Interest on arrears following a customs debt

EU customs law

Customs law is largely based on European regulations. In doing so, the Union Customs Code (UCC) forms the basis for customs legislation.[1] This regulation adopted by the Council of the European Union sets out the principles, basic provisions and main lines of customs legislation. The UCC has been in force since 1 May 2016, replacing the previously applicable Community Customs Code (CCC).[2]

Interest on arrears under section 114 (2) UCC

Based on the UCC, in certain cases, after a customs debt is incurred due to non-compliance with the customs rules and procedures or if the notification is the result of a post-release control by the customs authority, interest is charged in addition to the customs duties. The legislator's rationale is that, if the rules have not been complied with, charging interest from the time the customs debt is incurred up to the time of its notification is justified, as a considerable period of time may elapse before the customs duties are actually notified and hence there is loss of revenue. The UCC refers to this as ‘interest on arrears’ and this provision on interest on account of late notification of a customs debt is detailed in section 114(2) UCC.

Section 114 (2) UCC reads: “2.   Where the customs debt is incurred on the basis of Article 79 or 82, or where the notification of the customs debt results from a post-release control, interest on arrears shall be charged over and above the amount of import or export duty, from the date on which the customs debt was incurred until the date of its notification […].” Incidentally, this interest on arrears of the second paragraph of section 114 UCC should not be confused with the interest on arrears of section 114 (1) UCC. Interest on arrears ex Article 114 (1) UCC is actually default interest and this interest is due on the amount of import duty notified to the debtor from the date a notified customs debt was due[3] until the date of payment. This default interest is therefore not interest on account of late notification, but interest payable on account of late payment of a customs debt that has been notified.

Can section 114(2) UCC be applied to CCC-debts?

The CCC did not know the concept of interest on arrears. It is precisely for this reason that, in recent years, many objection and appeal proceedings have been conducted concerning interest charged on arrears. Ploum's Customs, Trade and Logistics practice group is also actively involved in these proceedings. This is mostly because, since the UCC entered into force on 1 May 2016, the Dutch customs authorities also charge interest on arrears on customs debts incurred before 1 May 2016 (i.e. under the operation of the CCC), but thus notified to the debtor after the UCC entered into force. Incidentally, interest on arrears under Article 114(2) UCC will then not be charged from the time the customs debt was incurred, but over the period from 1 May 2016 to the time the customs debt was notified to the debtor.

What is the correct interpretation of Article 114(2) UCC

We do not consider it legally correct to charge interest on arrears from 1 May 2016 up to and including the date of notification in precisely that situation - i.e. if there are customs debts incurred under the CCC. A key argument is that interest on arrears affects the amount of the debt and is therefore a substantive provision. The European Court of Justice (ECJ) has held that procedural rules generally apply to all disputes pending at the time they come into force, while substantive rules generally do not apply to legal positions acquired before they come into force.

Article 114(2) UCC is also clear in this regard; the moment interest on arrears starts to accrue is explicitly stated to be “the day on which the debt was incurred”. So that cannot be at a later point in time, including from 1 May 2016. In this sense, the legal position regarding the charging of interest on arrears on the day the debt is incurred has already been definitively acquired. In addition, we find that charging interest on arrears violates the principles of legal certainty and legitimate expectations. The CCC expressly did not provide for a scheme in which interest on arrears was charged.

Another clear indication that Article 114 (2) UCC can only be applied if the customs debt has been incurred under force of the UCC and thus in the case of import declarations that have been lodged and accepted by the customs authorities or situations of non-compliance that occurred on or after 1 May 2016, is the reference to Article 79 UCC in the statutory provision. Article 114 (2) clearly refers to Art. 79 UCC (a UCC provision) and not also to the Articles 202, 203 and 204 of the CCC.  In our opinion it is not possible to use Article 79 UCC to be interpreted as also the Articles 202, 203 and 204 of the CCC. In fact, that is simply not in that provision of the law. Those provisions of the CCC that, in short, dealt with smuggling, withdrawal from customs supervision and non-compliance respectively, are the equivalents of Article 79 UCC. In short, if the EU legislature would have intended that interest on arrears under Article 114(2) UCC would also apply to equivalent CCC debts from 1 May 2016, surely the legislature would have referred to these provisions as well. This is explicitly not the case. Only Article 79 UCC is referred to.

Moreover, the wording “[...] or where the notification of the customs debt results from a post-release control, [...]” apparently refers only to the situation where the customs debt has arisen due to acceptance of an import declaration under Article 77 UCC (and not Article 201 CCC). That Article 114(2) UCC refers to ‘the notification of the customs debt results from a post-release control’ and does not mention Article 77 UCC is logically explicable. After all, interest on arrears is never charged in the primary declaration process for import declarations for free circulation in the EU, while even in the primary declaration process, several days to weeks may well elapse between the time of acceptance and the notification of the customs debt via the electronic declaration system. Hence, reference is made to the situation of a retrospective control and not to Article 77 UCC.

State of jurisprudence in the Netherlands

Although the Customs Chamber of the District Court of Noord-Holland[4] initially followed the taxpayers' position in several rulings and thus ruled that no interest on arrears was due, there are now also rulings by the Customs Chamber of the Amsterdam Court of Appeal[5] that are negative for taxpayers.

The final word is ultimately up to the Supreme Court, as the highest national court in customs cases, which will have to give a final judgment whether the matter should in turn be referred to the ECJ if it were to be ruled that it is a question of interpretation of a provision of EU law reserved to the ECJ. Thus, preliminary questions would then be referred to Luxembourg.

Interest on arrears in respect of VAT on imports

The Dutch Supreme Court recently clarified on another pressing question related to the charging of interest on arrears,[6] namely whether - if the customs authorities impose VAT on importation in addition to customs duties - interest on arrears can also be charged on the import-VAT. In response to preliminary questions from the North Holland District Court[7] to the Dutch Supreme Court, the Supreme Court recently ruled that interest on arrears is also due on VAT upon importation. This was despite the fact that the Noord-Holland District Court was still of the opinion that it must be inferred from the Supreme Court's established case law that the Dutch Turnover Tax Act declares the provisions of the UCC - which therefore also includes the provision on interest on arrears - to apply mutatis mutandis only with regard to the method of levying turnover tax that has become due on imports. The provision on interest on arrears would then - according to the district court - not be part of the method of levying VAT and therefore not be an issue when VAT becomes due on imports. In her conclusion, Advocate General Ettema also concluded that Section 22 of the Turnover Tax Act does not provide a legal basis for charging interest on arrears on VAT upon importation.[8] The Supreme Court, on the other hand, ruled that the Turnover Tax Act has declared virtually all provisions of the customs legislation to apply mutatis mutandis in respect of VAT upon importation. This means that, according to the Supreme Court, the provision on interest on arrears from the customs legislation also applies mutatis mutandis to VAT on imports.

Customs practice Ploum

All in all, the regulations in the field of customs law (and import VAT) are complex and it will have to be assessed on a case-by-case basis how best to ensure legal protection for an interested party. Litigation in this area is a profession in its own right. Ploum‘s Customs, Trade & Logistics practice group has extensive experience in conducting proceedings in the field of customs law. If you have any questions in response to the above, please feel free to contact Arjan Wolkers (a.wolkers@ploum.nl) or Jikke Biermasz (j.biermasz@ploum.nl).