The European Union (EU) consists of 28 member countries that have 500 million people. The EU’s economy is worth EUR14 trillion ($15.5 trillion). Twenty-four million businesses operate within it, and over 300 million shoppers shop online. This massive marketplace offers enormous opportunities for companies outside the EU to sell their goods and services.
What precisely is the EU, and who’s part of it? What is the difference between the EU, the Single Market, and the Customs Union? What taxes and duties come with pre-importing goods into the EU? What are the most appropriate legal frameworks to consider when deciding whether to conduct business within the EU? And, perhaps most importantly, how can you reach out to the market in a way that balances customer service costs and complexity?
What Is the European Union?
The EU is a political and economic union that spans 28 nations (see the map below), which, when combined, encompass a large portion of the continent. The European Economic Community (EEC) is the precursor to the EU, founded in 1958. It aims to enhance the economic cooperation of six countries: Belgium, Germany, France, Italy, Luxembourg, and the Netherlands.
Since then, 22 countries have been added to the club (although there is a problem with the UK, which is currently undergoing the long-running process of leaving, which I will discuss in the future). In 1999, the new European currency, the euro, was introduced and is used today by 19 nations.
The EU can establish its own rules and treaties among the members, guaranteeing everyday actions in areas like the human rights of people, agriculture, the environment, and foreign and security policy.
Is the Single Market the Same as the EU?
It’s not quite that simple – you could be part of the European Union’s Single Market and not part of the EU. 28 EU countries – including Norway, Iceland, and Liechtenstein, which are all part of the Single Market, also known as the European Economic Area (EEA).
Single Market rules allow for the freedom of movement from one member state to the next of goods, persons capital, services, and goods (the”four freedoms” or “four freedoms”).
The rules are in two types. They first remove obstacles to trade. The second is to harmonize or unite national laws at the EU level. They take the form of minimum standards for safety, packaging, and bars.
Participation in the Single Market also typically involves paying annual contributions to the budget of the EU and acceptance of the jurisdiction of the European Court of Justice.
What About the Customs Union?
A customs union is when the parties involved in the league have the same tax rates on products imported to their territory from other countries. They also have no internal tariffs. For the EU, there aren’t taxes to be paid for goods transported from one member to another. When imports are made from the rest of the world and beyond, all Customs Union members charge an identical tariff called an external standard tariff. The EU is an example. It has an average 10% tax on vehicles brought into the EU.
Brexit and the EU
After winning the UK election on December 12, 2019, The Conservative Party has committed to withdrawing from the EU on January 31, 2020. However, in reality, that is when a transitional period will commence, at which point it is expected that the UK and the EU will discuss future relations. The transition period will last until December 2020. Until then, the UK will continue trading with the EU as it is now, respecting EU rules and contributing to the EU budget. Although there are many issues to be resolved, one sure thing is that the UK will be leaving the EU, particularly the Customs Union and the Single Market.
The political declaration, which was signed in October 2019, states the two sides will be working towards creating a Free Trade Agreement (FTA), and a high-level summit is scheduled for June 2020 to determine how the process is progressing. The document also includes an entire section on the “level playing field” – the extent to which the UK will commit to adhering closely to EU rules shortly. It states that both parties will maintain similar high-quality standards for state aid competitiveness, social and work criteria, climate change, the environment, and “relevant tax matters.”
These are political declarations, and they are not legally binding, which means there’s much to be accomplished between the moment and 2020.
Tax and Duty Implications
Once we have established that the importation of products from the US (or any other country) in the EU is a matter of adhering to the regulations that govern the Customs Union, what rules must be observed?
Tariff codes classify goods to collect details regarding duty rates, relevant safeguard measures (e.g., anti-dumping, for instance), and external trade statistics.
Value Tax (VAT) is a consumption tax (the equivalent of US sales tax) imposed on most items and services sold in the EU. Its structure has been uniform across the EU. The standard VAT system legislation concentrates on harmonizing the EU national legislation. It establishes a traditional VAT structure, a constant assessment basis, and the minimum rates that must be set in EU countries. VAT is imposed upon the importation of goods. It is typically charged when customs clearance procedures are in place to allow them to circulate. If the items are brought into an EU country but meant for use or consumption in another country, they may be put within a VAT suspension agreement. With the arrangement, VAT will only be applied to the EU country of destination, but it will not be charged to the EU country of entry into the EU.
VAT is calculated based on the “taxable amount,” which comprises the product’s price plus taxes on imports and additional expenses incurred before the destination.
How Should I Set Myself Up to Do Business in the EU?
If you have determined that the EU is a lucrative potential market, what’s the best method of gaining access to the market? This depends to a certain degree on what the primary aspect for exporters is: increasing customer satisfaction by offering quick delivery times and an extensive product line as well as keeping costs low so that you can maintain low selling prices and minimize administration burden and reporting requirements or a mix of all these. We’ll take a look at a few of the various alternatives below.