Tech tariff challenge

April 3, 2013

As the European Court addresses tariff classification for components, what are the implications for the technology sector?

Information technology goods have generally enjoyed duty-free access in the EU since the 1996 implementation of the World Trade Organization (WTO) Information Technology Agreement (ITA).

However, a recent European Court of Justice (CJEU) judgment serves as a reminder that not all components qualify as parts and accessories and thus may be subject to duty.

Duty-free components

In the EU, the ITA tariff exemption has been partially implemented in Heading 8486 of the customs tariff, which covers machines used for the manufacture of inter alia semiconductor devices and integrated circuits. As a result, products classified under certain subheadings of Heading 8486, which include parts and accessories, can be imported duty-free into the EU.

Components of semiconductor manufacturing machines excluded from duty-free treatment in the EU

On 19 July 2012, the CJEU delivered its judgment in a customs case concerning the tariff classification of polishing pads intended for semiconductor waferpolishing machines.

The pads, in the form of discs that measure approximately 40 cm in diameter and 3 mm thick, are adhesive; they are made up of different plastic layers, and they are intended for polishing machines for working semiconductor materials.

The issue that the CJEU considered was whether these polishing pads should be classified under either:

  • Tariff Code 8466 91 15, as parts or accessories suitable for use solely or principally with the machines classified under Headings 8456 to 8465
  • Tariff Code 3939 90 10, as a self adhesive flat shape made of plastic on the basis of its constituent material

We note that the case also involved imports prior to 2007, when the customs tariff was modified. For purposes of this article, we focus on the current tariff classification codes.

According to the CJEU, the polishing pads should be classified under Tariff Code 3939 90 10 for the following reasons:

  • In principle, there are arguments to classify the polishing pads at issue under Chapter 39, considering their physical characteristics.
  • The notion of “parts” implies a whole for the operation of which the part is essential, and the notion of “accessories” implies an interchangeable part designed to adapt a machine for a particular operation, to increase its range of operations, or to perform a particular service relative to the main function of the machine.
  • The polishing pads cannot be considered to be “parts” or “accessories” suitable for use with semiconductor wafer-polishing machines and cannot therefore be classified under Heading 8486 of the customs tariff.

The definition of “parts” and “accessories” was given in earlier CJEU judgments with respect to network cards and ink cartridges, which considered classification under the duty-free Heading 8473 (i.e., parts and accessories of Heading 8471). However, this is the first judgment in which the court has applied these criteria in practice to parts and accessories of Heading 8486.

In this case, polishing pads are excluded as “parts” of wafer-polishing machines by the Court because they are not essential for the operation of wafer-polishing machines. Hence, the argument that the polishing pads are exclusively intended to be fitted on certain types of wafer-polishing machines is not decisive to conclude that the concerned product is a part or accessory.

Accordingly, these components of semiconductor manufacturing machines have been excluded from duty free treatment in the EU. Practical consequences Based on this CJEU judgment, importers should not rely on the component’s “sole or principal use” with a product classified under 8486 to classify the product as a duty-free part or accessory of this heading.

Rather, the definition of “parts” and “accessories” as provided in this case should be referenced in the classification determination. In a broader sense, the judgment may trigger examination not only on components classified as parts and accessories of Heading 8486, but also on components classified as parts and accessories under other headings in Chapter 84.

This is an area that may attract additional customs scrutiny, particularly in the event of a customs audit where the company can face significant exposure for underpaid duty. Component suppliers and importers should review their tariff classifications, particularly where such products have been classified as parts and accessories of products in Chapter 84.

Importers should also consider applying for a Binding Tariff Information from the Customs authorities to obtain certainty with respect to the tariff classification of a product.

The full version of this article was first published in the Ernst & Young Indirect Tax Briefing, Issue 6, December 2012 (pdf, 4.96 MB)

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