Tag Archives: Customs valuation

53ird Session of the WTO Technical Committee on Customs Valuation (TCCV): A New Advisory Opinion 4.19 Reinstatement of a royalty remunerating two separate rights

During its 53rd Session held from 18 to 20 October, the WCO Technical Committee on Customs Valuation (TCCV) has adopted Advisory Opinion 4.19 with respect to Royalties and Licenses Fees.

As a reminder, the TCCV is the body responsible for ensuring harmonized implementation of the WTO Agreement on Customs Valuation, and makes technical decisions that are published as instruments in the form of commentaries, cases studies, advisory opinions, explanatory notes or studies. These instruments, although not having binding force of law, are helpful tools for interpreting national rules on customs valuation in countries that have ratified and implemented the WTO Agreement on Customs Valuation, as it is the case in the EU.

Advisory Opinion 4.19 adds to the 19 existing instruments that deal with Royalties and Licence Fees under Article 8.1 (c) of the Customs Valuation Agreement. It deals with the way a single royalty paid in return of two licensed rights (right to use or incorporate a patented imported input in the production of a finished product in the country of importation and right to use a trademark on the finished product) is to be treated for customs valuation purposes.

The opinion concludes that the entire royalty has been reinstated in the value of the input, since the conditions of Article 8.1.c of the Customs Valuation Agreement (i.e., the relationship of the royalty with the input and its payment as a condition of the sale export of the input) are met.

Once officially approved by the WCO Council, this advisory opinion will be published and accessible for consultation.

DS Avocats International Trade and Customs team is an active member of the ICC delegation which attends TCCV sessions as an observer, and is at your disposal to provide you with any additional information.

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Customs valuation: WCO TCCV 52nd session: Adoption of two new advisory opinions

The Technical Committee on Customs Valuation (TCCV) of the World Customs Organization (WCO) examines technical issues arising from the management of Customs valuation systems and publishes opinions providing appropriate solutions to the cases submitted. The TCCV is able to adopt various instruments including Advisory Opinions.

At the 52nd session, which took place from 17 to 19 May 2021, the TCCV finalized two new instruments:

  • Advisory Opinion 24.1 on the valuation treatment of imported goods bearing the buyer’s own trademark: this instrument relates to the valuation treatment of the trademark belonging to the buyer and provided free of charge to the seller for use in connection with the production of the imported goods. According to the TCCV, this circumstance is not by itself one that can lead to the rejection of the transaction value method.
  • Advisory Opinion 4.18 on Royalties and license fees under Article 8.1 (c) of the Agreement: the TCCV gives its opinion on the valuation treatment of the withholding tax deriving from the net royalty paid to the country of importation’s tax authorities in accordance with the terms of the license agreement signed by the importer and the seller, who is also the license holder. The opinion provides the rationale and calculation methodology in order to reintegrate this tax into the value of the goods subject to the license.

DS Avocats is an active member of the ICC delegation which attends TCCV sessions as an observer. The content of these Advisory Opinions will be published at a later date, once they have been approved by the WCO Council but we can yet comment and help grasp the impact of new guidance.

DS Avocats International Trade and Customs team is at your disposal to provide you with any additional information.

CONTACT US :

dscustomsdouane@dsavocats.com

 

The CJEU requalifies royalties paid in consideration of exclusive distribution rights to avoid debate on the relation with the goods’ condition

The Court of Justice of the European Union (hereinafter “CJEU”), in a judgment dated November 19, 2020 (case C 775/19, 5th Avenue), interpreted the conditions for reintegrating, in the customs value of imported goods, royalties paid by a buyer in exchange for the right to exclusively distribute these goods within the territory of the European union.

In this case, “5th Avenue”, a company established in Germany, had concluded an Exclusive Distribution Agreement (hereinafter the “EDA”) with Habanos SA, pursuant to which 5th Avenue was granted the exclusive right to import, sell and distribute in Germany and Austria cigars produced by Habanos SA. In return, 5th Avenue agreed to pay Habanos SA, for a period of four years, an annual amount, qualified as “compensation”, amounting to 25% of the annual revenue resulting from cigar sales in these Member States. Should this compensation constitute an amount that could be reintegrated into the customs value of the imported cigars?

Another limitation of the scope of application of article 71-1-c of the Union Customs Code

First of all, the Court considers, like the European Commission, that this compensation should not be analyzed as a royalty or license fee within the meaning of article 32-1-c of the Community Customs Code (CCC) (newly 71-1-c of the Union Customs Code), but with regard to article 29-1-3 of this code. Indeed, according to the Court, Article 32-1-c of the CCC applies only to royalties paid in consideration of the provision of intellectual property assets. Without debating whether an exclusive distribution right could be qualified as an intellectual property right per se, it is striking to note the restrictive application of article 32-1-c CDC by the CJEU, whereas the wording of the latter merely sets out the conditions for the reinstatement of royalties and license fees, without excluding payments that would not be made in consideration for making available an intellectual property asset.

This restrictive reading is in line with certain positions already taken by the European Commission, and recalled in its latest guidelines of September 17, 2020, which tend to exclude the application of article 32-1-c of the CCC for royalties paid in consideration of the provision of know-how or a production factor. This article, whose dual criteria of relation to the imported goods and condition of sale make the taxation of royalties more difficult, sees its scope of application limited once again. Such interpretation remains valid under the provisions of the UCC, whose article 71-1-c replaces article 31-1-c of the CCC.

In applying article 29-1-3 of the CCC to royalties paid in consideration of an exclusive distribution right, the Court subjected their taxable nature to a single criterion: their payment as a condition of the export sale of imported goods. It is no longer relevant to analyze whether these royalties are related to the latter.

A realistic approach of the condition of the sale which condemns to customs taxation payments made to the seller compensating exclusive distribution rights and calculated on the imported goods’ sales turnover

After having recalled and applied mutatis mutandis its GE Healthcare case law of 2017, although relating to article 32-1-c of the CDC, application of which was excluded in the case under consideration, the Court considers that the condition of sale is fulfilled when the payment is of such importance to the seller that, in the absence of such payment, the latter would not proceed with the sale. In this case, the Court is categorical: since the seller is also the recipient of payments calculated on the turnover of sales of imported goods made in the territory of exclusive distribution, these payments are made as a condition of the export sale of the goods and must be included in their value.

Does this mean that all payments made by a buyer to a seller in return for exclusive distribution rights are subject to customs taxation? Not necessarily. While the position of the Court of Justice may cover a large number of situations, in our opinion, this judgment should be limited to its case. Not all exclusive distribution contracts provide for compensation based on the resale price of the goods, nor do they provide for such compensation to be paid to the sellers of the goods. A work on the drafting of contracts, in order to disconnect as much as possible the compensation and the goods distributed, could prove useful, in order to avoid falling within the scope of this judgment, and to better defend the non-taxation of such payments by customs.

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DS Avocats International Trade and Customs team is at your disposal to provide you with any additional information.

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EU Commission Guidelines on Customs valuation

Removal of reference to domestic sale, role of the purchase order, sales under customs warehouses and treatment of royalties/licence fees 

The European Commission  has published on September 17th 2020 an updated version of its customs valuation guidelines, related to the sale for export, within the meaning of Article 70 UCC and Articles 128 and 347 of the UCC Implementing Regulation, and the dutiability of royalties and license fees under Article 71 UCC and Article 136 of the UCC Implementing Regulation.

The first noticeable change in this guidance is the removal of any reference to the concept of domestic sale (a sale occurring between two EU companies can thus be considered as “the last sale for export”). Such change is consistent with the WTO Customs Valuation Agreement, as reminded by Advisory opinion 14.1 of the WCO Technical Committee on Customs Valuation.

This removal was made necessary since few EU administrations linked domestic sale and domestic movement of goods, meaning that they refused that a sale made between two EU entities served as basis for valuation purposes, even though that sale was accompanied by a cross-border movement of goods. This was causing two main practical issues:

  • In cross trade operations (one physical flow between non-EU Seller A and importer C, with two financial flows between a non-EU Seller A to an EU buyer/reseller B and from an EU buyer/reseller B to EU importer C), importer C never holds the invoice of the sale between A and B. By requesting that invoice to be presented at customs clearance, customs administrations forced importers to declare on the basis of an alternative method. This was particularly problematic for transactions between independent parties, but also to some extent for transactions made between related parties.
  • Customs duties were be paid on the price of the sale between A and B, while VAT was to be paid on the basis of sale between B and C. Reconciliation between the two sales for VAT purposes was a non needed complication.

By removing the concept of domestic sale, the Commission invites all member States to consider a sale made between two EU entities for customs valuation purposes.

In one significant clarification, the Commission stated that a purchase order (PO) cannot serve as the basis for determining the customs value of goods. Not only the transaction price can serve as basis for valuation purposes only when an offer (PO) is formally accepted by the seller, but the invoice should be available at clearance and presented as supporting document. The Commission seems to be willing to grant a central place to the invoice and this point of view regarding the exclusion of PO can be seen as consistent regarding the provisions of the International Vienna agreement on the international sale of goods.

Further important developments on the last sale for export concept were made regarding goods sold under customs warehouses. The Commission has provided some examples of various models involving successive sales of goods under warehouses, identifying which sale was to be seen as the last one for export. It seems that private sector was not properly consulted on these aspects, creating confusion and uncertainty for various models. Also, it appears that Member States are not fully aligned on certain points.

As a matter of illustration, examples 4a, 4b and 7 shown in the guidance describe a situation where an importer could find himself in a place where he is not in possession of the invoice of the sale for export identified by the Commission as the sale of reference and does not know (most of the time) that sale for export price. Transaction value will then not be available, and that importer would need to use an alternative method to clear the goods. But will any of them be relevant?

The comparative method (similar or identical good) will be useful, for example for those that import fungible goods, for which similar/identical goods imported can be easily found. Nevertheless comparison remain difficult for certain categories of goods. Deductive method is, when strictly applied, opened to goods sold in the EU in the condition as imported, and at the first commercial level after importation, to unrelated persons. Three cumulative conditions that render the use of this method very difficult, notably in warehouses were goods are usually (at least) minimally processed and sometimes declared for import following several successive sales. The computed value will be tough to apply in cases where an importer cannot access the invoice for the sale for export, it will not be able to access data on production costs. If those three methods are not relevant, only the fall back one, with all its uncertainty, will remain.

Last point, the guidance provides new examples of situations where royalties and license fees are dutiable. The definition of royalties and license fees was modified compared to the last version, and the following wording was removed: or the use of, or the right to use, industrial, commercial or scientific equipment. We witness an evolution leading to assess, in an increasing number of cases, the inclusion of intangible assets into customs value under article 71-1-b UCC (assists), rather than under article 71-1-c (royalties and licence fees). We have seen situations where the provision of intangible assets (know-how for example) compensated under the form of a license fee was included in the value as an engineering study in the sense of article 71-1-b-iv UCC. Sometimes even under 71-1-b-i UCC, as a material cost. In situations where intangible assets, provided in return of a payment of royalties, are identified as production factors, assessment of their dutiability will be made following article 71-1-b UCC rather than article 71-1-c, whose conditions make it more difficult for administrations to reintegrate in customs value. Case 3 (page 30 of the guidance) shows this new approach, which was underlined in Conclusion n°30 of the EU 2018 Customs Valuation Compendium.

Regarding Case 1, the outcome is in line with recent ECJ cases (GE Healthcare, Curtis Balkans), and with TCCV Commentary 25.1. The trend is, when assessing the payment as condition of the sale criterion, to give more weight to the actual manufacturing and supply organization than to the contractual provisions signed between the seller for export and the buyer.

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The Customs and International Trade team of DS Avocats is at your disposal to provide you with any further information you may require. 

CONTACT US :

dscustomsdouane@dsavocats.com

 

The European Court of Justice confirms the possibility of including in the customs value of a product the cost of an intangible good designed in the EU and made available free of charge to the third party seller by the purchaser

The Court of Justice of the European Union (“ECJ“), in a judgment of 10 September 2020 (BMW Bayerische Motorenwerke AG, case C509/19), interpreted Article 71-1-b of the Union Customs Code (“UCC“) relating to adjustments made to the transaction value.

In this case, the European car manufacturer BMW buys order units from producers in various third countries. BMW owns a software which enables a communication among the applications and the systems of the vehicle included in the control unit. This software, developed in the EU, is provided free of charge to the manufacturers of the control units. In this way, they can ensure that the interaction between the control unit and the software works and understand any errors that might occur during delivery. Those units of commands equipped with the software were then imported by BMW.

For the customs value of the imported order units, BMW indicated the price paid to the sellers but did not include the cost of software development. In the dispute before the ECJ, the referring court wanted to know whether Article 71-1-b UCC allows the economic value of a software developed in the EU and made available to the seller free of charge to be added to the transaction value of the imported goods.

The question is therefore whether intangible goods can be considered as “goods and services (…) supplied directly or indirectly by the buyer free of charge” within the meaning of Article 71- 1-b of the UCC. In response, not only does the Court explicitly include immaterial goods in the definition of points i and iv but it considers that the value regulation allows any immaterial goods to be considered as being capable of constituting a contribution within the meaning of Article 71-1-b (as material costs, engineering and research and development costs, but also as a production tool or material consumed in the production process).

Yet, a careful reading of the value regulation does reveal a difference in the treatment to be accorded to tangible and intangible assets (the latter are subject to additional conditions for reintegration – studies and R&D work, royalties and license fees). Also, while the Court leaves open the question of whether a software is a service or a good, there is little doubt that contributions provided in the form of services can only be analyzed under Article 71-1-b-iv of the UCC.

This decision is part of a more general trend towards increasingly integrating the value of intangible assets into the customs tax base. Nevertheless, the Court’s position could be detrimental to the economic activity of European operators, whose significant costs of research, design and studies carried out on EU territory could be more easily reintegrated into the customs value of the products they import.

The compatibility of this decision with Interpretative Note 7 under Article 8 of the WTO Agreement on Customs Valuation, of which the European regulation is a transposition might be questioned. The Note states that in cases where the production of engineering work (such as a software) involves a number of countries and takes place over a certain period of time, the adjustment should be limited to the value actually added to this item outside the country of importation.

Following this statement, the Court seems to provide us, in what looks like a judgment of principle, the analytical grid of the texts applicable to the reinstatement of immaterial material:

  1. It should first be checked whether the intangible good is ‘necessary for the production of the imported goods’. In this case, reinstatement takes place on the basis of Article 71-1- b-iv of the UCC. Thus, the reinstatement of an intangible material under the visa of Article 71-1-b-i of the UCC is not automatic, and can only be made if the conditions of Article 71-1-b-iv of the UCC are not met.
  2. Failing this, it is a question of looking at whether the good is connected or incorporated and makes it possible to operate or improve the goods produced. If this is the case, the reinstatement of the value of this intangible asset under the terms of Article 71-1-b-i of the UCC is possible.

It is therefore up to the operator to determine how these functionalities are such as to confer on the order units a real value greater than their transaction value, and to determine the said real value with regard to its internal data. Thus, an intangible good such as this software designed by the buyer, which is not commercialized, may have an economic value that must be taken into account for customs value purposes, even thought it doesn’t have any market value. Even when the parties have, by virtue of the principle of freedom of contract, agreed not to attribute any value to this good.

The calculation of the value of such an intangible asset and its allocation to a specified number of goods will be technically complex and will require ever greater precision in the operators’ internal data, on which this calculation will be based.

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The Customs and International Trade team of DS Avocats is at your disposal to provide you with any further information you may require.

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Customs valuation: The CJEU recalls that the reintegration of royalties and license fees paid by a subsidiary to its parent company cannot be automatic

Referred for a preliminary ruling, the Court of Justice of the European Union interpreted, in a judgment of 9 July 2020, Direktor na Teritorialna direktsiya Yugozapadna Agentsiya “Mitnitsi”, case C-76/19, Article 32-1-c of regulation (EEC) 2913/92 establishing the Community customs code (“CCC”), relating to the conditions for reintegrating royalties and license fees into the customs value of imported goods. Although the CCC is no longer in force, the reasoning of the Court remains fully relevant for interpreting the customs valuation rules of the Union Customs Code (“UCC”), applicable since May 1, 2016.

The facts:

The question was twofold:

  • Under what conditions must the 10% royalties paid to the parent company by its subsidiary be reintegrated into the value of the imported parts and elements purchased from third-party suppliers?
  • Insofar as these imported parts and elements are only integrated into a part of the finished products covered by the know-how supply agreement, how to manage the appropriate adjustment of the part of these royalties that can be reintegrated into the value of these parts and elements?

First comment, the Court of Justice clearly affirms that royalties paid in return for the supply of know-how for the purposes of manufacturing finished products in which the imported goods are incorporated, can only be analyzed with regard to the single Article 32-1-c  of the CCC. Important reminder, which could slow down certain attempts (by customs administrations) to requalify, for customs valuation purposes, the fees paid in return for know-how into engineering or R&D costs. In the latter case, the royalties are analyzed on the basis of Article 32-1-b-iv of the CCC, without assessment of the relationship between the royalties and the goods as well as the conditionality of their payment for the sale for export to the EU.

On the relationship between the imported parts and elements and the royalties, the Court makes some interesting developments. After recalling that the method for calculating the royalties is not a relevant element in assessing this relationship, the Court held that the mere fact that a good is incorporated into a finished product is not sufficient to conclude that the royalties, paid in return for the supply of know-how for the manufacture of this finished product, relates to the latter. The relationship must be tighter. It is for example the case where the know-how provided under the license agreement is necessary for the manufacture of the imported good, which is for example, established when the imported goods are specifically designed to be incorporated into the manufactured finished products on the basis of the licensed know-how, without any reasonable alternative use being considered.

With regard to the payment of these royalties as a condition of the sale for export, the Court continues in line with its GE Healthcare judgment of March 2017, adopting an extensive interpretation, based, not on the content of the contracts signed between the licensee and the licensor, but on the balance of power between the parties involved and the commercial dominant position of the licensor,. Thus, even if the contract for the provision of know-how signed between the two companies of the same group does not mention the supply of imported goods, or if that same contract does not specify that the payment of the royalties is necessary for the supply of these parts and elements, the fact that the licensor controls the production chain until the sale of the finished products, is sufficient to recognize this condition of sale. By focusing more on commercial reality than on the legal relationship, the Court follows in the footsteps of the European Commission (Guidelines on Customs Valuation) and the WCO (see for example, comment 25.1 TCCV). In contrast, it differs from the case law recently established in several countries, including the United States (see for example, US CIT, Trimil SA v. United States, December 17, 2019).

In the end, the Court counterbalances a restrictive approach on the concept of relationship between royalties and imported goods, by an extensive interpretation of the condition of the sale. Will this give hope to operators who see, in the drafting of the UCC customs valuation rules, a mechanism implying automatic integration of royalties into the value of imported goods? The Court thereby confirms that it does not tolerate such automatism.

This judgment, without marking a break with existing law, allows the Court to refine its interpretation of the two cumulative conditions for reintegrating royalties into the customs value of goods, in the context of recent changes in the applicable rules introduced by the UCC.

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The Customs and International Trade team of DS Avocats is at your disposal to provide you with any additional information.

CONTACT US :

dscustomsdouane@dsavocats.com

 

WCO advisory opinion on valuation of imported goods purchased in flash sales

by Arnaud Fendler

During its 48th Session held from 13 – 17 May 2019, the WCO Technical Committee on Customs Valuation (TCCV) has adopted Advisory Opinion 23.1 with respect to the valuation of goods purchased in a flash sale.

As a reminder, the TCCV is the body responsible for ensuring harmonized implementation of the WTO Agreement on Customs Valuation, and makes technical decisions that are published as instruments in the form of commentaries, cases studies, advisory opinions, explanatory notes or studies. These instruments, although not having binding force of law, are helpful tools for interpreting national rules on customs valuation in countries that have ratified and implemented the WTO Agreement on Customs Valuation.

The two issues submitted by a member to the TCCV in this Advisory Opinion 23.1 were whether a highly discounted price of goods purchased could be accepted as the basis for customs valuation under Article 1 and whether the discounted price could be used to determine the transaction value of identical or similar goods for which there is no transaction value.

ICC attends with a status of observer. DS Avocats belongs to the ICC Delegation which gives us a better chance to understand the customs approach of complex valuation issues specially in case of new business models.

Here, while some WTO members expressed during the debates their desire to limit this instrument to e-commerce sales, it was eventually decided to also extend it to more traditional sales.

TCCV reaffirmed transaction value as the primary basis of valuation under the Agreement on Implementation of Article VII of the GATT 1994 and concluded that the highly discounted price is acceptable for Customs valuation purposes provided that the provisions of Article 1 are met. On the second issue, TCCV also found that the transaction value in a flash sale may be used when applying Article 2 or Article 3, as the case may be, if all the requirements of these Articles are satisfied (similarities of products, same importing countries, operations of import made at or about the same time, etc.)

Important: This Advisory Opinion will be submitted to the WCO Council for approval at its Sessions of June 2019.

DS Avocats has a strong expertise on customs valuation issues in the most important jurisdictions, EU and non EU.

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