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Friday, 14th August 2020
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Did you overpay? Back  
Millions of pounds in customs duty have been overpaid by Irish high tech companies. A ground breaking decision of the European Court of Justice may mean tax refunds.
It is not often that an Irish taxpayer appears before the European Court of Justice. That has happened recently to an Irish company called Cabletron.

Even more unusual is the manner by which Cabletron reached the European Court of Justice. For the first time ever the Appeal Commissioners referred a dispute relating to European Community law directly to the European Court of Justice, bypassing the Irish superior courts. This short cut probably took some years off what was a fairly lengthy process in any event, and probably a few noughts off the cost.

The dispute
Cabletron claimed that they were over charged customs duty on the importation from outside the EU of certain computer networking components. Customs duty is for many business people a forgotten tax. It is not separately identified in financial accounting systems in many cases. It is buried in the cost of goods which are imported, or it may be capitalised as part of the cost of imported equipment. What is certain is that it is a very substantial cost for many businesses.

The Cabletron case may wake many businesses up to the savings opportunities open to them in this area.
Customs duty is applied only on importations from outside the EU into the EU. It does not apply to intra community trade generally speaking. It is a tax which belongs to the European Community rather than to the national governments whose Revenue services collect it.

The level of customs duty and indeed whether or not any customs duty is payable, depends on the classification number applied to a particular product. There is a worldwide agreement under the auspices of the World Customs Organisation known as the Harmonised System which broadly determines how the multitude of goods that are in international commerce should be classified for customs purposes. In addition there is a body of European law, broadly consistent with the Harmonised System, which provides further detail on classification.

EU money grab
Cabletron imported a wide range of what could be broadly described as ‚€ėcomputer networking parts‚€ô. These parts were generally for use in the construction of local area networks. Largely they were used in controlling the flow of data along local area networks between computers in a firm.

In 1994 and 1995 the European Commission published regulations under European law. These regulations had the effect of reclassifying a range of items imported by Cabletron from classification as computer units to that of telecommunications apparatus carrying a higher rate of duty.

Cabletron challenged the interpretation of the HS by the European Commission and the regulations issued pursuant to that interpretation. They believed that the Regulations were manifestly in error in their interpretation of the HS and therefore should not be applicable in the reclassification of their goods.

The Advocate General of the European Court of Justice, who gave a preliminary opinion for the assistance of the court, was of the view that Cabletron were right. He considered that the regulations were invalid and void ab initio He considered that it was beyond question that the reclassification and interpetation of the HS by the Commission was manifestly in error.

He also made allusion to the fact that the regulations adopted by the EU Commission, which were the root of the problem, could be perceived as a revenue raising device rather than an objective interpretation of the Harmonised System. The European Court of Justice in their final judgement largely endorsed the view of the Advocate General.

Who gets their money back?
Although the basic issue as to the correct classification of the computer components, and of the power of the EU Commission to issue the regulations which it had issued, was resolved an area of dispute remains. This is as to the period which can be covered by claims for repayment of customs duty improperly extracted from businesses on the basis of the impugned regulations.

The Revenue Commissioners had sought to have tax refunds limited to those who had already challenged the legality of the regulations. This attempt was rejected by the European Court of Justice who said that any taxpayer affected by the regulations was entitled to a refund. However there is provision in European law limiting refunds to a period of three years save in exceptional circumstances. Whether or not refunds on foot of the Cabletron case should be limited to three years was not ruled on by the European Court of Justice.

The Cabletron case should cause all companies importing goods from outside the EU to look again at how they handle customs duties. Do they know how much these duties cost them? Have they procedures in place to ensure that they pay no more than they should?

With corporation rates falling steadily, other business taxes such as customs duties are likely to come into increasing prominence.

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