Customs Duties and VAT in the EU

Customs Duties and VAT

1. General Introduction

In the European Union, customs duties and Value Added Tax (VAT) play a crucial role in the economic integration and protection of the internal market. Customs duties primarily serve to protect the EU market from competition from third countries, while VAT is applied to all goods and services, excluding those subject to special excise duties.

Customs duties are not only levied for revenue generation but also to ensure economic security. Key customs instruments in the European Union include preferential trade agreements and customs concessions for developing countries. Customs duties also safeguard the security of international supply chains, achieved through the introduction of the “Authorised Economic Operator” (AEO) and the implementation of risk management measures in customs law.

2. Arising of Customs and VAT

In the EU, the importation of goods is not automatically linked to the creation of a customs debt. Customs supervision applies when goods are transported from non-EU countries to the customs territory of the Union. Customs debt only arises when goods enter the Union illegally. Customs supervision ensures that goods enter the economic circulation of the Union, which is essential for the taxation of dutiable goods.

VAT applies to the importation of goods and services and is based on the principle of economic neutrality. The tax is due when goods enter economic circulation within the Union and is not dependent on customs supervision or securing the goods.

3. Deduction of Import VAT

According to the German VAT Act (UStG) Section 15(1) No. 2 and Section 12(1) No. 2a, the right to deduct previously charged VAT is contingent upon the payment of VAT. However, Article 168e of the VAT Directive stipulates that only import VAT must be paid. The European Court of Justice (ECJ) ruled in the Veleclair case (ECJ 29.03.2012, C-414/10) that the German (and Austrian) requirement to pay VAT before claiming a deduction is incompatible with the VAT Directive.

The VAT Directive does not require the import VAT to be paid before it can be reclaimed as input tax. The core argument is that the rules for input tax deductions aim to ensure that traders are fully relieved from VAT on their economic activities. The common VAT system ensures full neutrality of all economic activities, regardless of their purpose and outcome, provided that the activities are VAT-liable.

As a result of this judgment, the German legislator amended Section 15(1) No. 2 of the UStG to align it with the ECJ’s case law. Since no tax evasion or attempt of tax evasion was identified in the case, the imposition of a second payment of VAT without granting the right to deduct it is considered incompatible with the principle of tax neutrality.

4. Deduction of Import VAT Depending on Use

Under current practice, traders can only deduct VAT as input tax if, after the customs clearance process, the goods from a third country are intended for use in their domestic business operations. This assumes that the trader has disposal rights over the goods at the time of importation.

This viewpoint contradicts EU law, which does not refer to the subject matter of the service or the right of disposal in relation to VAT. The Hamburg Tax Court ruled in its decision of 19.12.2012 (5 K 302/09) that the taxpayer is generally entitled to the deduction of VAT if they are liable for VAT and this is evidenced by the import VAT assessment notice.

5. Conclusion

Customs duties and VAT play a pivotal role in the EU economy. Customs duties protect the internal market from competition from third countries, while VAT serves as the primary source of revenue for EU member states. The rules for deducting VAT on imported goods ensure tax neutrality and prevent taxpayers from being burdened by unnecessary costs. EU regulations and the case law of the ECJ ensure that the customs and VAT system operates efficiently and fairly.

Dr. Katona Géza, LL.M. ügyvéd (Rechtsanwalt / attorney at law)

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