Software installation and origin of goods

Reader's question: ‘We export certain devices to Ukraine. The product-specific rule is based on the value criterion. Can the value of expensive software, which was created and developed in the EU, be counted as the value of originating materials?’. To answer this question, we review various aspects of the topic, which is becoming increasingly important, as more and more goods do not function without software. 

Nowadays, many products without software would not perform the functions they were designed to and become worthless. Such as, probably, the devices indicated in the question, or, for example, such innovations as 3D printers. Thus, the question arises, is it correct to take into account only physical materials or goods when determining the economic (non-preferential) and preferential origin of the goods? This issue was also discussed in the Customs Expert Group Origin Section (the Group) of the European Commission (EC).

To provide you with an answer, we refer to the meeting minutes of the Group (TAXUD/2744052/17, 30.06.2017). Let's take a look at the various aspects of origin discussed by the Group on how the installation of software should be treated for the purposes of determining the origin of goods.

Origin of software

When establishing the origin of goods for customs origin purposes, only physical materials are considered as originating or non-originating. For example, it is set out in Article 38 of the EU-UK Trade and Cooperation Agreement:
(e) ‘material’ means any substance used in the production of a product, including any components, ingredients, raw materials, or parts;
(f) 'non-originating material’ means a material which does not qualify as originating under this Chapter, including a material whose originating status cannot be determined.

There was consensus among the members of the Group that, from a legal perspective, software as such is not to be considered a material or good and therefore, rules of origin cannot be applied to it. So, it is not (yet) possible to establish the origin of the software for customs origin purposes.

Value of the software and the EXW value of the goods

When the product specific rule (PSR) is based on the value criterion, usually, the EXW price of the goods should be determined (for example, the PSR could set out that the value of all the non-originating materials shall not exceed 50 % of the EXW price of the product). EXW price is the price paid by the buyer when purchasing goods in the manufacturer's warehouse, packed and ready for international transportation. So, the EXW price is not tied to physical or non-physical materials. It is the market price paid by the buyer for the goods.

The Group agreed that the price of the product is the total price paid or payable to the exporter, including the costs of the software incorporated/ installed in the physical product. 

This (‘software incorporated/ installed’) might raise the question, what if the software is purchased together with the product; however, it is installed later, after the importation, so should it not be included in the EXW price for origin purposes? There is no answer to that provided in the minutes of the meeting, so, if relevant, you should check it with your customs authority.

Continue reading the article ‘Software installation and origin of goods’ by Enrika Naujokė, co-owner of UAB 'Muita'. The article was published in the Customs Compliance & Risk Management Journal. Would you like to get access to all the articles published since 2020? Check the pricing here and choose most suitable subscription plan.