The various sections of the Customs Code Committee are currently in the process of drafting the Implementing Provisions to the Modernised Customs Code ("MCCIP"). The MCCIP are set to replace the Implementing Provisions to the Community Customs Code ("IPCCC") and are aimed at implementing the changes as set forth in Regulation (EC) No 450/2008 which established the Modernised Customs Code ("MCC").
There are, inter alia, two aspects relating to customs value which are amended by the MCCIP, the first sale for export and the royalty provisions. Please note that the MCCIP have not yet been finalized and amendments may be made to this version of the MCCIP before adoption hereof by the Commission.
First sale for export
The current draft deletes the so-called first sale for export ("FSFE"). Under the current Article 147 of the IPCCC, the customs value of a good may, in a chain of subsequent sales before importation of the good into the European Union ("EU"), be derived from the first sale pursuant to which the good is imported into the EU. For example, the situation where a company located in Viet Nam arranges for the manufacturing of a good there by a local producer, and consequently sells this good to an affiliated company in the EU. If it can be proven that at the time the Vietnamese company ordered the goods from the manufacturer, these goods were already destined for the EU, the price which the Vietnamese company paid to the producer can be used as customs value of the good, instead of the sales price between the Vietnamese company and its affiliate in the EU.
The World Customs Organization ("WCO") has in the past taken a negative approach towards application of the FSFE, noting that such valuation would not include all economic factors relevant to establish the value of the goods. This is why the WCO Technical Committee on Valuation has concluded that the transaction value should be based on the last sale in a chain of sales. With the MCCIP, in their current draft, the views of the WCO are indeed taken into account.
Royalties and licence fees
The rules on whether or not royalties and licence fees should be added to the customs value of a good are also amended in the MCCIP.
Under the IPCCC, royalties and licence fees must not be included in the customs value of a good if they are related to the goods imported and are a condition of sale.
Royalties and licence fees are deemed to be a condition of sale if the seller (in the transaction from which the customs value is derived) or a company related to the seller requires payment of the royalties/licence fees. The payment is deemed to be not related to the goods imported if the royalties and licence fees are due regardless of which supplier/manufacturer the buyer/importer purchases the goods.
The current draft of the MCCIP states that a condition of sale also exists if the goods may not be produced or sold without the royalty being paid directly or indirectly to the licensor. The problem with this criterion is that practically every mark/technology/idea is protected by an intellectual property right such as a patent, trademark, copyright, etc. Using marks/technologies/ideas that are protected in such a way, is prohibited in intellectual property legislation (and is even an offence) unless the owner of the intellectual property right grants permission for the use of that right. And he will only do so once a royalty or licence fee is paid. The consequence hereof is that there will almost always be a condition of sale. It is thus no longer relevant whether it is the buyer or the company related to the buyer that demands payment of the royalties/licence fees.
Royalties and licence fees are, under the current draft of the MCCIP, related to the goods imported if the rights/ideas for which the royalties and licence fees are paid are embodied in those goods. This will quickly be the case, e.g. a Mickey Mouse print on a pair of pyjamas or a device which uses a technology protected by a patent. Whether or not the imported is free to choose the supplier/manufacturer is no longer relevant under the current draft of the MCCIP.
If these two proposals relating to the FSFE and the addition of royalties and licence fees to the customs value of a good are implemented in the final version of the MCCIP, this will result in a substantial increase of duties payable over royalties and licence fees which previously where not dutiable..
The discussion is, however, not yet over. At the latest in June 2013, the MCCIP must be adopted. Several interest groups are currently in the process of lobbying with the European Commission to ensure that these two proposals are not included in the final version of the MCCIP. We assist several clients in these lobbying activities and would gladly take on more companies to protect their interests in the ongoing discussions on the MCCIP.