Morrisons foiled by anti-dumping duties

In a landmark decision, the Tax Tribunal has upheld a post-clearance demand that imposed anti-dumping duty (“ADD”) on WM Morrison Supermarket Limited (“Morrisons”) in relation to imports of aluminium foil between 2018 and 2020 because the goods originated in China. 

The European Anti-Fraud Office (“OLAF”) conducted an investigation into foil exported from Thailand by two subsidiaries of Chinese companies. Imports of foil into the European Union from China were subject to ADD, whereas imports from Thailand were not. The goods in question were manufactured predominantly in China with the final stage of the production process taking place in Thailand. 

HMRC concluded that the purpose of finishing the goods in Thailand was to avoid the ADD and that the goods did not undergo substantial processing or working in Thailand. It therefore imposed ADD of £4.8 million inclusive of VAT on the basis that the imported foil was, in substance, of Chinese origin. 

Submissions

Article 60 (2) of the Union Customs Code (“UCC”) applies where the production of imported goods involves more than one territory. Goods are deemed to originate in the territory where they underwent their last, substantial, economically-justified processing or working. 

Article 33 of the Delegated Regulations made under the UCC provides that any processing or working will be deemed not to be economically justified where the purpose of the operation is the avoidance of anti-dumping measures. The CJEU recently held that the test under this article is to establish the “principal or dominant purpose” of the operation, objectively on the available facts.

The two principal issues were therefore whether the processing in Thailand was economically justified and, if it was, whether that represented the last, substantial, processing or working of the goods.

Morrisons sought to prove that the Thai production facilities and subsidiaries were established for genuine commercial and logistical reasons. It said that its customers had requested it establish operations closer to markets in the USA, India and Vietnam. Its main witness also asserted that 70% of the production in the Thai factory was destined for the Thai market. HMRC produced evidence of numerous statements made by the Thai manufacturers on their websites and social media stating that the plant had been established “to eliminate anti-dumping duties” in export markets.

Both parties produced expert evidence on the manufacturing process. Only about 5% of the overall cost of production took place in Thailand (the most significant element being the “annealing process” which changes the temper of the foil and removes some oil from it). The experts were largely in agreement about the steps involved in the process, save for the significance of the microscopic changes to foil as a result of the annealing in Thailand. 

The Tribunal dismissed the appeal, finding that the processing undertaken in Thailand was not economically justified because the dominant purpose of establishing the Thai factories was to avoid ADD. 

The Tribunal gave less weight to Morrisons’s main witness because, among other reasons, it emerged that someone had written his statement for him in English and he had not had it read back to him in Mandarin. It refused to accept his uncorroborated assertion that 70% of the foil produced in Thailand was destined for the Thai market. By contrast, the Tribunal gave full weight to the statements on the Thai company’s own website tendered by HMRC.

Although that finding would have been sufficient to dispose of the appeal, the Tribunal also found that the Thai operations did not amount to the “last substantial processing or working” of the foil. That is because the limited further processing conducted in Thailand did not produce substantial changes in the foil properties  and did not give rise to a significant qualitative change. 

Comment

This decision should serve as a warning to all UK importers of the risk of goods of non-preferential origin in their supply chains. The test was not whether Morrisons itself had an intention or purpose of avoiding ADD  but whether the dominant purpose of the operation in Thailand, determined objectively, was to avoid ADD or was economically justified. The task of rigorous supply chain due diligence is therefore vital to mitigate this risk for businesses going forward.

Our Tax Disputes and Investigations Team is experienced in customs advice and litigation. If you would like to discuss an independent review of your supply chain or for advice on HMRC enquiries, please get in touch with one of the team.