On 31 January 2017 the Commercial Court of Lipetsk Oblast rendered a decision (the “Decision”) in case No. А36-5326/2016 in which the issue was considered of including royalties payable on a finished product produced within Russia in the customs value of the imported raw materials used to produce the product.
The court stated that royalties should be included in the customs value in such a situation. To substantiate its position the court made the argument that under the license agreement concluded between the rights holder (the seller and manufacturer of the raw materials) of the trademark and the importer there was a condition allowing the rights holder to exercise indirect control over the importer (its activity to produce the finished product), so the payment of royalties was a condition for the sale of the raw materials imported by the importer. The court also pointed out that it was possible to import the raw materials to Russia provided the importer fulfilled and observed the provisions of the license agreement, so royalties were a condition for selling the raw materials and directly related to the imported raw materials.
The Decision described here is thereby consistent with the recently adopted Recommendations of the Collegium of the Eurasian Economic Commission No. 20 of 15 November 2016 (the “Recommendations”), which contain detailed comments on cases of performing one of the conditions for including royalties in the customs value of imported goods: the provision that the payment of royalties must be a condition for sale of the imported goods. We remind readers that royalties must be added to the price of the goods to determine their customs value when all three of the following conditions are met:
- The royalties relate to the imported goods (Condition 1)
- The royalties are directly or indirectly paid to the seller or the third party (Condition 2)
- The payment of royalties is a condition for sale of the imported goods in the transaction between a foreign seller and a Russian buyer (Condition 3)
There have almost never been any questions as to whether the first two conditions (Condition 1 and Condition 2) for including royalties in the customs value of imported goods are met. Condition 1 is met if the imported goods are labeled with a trademark, and Condition 2 is met if the seller (rights holder) or a third party (that is not the seller but is the rights holder) and the Russian customer (importer) of the goods have concluded a license or other similar agreement stipulating that the Russian customer (importer) shall pay royalties. Whether Condition 3 was met was always debatable, but the above-mentioned Recommendations have essentially put an end to debate on that subject. This is because the Recommendations list the circumstances accompanying sale and import of the goods which, if present, show that Condition 3 has been met. Namely:
- The foreign trade contract or other documents related to the sale of the goods containing royalty payment provisions
- The license agreement containing provisions on sale of the imported goods
- The foreign trade contract and/or license agreement containing provisions making it possible to terminate the foreign trade contract if the customer (licensee) fails to pay the rights holder royalties
- The license agreement containing a condition prohibiting the manufacturer (seller) from manufacturing and/or selling goods to the customer that were created using the rights holder’s intellectual property if the rights holder is not paid the relevant fee
- The license agreement containing a condition enabling the rights holder to exercise control over production of the goods or their sale by the manufacturer (seller) to the customer (sale of goods for export to the customs territory of the Union) that would go beyond quality control
In addition, the Recommendations list some practical examples, one of which is similar to the case described here.
Therefore, the issue of including royalties payable depending on the sales volume of a finished product in the customs value of the imported raw materials directly depends on how thoroughly the foreign trade contract and license agreement are elaborated, and on the company’s approach to determining customs value.
The lawyers of Dentons’ Russia Tax and Customs practice offer the full range of legal services in customs law, including, among other services, analysis of the process of how a company determines the customs value of goods, the nature of the company’s business and preparing the arguments to substantiate the declared customs value and represent the company before the customs authorities, including:
- Analyzing the need to include royalties for the right to use intellectual property in the customs value of imported goods
- Analyzing transfer pricing and customs value
- Voluntarily adjusting customs value after goods are released due to the need to make amendments to the goods declaration that affect the amount of customs duties payable
- Analyzing customs value and supporting documents in supply of goods between related parties
- Appealing the decisions, actions or inaction of customs authorities with respect to adjusting the declared customs value of goods, including developing the appeal concept (including the subject of appeal, the court and/or customs authorities, and extending the deadline for filing the appeal or claim)