Issues relating to customs value have been a common source of questions since work began on legislation. With the customs authorities paying particular attention to whether companies are performing their obligations to pay license fees to intellectual property rights holders, the subject is receiving renewed attention.
As soon as the customs authorities see a trademark listed in customs documents, the question of whether the trademark license fees are included arises automatically.
Practice in disputes concerning whether license fees should be included in the customs value of imported goods is not in favor of companies. This tendency can be seen in the statistics on challenges against customs authority decisions revising customs value, both in court and before higher customs authorities (such as the Federal Customs Service of Russia (FCS)).
At the same time, contractual relations between licensees and rights holders can be complicated where licensees are granted a range of intellectual property rights and not limited to trademark rights alone. A set of rights may include the right to use a trading name, know-how, patents, or rights to other intellectual property, and not include the right to use a trademark.
Disputes arise concerning whether license fees for use of a set of rights should be included in the customs value of imported goods, methods for inclusion, and how to divide license fees into "goods" and "non-goods" elements.
Judicial practice shows that the standard approach should be followed, although the inclusion of license fees in customs value remains one of the most controversial issues in customs enforcement practice.
In accordance with art. 5.1(7) of the Agreement on Determining the Customs Value of Goods Moved Across the Customs Border of the Customs Union, when determining customs value on the basis of the first method (value of transaction with the imported goods), licensee fees and similar payments for use of intellectual property should be added to the price actually paid or payable for the goods, if the said payments:
- relate to the goods being valued (imported);
- are directly or indirectly paid by the purchaser as a condition of sale of such goods;
- are not included in the price actually paid or payable for the said goods.
Neither the official guidance issued by the Federal Customs Service nor existing court decisions provide a clear answer as to the scope of the above conditions.
According to FCS guidance, the first condition for inclusion of license fees in customs value means that license fees apply to imported goods if the imported goods contain intellectual property (in particular, trademarks).
The second condition is usually based on the nature of the relations between the parties irrespective of whether a license fee is paid directly to the supplier of the goods or a third party, as well as whether this condition is provided for in the agreements. In accordance with customs law, all things being equal, license fees should also be added to the price paid or payable if they are provided for in the sale-purchase agreement and/or other documents, which means a license agreement, distributor agreement, subfranchise agreement, and other documents.
The third condition is determined on the basis of the supply agreement (with respect to the price of goods). For example, an agreement may provide that the price of the goods includes payment for use of trademarks, as well as transportation and other expenses.
In accordance with civil law (article 1541 of the Russian Federation Civil Code), a trading name or elements thereof may be used in a trademark belonging to the rights holder. In this case, the trading name included in the trademark is protected irrespective of the trademark protection.
However, in current court practice attempts to separate the rights to use trademarks and trading names have so far not been successful for companies.
This trend is illustrated by the case of Oriflame, where a company used a set of exclusive rights under a subfranchise agreement between the company and the rights holder solely to carry out activities relating to the offer for sale and sale of goods, production of goods, and provision of ancillary services.
According to the terms of the subfranchise agreement, the ancillary services were provided to procure sales of the imported goods, and the company was required to pay the rights holder a license fee for use of the set of exclusive rights, which was calculated as the rights holder’s share in total revenue from the sale of goods. Based on the above circumstances, the court determined that the customs authorities had been right to revise the customs value of the imported goods to include license fees, since the license fees related to the imported goods.
Therefore, it appears that the most promising position is for a company using a set of rights to challenge the additional assessment of license fees by the customs authorities. The amount may be reduced by correctly determining the base for calculation and/or splitting the licensee fees into "goods" and "non-goods" elements.
We are also aware of positive practice of not including license fees for use of commercial information on business practices and sales accounting systems (know-how) in customs value. This position does not usually encounter any resistance from the customs authorities, since know-how is typically used in the country importing the goods (in particular, in Russia), and relates to doing business and/or production in the country importing the goods.
Under article 9 of the Customs Code of the Customs Union, the procedure for challenging decisions or acts/omissions of the customs authorities is governed by the national law of the member states of the Customs Union.
An appeal against a decision or act/omission of the customs authorities may be brought within three months of the day the company learned of the breach of its rights, or the expiration date of the established period in which the customs authority was required by customs law to make the decision. The appeal may be filed with the higher customs authority and/or in court.
If the company chooses to appeal a customs authority decision or act with respect to reducing the customs payments charged, we advise using the right to appeal to the higher customs authority (for example, the FCS). The chances of success will be improved if the company offers its method for including license fees in customs value alongside the appeal.
We are aware of companies that have been successful in defending their position before the FCS of Russia.
In parallel, the company can also consider amending the license agreement and supply agreement.
A license agreement may, for instance, split the license fee into the part paid for use of the trading name with respect to the goods ("goods element"), and the part paid for the right to use the trading name on documentation, printed products, in advertising, a domain name, etc., as well as the right to use know-how that is essentially related to doing business in Russia ("non-goods element").
It is also possible to develop a method of calculating license fees that takes into consideration the nature of the company's business and allows precise calculation of the license fee at the time of customs processing. For example, the "goods element" from the invoiced value of the imported goods, the "non-goods value” out of the marketing budget, profit, product sales value, etc.
Only the portion of the license fee that is paid for use of the intellectual property with respect to the goods in accordance with the license agreement or other such agreement should be included in the customs value, while the license fee for the "non-goods element" should not be included in the customs value.
A number of companies have already made the respective changes to their license agreements and are successfully using them in practice.
We would be happy to propose more detailed language for inclusion in the respective agreements, draft appeals/statements of the claim, submit opinions on the tax consequences of amending the calculation base for license fees, and provide other assistance as needed to implement our proposals.