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Written by

Alex Kalevi Dieke

James I. Campbell Jr.

Antonia Niederprüm

Sonja Thiele

Willem van Lienden

Colum Joyce

15 October 2020

DG GROW

International Postal Service,

Remuneration and Regulation

Final Report

EUROPEAN COMMISSION

Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs Directorate GROW E ² Services in the Single Market and Digitalisation

Unit GROW E.2 ² Public Interest Services

Contact: Hubert GAMBS

E-mail: GROW-E2@ec.europa.eu

European Commission

B-1049 Brussels

EUROPEAN COMMISSION

Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs 2020

International Postal Service,

Remuneration and Regulation

Final Report

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This document has been prepared for the European Commission however, it reflects the views only of the authors, and the

European Commission is not liable for any consequence stemming from the reuse of this publication. More information on

the European Union is available on the Internet (http://www.europa.eu). PDF ISBN 978-92-76-27174-1 doi:10.2873/649900 ET-06-20-141-EN-N Print ISBN 978-92-76-27173-4 doi:10.2873/482772 ET-06-20-141-EN-C

Printed by WIK-Consult GmbH in Germany

Manuscript completed in October 2020

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ABSTRACT

Cross-border e-commerce has boosted postal imports of low-value consignments from the Asia- Pacific region to the EEA Member States. The significant growth in imports of low-value consignments particularly from China challenged designated operators and customs authorities in the single market. This study by WIK-Consult explores the development of international postal services in the EEA, assesses the impact of UPU terminal dues and self-declared rates on designated operators, and examines import models for international e-commerce consignments along with the requirements and procedures concerning VAT, customs and security regulations. The assessment is based on extensive desk research and intensive stakeholder interaction. Online surveys and interviews were conducted among EEA designated operators, national regulatory authorities and ministries, and national customs authorities gathering input from practical and regulatory perspectives regarding the expected changes and challenges involving international postal services. terminal dues rates for the delivery of imported e-commerce goods will reduce the distortions under the current system, while the reforms in customs and import VAT regulations are a step in the direction towards levelling the playing field between postal and express operators, as well as between EU and non-EU e-retailers and online marketplaces. While this represents significant progress, some challenges are expected to persist.

RÉSUMÉ

Le commerce électronique transfrontalier a stimulé les importations de paquets de faible valeur

importante des importations de paquets de faible valeur, notamment de la Chine, met au défi

les opérateurs désignés et les autorités douanières sur le marché unique. La présente étude,

réalisée par WIK-Consult, analyse le développement des services postaux internationaux dans du commerce électronique ainsi que les exigences et les procédures concernant la TVA, les douanes et les réglementations en matière de sécurité.

intensive avec les parties prenantes. Des enquêtes en ligne et des entretiens ont été menés

ministères, ainsi que les autorités douanières nationales, afin de rassembler des éléments

concernant les perspectives pratiques et réglementaires concernant les modifications et les difficultés attendus pour les services postaux internationaux. des frais terminaux pour la livraison de marchandises du commerce électronique importées

réduira les distorsions existantes dans le cadre du système actuel, alors que les réformes des

réglementations douanières et en matière de TVA constituent un pas dans la direction de

ligne. Bien que ceci constitue un progrès important, certaines difficultés devraient persister.

INTERNATIONAL POSTAL SERVICE, REMUNERATION AND REGULATION [7]

Contents

LIST OF FIGURES .......................................................................................................... 9

LIST OF TABLES .......................................................................................................... 11

COUNTRY ABBREVIATIONS .......................................................................................... 13

ABBREVIATIONS ......................................................................................................... 14

EXECUTIVE SUMMARY ................................................................................................. 16

RÉSUMÉ ANALYTIQUE .................................................................................................. 27

1 INTRODUCTION ................................................................................................... 41

1.1 Background of the study.............................................................................. 41

1.2 Objectives of this study ............................................................................... 42

1.3 Methodology .............................................................................................. 42

1.4 Outline of the study .................................................................................... 45

2 DEVELOPMENT OF INTERNATIONAL E-COMMERCE MARKETS ..................................... 46

2.1 Development of major e-commerce flows ...................................................... 46

2.2 How e-commerce items are transported through the single market ................... 55

2.3 Transformation of the international postal services market .............................. 62

2.4 VAT relief for low-value consignments ........................................................... 65

2.5 Conclusions ............................................................................................... 68

3 INTERNATIONAL POSTAL SERVICES AND IMPORT MODELS FOR E-COMMERCE

CONSIGNMENTS .................................................................................................. 70

3.1 Universal Postal Union and the postal product classification ............................. 70

3.2 EEA markets for international postal services ................................................. 73

3.3 Models for the import of cross-border e-commerce consignments ..................... 83

3.3.1 Direct to consumer: Designated operators .......................................... 85

3.3.2 Direct to consumer: International express carriers ............................... 87

3.3.3 Direct to consumer: Consolidators ...................................................... 89

3.3.4 EU warehouse based fulfilment .......................................................... 95

3.4 Conclusions ............................................................................................... 98

4 REMUNERATION SYSTEMS OF THE UPU ................................................................. 101

4.1 Organisation and acts of the UPU ................................................................ 101

4.2 History of UPU remuneration systems .......................................................... 110

4.3 Limitations on remail and ETOEs ................................................................. 114

4.4 Terminal dues in the 2016 UPU convention ................................................... 117

4.5 Terminal dues amendments by the Geneva Extraordinary Congress (2019) ...... 125

4.7 Terminal dues proposal for 2022 to 2025 (2020 Convention) .......................... 134

4.8 Inward land rates ...................................................................................... 138

4.9 Supplementary services ............................................................................. 139

4.10 Alternative remuneration agreements .......................................................... 140

4.11 Conclusions .............................................................................................. 142

5 ECONOMIC EFFECTS OF UPU TERMINAL DUES ....................................................... 145

5.1 Types of distortions resulting from terminal dues ........................................... 145

5.1.1 Uniformity of terminal dues .............................................................. 145

5.1.2 Imbalanced flows: exporters versus importers .................................... 147

5.1.3 Failure to incorporate cost-causative factors in domestic rates .............. 148

INTERNATIONAL POSTAL SERVICE, REMUNERATION AND REGULATION [8]

5.1.4 Transactions affected by terminal dues .............................................. 149

5.1.5 Conclusions .................................................................................... 152

5.2 A terminal dues model ............................................................................... 153

5.3 Effects of terminal dues on EEA designated operators .................................... 161

5.3.1 Terminal dues in 2020 ..................................................................... 162

5.3.2 Self-declared rates and terminal dues 2021-2025 ............................... 167

5.4 Effects of terminal dues on EEA e-retailers and consumers ............................. 175

5.4.1 Assumptions ................................................................................... 175

5.4.2 Effects on consumers ...................................................................... 179

5.4.3 Effects on e-retailers ....................................................................... 182

5.5 Conclusions .............................................................................................. 185

6 CUSTOMS, SECURITY AND VAT FOR POSTAL IMPORTS ............................................ 189

6.1 Current framework for postal imports........................................................... 190

6.1.1 EU VAT Directive ............................................................................. 190

6.1.2 Customs and security regulation in the EU ......................................... 190

6.1.3 UPU provisions and programmes ....................................................... 193

6.1.4 Customs procedures for postal imports in practice ............................... 197

6.1.5 Liability for data accuracy and completeness of the customs

declaration in the current system ...................................................... 207

6.1.6 Conclusion ..................................................................................... 212

6.2 Reforms of EU import VAT and customs procedures in 2021............................ 213

6.2.1 Diminish VAT fraud: Import VAT for all commercial low-value

consignments ................................................................................. 213

6.2.2 Enhancing security and safety of postal imports: ICS 2 ........................ 218

6.2.3 Conclusion ..................................................................................... 220

6.3 Challenges for designated operators and customs authorities .......................... 222

6.3.1 VAT e-commerce package ................................................................ 223

6.3.2 ICS2 Release 1 ............................................................................... 227

6.4 How are stakeholders preparing for the reforms? ........................................... 231

6.5 Conclusions .............................................................................................. 232

7 CONCLUSIONS AND FUTURE OUTLOOK ................................................................. 237

7.1 Conclusions .............................................................................................. 237

7.2 Future Outlook .......................................................................................... 241

APPENDIX 1: TARGET SYSTEM FORMULAE IN THE 2016 UPU CONVENTION ............... 248

APPENDIX 2: BIBLIOGRAPHY ............................................................................... 256

INTERNATIONAL POSTAL SERVICE, REMUNERATION AND REGULATION [9]

List of figures

Figure 1 Share of individuals purchasing online cross-border (EU-28)..................... 48 Figure 2 Buying behaviour of consumers from national and international online

sellers (2019) ..................................................................................... 49

Figure 3 Origin of most recent cross-border purchase .......................................... 51 Figure 4 Importance of online marketplaces for cross-border purchases ................. 52 Figure 6 E-commerce demand-to-delivery model ................................................. 55

Figure 7 Transport mode cross-compatibility ....................................................... 56

Figure 8 Key rail routes China ± Europe 2020 ...................................................... 57

Figure 9 Key sea emerging routes China ± Europe ............................................... 58

Figure 10 Major e-commerce delivery chain options 2020 ....................................... 59 Figure 11 Trends in international letter post streams (outbound) ............................. 63 Figure 12 Share of postal tonnage for packets between world regions ...................... 64

Figure 13 International postal services 2018 ......................................................... 72

Figure 14 EEA inbound letter post volume by destination terminal dues group,

2018 ................................................................................................. 73

Figure 15 Export and import letter post and DO shares (EEA, 2018) ........................ 75 Figure 16 Export and import letter post per capita (EEA, 2018) ............................... 76 Figure 17 Import letter post and small packets: Region of origin (EEA, 2018) ........... 77 Figure 18 Export letter post and small packets: Region of destination (EEA, 2018) .... 77 Figure 19 Share of packets in total international letter post of DOs, 2013 and

2018 ................................................................................................. 78

Figure 20 Perceived competition for import and export small packets (E-format) and parcels by NRAs ............................................................................ 80

Figure 21 Importance of USPs in B2C deliveries .................................................... 81

Figure 22 Basic models for the import of international e-commerce consignments ..... 83

operators ........................................................................................... 85

operators ........................................................................................... 89

Figure 26 Number of ETOEs per designated operator of EEA Member States and

Switzerland ........................................................................................ 90

Figure 27 Spring: PostNL Gateway to Europe ........................................................ 92

Figure 33 Cap and floor rates for E-format items, 2016 Convention ........................ 123 Figure 34 Allocation of global letter post flows by pairs of terminal dues groups ....... 155 INTERNATIONAL POSTAL SERVICE, REMUNERATION AND REGULATION [10] Figure 35 Allocation of global E-format flows by pairs of terminal dues groups ......... 156 Figure 36 Outbound letter post volume, 2018 (WIK model) ................................... 160 Figure 37 PG-format: terminal dues v. 70% domestic postage, 2020 ...................... 163 Figure 38 E-format: regular terminal dues v. 70% domestic postage, 2020 ............. 164 Figure 39 EEA inbound letter post: terminal dues v 70% domestic postage, 2020 .... 165 Figure 40 Estimated undercharges for EEA inbound letter post, 2020-2025 ............. 168 Figure 41 Estimated undercharges for EEA outbound letter post, 2020-2025 ........... 169 Figure 42 Terminal dues for E-format items weighing 158 grams as a percent of equivalent domestic postage by EEA Member State, 2021 - 2025 ............. 170 Figure 43 EEA letter post TDs as a percent of equivalent domestic postage, by UPU TD group, 2020-2025 .................................................................. 171 Figure 44 Inbound TD undercharges by EEA Group I designated operators, by UPC membership, 2020-2025 .............................................................. 172 Figure 45 Estimated undercharges for global inbound letter post, 2020-2025 .......... 173 Figure 46 Estimated undercharges for global outbound letter post, 2020-2025 ........ 174 Figure 47 Example of effects on EU consumers by self-declared rates (China to

EU) .................................................................................................. 176

Figure 48 Comparing effects of import VAT and increases in terminal dues on low-value orders up to ¼22.................................................................. 181 Figure 49 The Global Postal Model for electronic advance data (flowchart) ............... 195 Figure 50 Example of a postal customs procedure ................................................ 199 Figure 51 Expectations of NRAs and DOs regarding the development of international postal volume over the next five years ............................... 244 Figure 52 Target system formula applied to P-format documents ........................... 250 Figure 53 Target system formulae applied to G-format documents ......................... 250 Figure 54 Target system formulae applied to E-format items, 0-500 grams ............. 252 Figure 55 Target system formulae applied to E-format items, 0-2000 grams ........... 253 INTERNATIONAL POSTAL SERVICE, REMUNERATION AND REGULATION [11]

List of tables

Table 1 Overview of survey responses .............................................................. 44

Table 2 Non EU e-commerce cross border market preferences 2018 ..................... 50 Table 3 Key logistics service suppliers by EU Member State, 2020 ........................ 61

Table 4 Distribution of ETOEs in the EEA ........................................................... 79

Table 5 Council of Administration, 2016-2020 ................................................... 103 Table 6 Postal Operations Council, 2016-2020 .................................................. 104

Table 7 Primary acts of the UPU ...................................................................... 106

Table 8 Terminal dues groups, 2016 UPU Convention ......................................... 119 Table 9 Terminal dues cap and floor rates, 2018-2021 (2016 Convention) ............ 121 Table 10 Countries adopting self-declared rates for delivery of E-format items,

2021 ................................................................................................ 131

Table 11 Normal and self-declared terminal dues 2021 for a 158-gram E-format item as percentage of domestic postage for similar services .................... 132 Table 12 Proposed terminal dues cap and floor rates, 2022-2025 (2020

Convention) ...................................................................................... 136

Table 13 Proposed terminal dues, 2022-2025: thresholds .................................... 137 Table 14 Effect of terminal dues in an exchange of items between A and B ............. 146 Table 15 Effects of terminal for net exporters and importers ................................. 147 Table 16 Model: effects of terminal dues on EEA designated operators, 2020 .......... 167 Table 17 Volume data (2018) for modelling effects on EEA e-retailers and

consumers ........................................................................................ 177

Table 18 Model 1: Examples for illustrating effects on EEA consumers ordering online from China / Hong Kong ............................................................ 178 Table 19 Model 2: Examples for illustrating effects on EEA e-retailers .................... 178 Table 20 Potential effects on consumers ordering online from China / Hong Kong.... 180 Table 22 Percentage of imported small packets by accompanied type of customsquotesdbs_dbs13.pdfusesText_19

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