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EU: Trade and customs implications of “Brexit” delay, now through January 2020

EU: Trade and customs implications of “Brexit” delay

The European Union this week granted the UK an extension, until 31 January 2020, to leave the EU—a “Brexit” extension.

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With this delay, there are a number of unanswered questions such as:

  • Will there now be a deal in the short term?
  • Will there be a “no deal” Brexit?
  • What does this extension mean and what will happen on Brexit day?


What does this deal actually mean and what will happen on Brexit day?

To start with the latter, nothing at all for the time being. This is because everything will remain the same, since a transitional phase, lasting until 1 January 2021, will come into effect immediately after the UK’s withdrawal. This transitional phase may be extended by a maximum of two years until 1 January 2023. This period is to allow time for the UK and the EU to conclude a new trade agreement. Irrespective of whether an agreement is concluded in time, the Ireland-Northern Ireland protocol will enter into force. Northern Ireland would then be part of the UK customs territory, but would follow the rules of the EU’s internal market (for example, all veterinary and phytosanitary measures, CE marking obligations, REACH regulations, etc.). The rules on value added tax (VAT) and excise duty would also continue to apply in Northern Ireland and the Court of Justice of the European Union (CJEU) would continue to play a role in the protocol. The fact that only 1% of UK-EU trade passes through Northern Ireland may have been a factor influencing agreement on these matters.


Border controls

The Northern Ireland Assembly can decide every four years whether the special status for Northern Ireland is still necessary. If the protocol is no longer required, the shifted border control would be moved back to the Ireland / Northern Ireland border (although not explicitly stated in the protocol, trade professionals believe this would happen). When the protocol enters into force, border controls in Northern Ireland will take place at airports or seaports and the applicable (UK or EU) customs duties would then be determined.


EU customs duties

Goods coming directly from the UK and destined for Northern Ireland would not be subject to customs duties. If the goods are from anywhere else, and it is not certain that the final destination is Northern Ireland, the customs duties applicable in the EU would be levied by the UK and paid to the EU. If it subsequently transpires that the goods would remain in Northern Ireland, these duties could be reclaimed. It is not yet clear what the deadlines for reclaiming unduly levied EU customs duties would be, and how this process would work also needs to be elaborated upon in more detail.


No monitoring of goods

Based on an initial prediction, once goods would be released for free circulation (either in the UK or in the EU), they would no longer be subject to any form of monitoring. This would allow goods to be resold without the knowledge of customs or any other authority. After all, imported goods can be traded in the same way as goods originating in Northern Ireland. Goods can be resold, and the information about this does not have to be shared with the government. If this is not monitored in some manner, there would be a gap in the EU’s external border.


Free trade agreement

Consider the following situation:

  • The UK concludes a free trade agreement with the United States. The EU does not have a free trade agreement with the United States.
  • Assume a standard chemical product is subsequently sold from the United States to a buyer in Northern Ireland, which uses this in its production.
  • As a result of the free trade agreement with the United States, this product would be subject to 0% customs duties in the United Kingdom, while the EU would impose a customs duty of 5% for this product from the United States.
  • Since the goods are destined for the Northern Ireland business, the UK customs duties of 0% would be applied.
  • Assume one year later, the Northern Ireland business sells the product to another Northern Ireland business, which in turn resells it to a customer in Ireland or elsewhere in the EU.

Query: How could the EU determine that the loss of 5% customs duties is still levied?


Implications for businesses in Northern Ireland

One possibility that is foreseen is that the business sector in Northern Ireland will have to keep track of all the data itself.  How long must a product that was unequivocally intended for a Northern Ireland business remain in Northern Ireland and enter into free circulation before it can be sold to a business in Ireland without any restriction? Is that a day, a month, a year, three years, 10 years or maybe never? At the moment, it is not certain. This Ireland-Northern Ireland protocol will certainly lead to an increased financial burden for businesses in Northern Ireland. On the other hand, business in Northern Ireland will benefit from freedom of trade with Ireland and the rest of the EU. The rest of the UK may also be affected because when “exporting” to Northern Ireland, the UK has to prove that the goods originated in the UK in order to “import” into Northern Ireland without import duties. This could also result in more litigation for the government. Bottom line: Wait and see again.

The deal that former UK Prime Minister Theresa May made with the EU remains largely untouched. Prime Minister Boris Johnson has removed the backstop from the divorce agreement. He has been able to insist that Northern Ireland belongs to the UK Customs Union, has agreed to allow the CJEU to play a significant role in Northern Ireland, and has agreed that the rules of the EU internal market will apply— for as long as necessary—to Northern Ireland. It thus appears that the UK will not have to pay a contribution to the EU, while countries like Switzerland and Norway do. It is now once again a matter of waiting to see what actually happens with this Brexit deal.
 

Read an October 2019 report prepared by the KPMG member firm in the Netherlands


For more information on this topic or to learn more about KPMG’s Trade & Customs Services, contact:

Doug Zuvich
Partner and Global Practice Leader
T: 312-665-1022
E: dzuvich@kpmg.com

John L. McLoughlin
Principal and East Coast Leader
T: 267-256-2614
E: jlmcloughlin@kpmg.com

Andy Siciliano
Partner and National Practice Leader
T: 631-425-6057
E: asiciliano@kpmg.com

Steve Brotherton
Principal and Global Export and Sanctions Leader
T: 415-963-7861
E: sbrotherton@kpmg.com

Luis (Lou) Abad
Principal, Washington National Tax
T: 212-954-3094
E: labad@kpmg.com

Irina Vaysfeld
Principal
T: 212-872-2973
E: ivaysfeld@kpmg.com

Amie Ahanchian
Managing Director
T: 202-533-3247
E: aahanchian@kpmg.com

Robert Waldrop
Principal
T: 212-954-8117
E: rwaldrop@kpmg.com

Gisele Belotto
Managing Director
T: 305-913-2779
E: gbelotto@kpmg.com

Christopher Young
Principal
T: 312-665-3229
E: christopheryoung@kpmg.com

Andy Doornaert
Managing Director
T: 313-230-3080
E: adoornaert@kpmg.com

George Zaharatos
Principal
T: 404-222-3292
E: gzaharatos@kpmg.com

Jessica Libby
Managing Director
T: 612-305-5533
E: jlibby@kpmg.com

 

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