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March 8, 2021
US suspends punitive tariffs on UK- and EU-origin goods for four-month period
The United States (US) Trade Representative (USTR) issued joint statements with the United Kingdom (UK) on 4 March 2021 and the European Union (EU) on 5 March 2021 announcing a four-month suspension of the US punitive tariffs imposed on certain UK- and EU-origin goods in relation to the ongoing dispute on large civil aircraft subsidies.1 The suspension effective date for the EU has not yet been established, with the USTR indicating the suspension will become effective once internal procedures are completed. The suspension for the UK is effective as of 4 March 2021 and will temporarily relieve punitive tariffs of 15 to 25% levied under Section 301 of the Trade Act of 1974 (Section 301) on certain UK- and EU-origin products.
The long-standing dispute between the EU and US surrounding civil aircraft subsidies reached a turning point in May 2018 following a formal challenge by the US, which resulted in a determination by the World Trade Organization (WTO) that subsidies provided to non-US aircraft manufacturers were inconsistent with the EU’s obligations under the General Agreement on Tariffs and Trade (GATT). The WTO Appellate Body authorized the US to take countermeasures on EU exports worth up to US$7.5 billion. As a result of the WTO decision, the US imposed punitive tariffs on specific goods originating in the UK and/or EU member jurisdictions under Section 301 in October of 2019. The list of products subject to US tariffs has been altered and expanded over time.
In October 2020, the WTO authorized the EU to take similar countermeasures of up to US$4 billion on US exports because of US subsidies on aircraft inconsistent with US GATT obligations. In November 2020, the EU imposed punitive tariffs on civil aircrafts and an array of other US-origin goods.
On 4 March 2021, the USTR published a Joint US-UK Statement on the Suspension of Large Civilian Aircraft Tariffs. Subsequently, on 5 March 2021, the USTR published a Joint EU-US Statement on the Large Civil Aircraft WTO disputes. The announcements follow the UK decision to cease retaliatory tariffs effective 1 January 2021, signaling an easing of tensions following a year of escalating trade actions on both sides of the Atlantic.
The four-month suspension is effective 4 March 2021 for the UK while the EU effective date remains to be established once internal procedures are completed. The suspensions will relieve punitive tariffs of 15% on certain civil aircrafts and civil aircraft parts, as well as 25% punitive tariffs on goods such as cheese, spirits and apparel of UK- and EU-origin. In the announcements, the USTR characterized the suspension as a step towards resolving the dispute by allowing time for discussion and joint resolution while temporarily relieving the burden on industry.
Actions for businesses
Companies with US and UK/EU trade lanes, and particularly those importing UK- and EU-origin goods into the US, should closely monitor trade negotiations between the US and the UK/EU as they evolve over the four-month suspension period. Strategic planning activities currently on-going as a result of the civil aircraft dispute should continue in lieu of a long-term joint resolution.
US distributors who purchase UK/EU-origin goods from related parties which have been subject to 301 duties will almost certainly have transfer prices impacted by the temporary suspension of Section 301 duties. Along with the strategic importance of aligning the income tax and customs approaches, mechanics for reporting any transfer pricing adjustments to US Customs should also be reviewed. This process may be particularly complex when duties are present for only a portion of the year, and in many cases, actions need to be taken in advance of importations. US Customs has very specific rules for reporting adjustments to prices made after importation, such as transfer pricing adjustments. These rules require that the importer take specific actions before importation of goods for which prices may be adjusted, including adding customs specific language to transfer pricing policies.
UK and EU distributors of US goods subject to the punitive tariffs will face similar transfer pricing challenges in their jurisdictions. Rules for reporting transfer pricing adjustments vary among EU Member States. This highlights the need for careful planning to manage volatile supply chain costs like the punitive tariffs in each jurisdiction of operations.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Global Trade