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HMRC internal manual

Guidance on the Audit of Customs Values

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HM Revenue & Customs
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Royalties and licence fees: valuation treatment

The fact that a royalty is paid by the buyer to the seller is not, however, in itself sufficient reason for assuming that the whole or indeed any part of it is necessarily related to the imported goods and therefore is to be included in the customs value. The aim must be to ensure that any proposals for an addition to the price actually paid or payable are fully supported by relevant facts and based on objective and quantifiable data.

Rights for which royalty or licence fees are paid will vary and may include one or more of those items shown below.

Trademarks

Where the imported goods are only an ingredient or components of goods manufactured in the EC an adjustment in respect of the right to use a trade mark in connection with the goods manufactured in the EC will normally be inappropriate.

Minor processing means activities such as diluting and packaging (Article 158.2 of the CCIP refers). (The list of usual forms of handling in Annex 69 to the CCIP would also qualify as minor processing activities).

With regard to ‘freedom to source’ it is not necessary for the buyer to demonstrate that in practice such goods are obtained from other unrelated suppliers. Providing the buyer can show that there is no obligation to obtain the goods to be valued exclusively from the seller, the freedom to source criterion is satisfied (Article 159 of the CCIP refers).

Royalties for know-how

The importer is often required to pay a royalty or part of a royalty in respect of technical information or ‘know-how’ supplied by the seller. Claims that the royalty or part royalty does not relate to the imported goods may be accepted where it can be established that the particular information or ‘know-how’ has to do with something clearly unrelated to the imported goods and that the amount paid is reasonable having regard to what is supplied. Claims made for exclusion of payments for the provision by the seller to the importer of information necessary to assemble and/or use the goods for the purpose for which they were designed are not acceptable.

Payments made (whether the full royalty or only part) for technical information concerning a process or operation that is specialised in itself, are excludable from the customs value (for example the importer may be able to show that the process could be carried out by similar goods obtained from other suppliers, who manufacture them without specialised information from the licensor or the importer).

Rights of reproduction

Royalty payments for the right to reproduce the imported goods in the EC are excludible from the customs value provided that they are shown separately from the price paid or payable for the goods (Articles 32.5(a) and 33.1(d) of the Code).

Right to dispute

Payments made by a buyer for the right to distribute or resell the imported goods are not to be added to the price actually paid or payable for the imported goods if such payments are not made as a condition of the sale for export to the EC of the goods (Article 32.5(b) of the Code). In the majority of cases such payments are made as a condition of the sale between the seller and buyer and must therefore be included in the customs value under Article 29.3(a) of the Code (Judgement of the High Court in the BSC Footwear Supplies Limited case refers).

Patents

Whether imported goods are completes (including kits for assembly) or sub assemblies, components, parts or ingredients, it must be established wherein lies the right or speciality for which the royalty is paid. The position must be resolved in each individual case on the basis of the best information obtainable.

This will vary considerably in complexity. At one end of the scale will be found the simplest case involving goods imported complete, which incorporate the whole of the speciality value. In such cases the whole of the royalty payments however expressed must be taken into account when determining the customs value. At the other end of the scale, because the imported goods are common place articles having no speciality value and the royalty relates wholly to post-importation operations or added ingredients or components, no part of the royalty is to be included in the customs value.

This also applies where the imported goods are specialised only in the sense that they are made to a specification (for example non-standard sizes of nuts and bolts). If there is any doubt, patent specifications need to be examined.

Research and development

Sometimes the royalty or licence fee is paid to finance research and development costs incurred by the seller as licensor or for the supply of technical information about the use of the imported goods. These costs are usually incurred before any product containing special features is produced commercially. Most, if not all R and D royalty payments are to be included in the value for customs duty providing payment can be related wholly to the imported goods. You can find further guidance on the treatment of research and development costs, that are not the subject of a royalty agreement, see GACV06350.

Calculation of the amount to be added to the invoice price

In general royalties and licence fees are calculated after importation of the goods to be valued. In such cases a percentage adjustment may be agreed with the importer based on results over a representative period and updated regularly (Article 156a of the CCIP refers). When a part only of a royalty payment is held to be includible in the customs value, consultation between the importer and Customs is particularly desirable.

The basis for apportionment of the total payment into dutiable and non dutiable elements can sometimes be found in the licence agreement itself, when for example a 7% total royalty may be specified as representing 3% for patent rights, 2% for marketing know-how and 2% for trademark usage. More often than not, however, the basis for apportionment cannot be so found. The respective values for rights and know-how can at times be established by evaluating the extent to which know-how is transferred or availed of and deducting that sum from the total royalty paid or payable. Also at the joint request of the importer and Customs the licensor may be prepared to indicate an appropriate apportionment based on his own calculations.

Further inspection of correspondence between licensor and licensee, inter office reports of negotiations which preceded the drawing up of the licence agreement or discussion with one of the negotiators of the licence agreement may provide the basis for apportionment when at first sight apportionment may not seem possible.

Assists

A common situation arises whereby the licensor provides the licensee, either directly or indirectly, with drawings, designs or instructions for manufacture of the goods, or computer programs for incorporation outside the EC in memory chips. The drawings etc are passed to the manufacturer so that he can produce the specified items.

It is considered that the items in question are assists under the terms of Article 32.1(b)(iv) of the Code and their cost or value is to be included in the customs value of the imported goods, unless the work involved was undertaken in the EC. WCO Case Studies 8.1 and 8.2 provide examples of royalty or licence fees being treated as ‘assists’. There is also a legal precedent namely ECJ Case C-116/89 (Baywa AG).

Note: Further guidance on the subject of royalties and provided in WCO AO’s 4.1 to 4.13.