New UK-EU Trade Deal Vs. Old Israel-EU Free Trade Agreement

After voting for Brexit back in 2016 and much acrimony, the UK finally reached a trade deal with the EU on December 24, known as the Trade & Cooperation Agreement. It should apply from the beginning of 2021.

The new UK-EU deal is not dissimilar to the Israel-EU free trade agreement (FTA). How do the two deals compare? Following is an initial impression.

History:

The UK joined the EU in 1973, voted to leave in 2016 and left on January 31, 2020. The UK-EU trade agreement is brand new and over 1200 pages long. It covers a range of topics including cooperation in the legal, tax, environmental and cyber areas, but the UK government stresses it has taken back its sovereignty.

The first Israel-EU FTA dates back to 1975. It was superseded by an FTA known in the EU as an Association Agreement on June 1, 2000. It covers not only free trade but also political dialog, provisions on freedom of establishment and liberalization of services, the free movement of capital, economic cooperation, environmental and other social and cultural matters.

Industrial products’ free trade:

Generally, no customs duties or quantitative restrictions (quotas) may be imposed on imports and exports under both the UK-EU agreement and the Israel-EU Agreement. Under the UK-EU agreement, customs post checks of paperwork and safety will now apply, especially to trucks unless they join a “trusted trader” arrangement.

In the case of Israel-EU trade, such customs checks are not new, but most shipments are by air or sea, not truck.

Rules of Origin:

To qualify for customs exemption, products must be produced (originate) locally in the exporting country, but not 100%. This is a complex topic and each agreement has an annex listing many products and their allowed non-originating (non-local) content.

For many products in the UK-EU agreement, 40%-50% may be allowed, compared with 30% for many products under the Israel-EU agreement, but numerous exceptions exist in both agreements.

In addition, “cumulation” exceptions exist in both cases. This means non-local content may not matter if it originates in the import side e.g. EU content in UK/Israeli products exported to the EU.

Moreover, unlike the UK, Israel may benefit from “pan-Euro-Mediterranean cumulation” rules which may let Israeli products include content from Turkey, Jordan and EFTA countries (Switzerland, Iceland, Norway) without affecting the Israeli content percentage when exporting products to the EU. This is because Israel has FTAs with all those countries, so does Israel.

Financial and other services:

The UK-EU agreement says that service suppliers are to be treated no less favorably than local ones. The UK and EU aim to agree by March 2021 a Memorandum of Understanding for regulating financial services. The EU-Israel FTA calls for most-favored-nation treatment and regulatory agreements.

Aliyah:

The Israel-EU FTA calls for “cooperation in defining mutual interests concerning policies in immigration”.

Public contracts:

Both agreements call for a mutual opening up of governmental procurement of goods and services beyond the WTO Government Procurement Agreement.

Disputes (aka level playing field):

Under the UK-EU deal, any subsidies which appear to cause a serious risk of a significant negative effect on trade or investment, the aggrieved party may resort to unilateral remedial measures 60 days after requesting information and consultation. More generally, a detailed arbitration procedure is prescribed, and non-compliance can lead to import tariffs and suspension of parts of the UK-EU agreement.

Under the Israel-EU FTA, an Association Committee consisting of EU and Israeli officials meets at least annually to consider any major issues arising within the framework of the FTA. It is assisted by an Association Committee in matters delegated to it. Both can take binding decisions. And a Customs Cooperation Committee can be asked to verify product origin.

Comments: 

Both Britain and the EU published summaries of their deal in English, but the language is very different. Britain talks about sovereignty. The EU talks about money.

Israel entered into its FTA with the EU to help beat the Arab trade boycott prevailing in 1975.

The UK regained its sovereignty by leaving the EU and no longer accepting the jurisdiction of the European Court of Justice.

Israel never lost sovereignty because joining the EU itself wasn’t on the cards. Israel needed and got a trade deal.

As for rules of origin, the devil is in the detail for each product.

As for e-commerce and digital products, it seems these were under-estimated in both agreements.

Which deal is best?

Our verdict is it’s a tie, but time will tell….definite deja vu here.

Next Steps:

Consult your customs agent regarding customs matters. Contact us for international tax advice and structuring regarding income tax, sales tax/VAT, digital services taxes et al. There is a risk of multiple taxation. The aim should be: make more, take more!

As always, consult experienced professional advisors in each country at an early stage in specific cases.

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The writer is a certified public accountant and tax specialist at Harris Horowiz Consulting & Tax Ltd

(c) 27.12.2020