes the opportunity to clarify the statement “the purpose of that operation was to avoid..”. For the court, the term “purpose” apply to a relocation operation that may have several objectives. However, if the avoidance objective is “principal”, “dominant” or “decisive” to the decision to relocate production, then article 33 UCC-DA applies.
This is a major change from previous interpretations. This is moving aways from the decision in Brother International. It removes the possibility for traders to structure their activity in order to limit the fiscal debt.
Definition of “On the basis of available facts”
Article 33 UCC-DA refers to the expression “on the basis of available facts” as follows:
Any processing or working operation carried out in another country or territory shall be deemed not to be economically justified if it is established on the basis of the available facts that the purpose of that operation was to avoid the application of the measures
The Court clarifies (at 61) the expression, not to the benefit of traders. The use of the expression refers to:
“facts available to the authority responsible for checking whether the purpose of a relocation operation was to avoid the application of EU measures relating to the origin of the goods.”
Interpretation of Article 33 UCC-DA
The Court follows by giving an interpretation of article 33 that:
must be interpreted as meaning that if, on the basis of the available facts, it appears that the principal or dominant purpose of a relocation operation was to avoid the application of EU commercial policy measures, then that operation must be considered incapable, as a matter of principle, of being economically justified.
Consequence of the new definition: new burden on proof on traders
It is now for the economic operators to prove that the “principal” or “dominant” purpose of a relocation operation was not, at the time when the decision concerning that operation was taken, to avoid the application of EU commercial policy measures (at 63). Such proof differs from the search, after the event, for an economic justification or rationale for that relocation operation.
Traders used to be able to demonstrate reasonable reasons for a relocation such as a cost reductions or change in supply chains. They must now demonstrate an objective that is “principal”, “dominant” over and above the duty reduction objective that becomes a secondary side effect. In effect, the burden of proof is now on traders.
Economic Justification criteria: new uncertainty
The applicant also puts forward that the “economic justification” criteria is an objective test (at 51) based on the specific elements of a transaction as described in Art 60.2 UCC where the “processing or working, in an undertaking equipped for that purpose, resulting in the manufacture of a new product or representing an important stage of manufacture.” . They claim the Commission origin decision is based on a subjective matter such as the motives of the producer.
For the Court, regarding this change from a objective test to a subjective test, the tribunal state (at 75) that the Commission “was justified in referring to subjective factors” in its application of article 33 UCC-DA.
In that regard, in its examination of Harley-Davidson’s conduct for the purpose of identifying any circumvention of those commercial policy measures, the Commission was required to rely on all the relevant and available facts. In that context, the Commission was entitled to assess the strategy pursued by that undertaking.
Conclusion
This decision brings clarification on the meaning of Article 33 UCC-DA even if it is a hard one for businesses.
Traders must now demonstrate that any relocation decision impacting origin is based on objectives other than duty reduction. However, the Court does not give any criteria to determine what is an objective that is “principal” or “dominant”.
The decision adds risk and legal uncertainty for the trade community because it is difficulty to see how traders are going to demonstrate economic justification no being clear in advance how a transaction will be treated. It would therefore be useful if, in the future, the Court could clarify the meaning of “dominant” or “principal”.
Article 33 UCC-DA has rarely been the subject of interpretation by the Court. Future cases on article 33-UCC DA will now be closely watched to see whether the Court will follow this decision or not.