[Abstract] In recent years, Customs has increased the voluntary declaration obligation for enterprises on the tax-related elements of commodities such as royalties, requiring them to declare voluntarily and confirm the payment of royalties at the declaration of imports, and subsequently conduct a series of special investigations and Customs checks and inspection on royalties. Given the complicated trade arrangement of royalties in international trade, many enterprises are confused about whether the relevant fees are taxable royalties and whether they should declare to the Customs when importing. Based on this, the notes briefly introduce relevant regulations on royalties that Customs pay attention to when determining the dutiable value, and give compliance advice for the reference of enterprises.
[Keywords] Customs Determination of Dutiable Value, Royalties, Compliance Advice
I. Royalties in the Customs price review
Economic globalization and specialization in the division of labor have intertwined tangible goods, technology trade and service trade in modern international trade. The process of importing goods often involves various types of concessions that are closely related to the import, manufacture, sale or use of goods, in particular the growing number of transnational corporations, which further complicates and exacerbates such problems. Since 2016, Customs has strengthened the supervision over the royalties in the determination of dutiable value by standardizing Customs declarations and issuing announcements.
According to the Measures of the PRC Customs on Determination of Dutiable Value for Imports and Exports, royalties shall mean fees paid by the buyer of imports to an intellectual property rights holder or persons duly authorized by the rights holder for licensing or transfer of patent rights, trademark rights, proprietary technologies, copyrights, distribution rights, or selling rights.
The main basis for Customs to levy the royalties is the Regulations of the People’s Republic of China on Import and Export Duties (Decree No. 392 of the State Council of the People's Republic of China), Measures of the PRC Customs on Determination of Dutiable Value for Imports and Exports (General Administration of Customs Order No. 213 hereinafter referred to as the "Measures" ) and relevant announcements issued by the General Administration of Customs. The above provisions clearly stipulate the conditions and standards for Customs to levy royalties.
II. Royalties that may be included in dutiable value of imports
According to Article 51 of the Measures, the types of concessions include patent rights or proprietary technology, trademark rights, copyrights, distribution rights, selling rights, or other similar rights.
(I) Patent Rights
According to the Patent Law of the People's Republic of China (Revised in 2020), patented invention-creation means invention, utility model, or design. Patent rights are granted in accordance with legal procedures and protected by law on the condition that the technology is disclosed to the public after examination by relevant state department.
(II) Proprietary Technology
According to Article 51 of the Measures, “proprietary technology” shall mean undisclosed workflow, formula, product design, quality control, testing and knowledge, experience, methods, and know-how of marketing management, etc, in the form of drawings, models, technical information, and norms, etc. According to the provisions of Article 9 of the Law of the People's Republic of China Against Unfair Competition on commercial secrets, that is, commercial secrets shall mean commercial information such as technical information and business information, which is not known to the public and has commercial value and for which the rights holder has adopted the corresponding confidentiality measures. In practice, the concept of proprietary technology can be basically equivalent to commercial secrets and usually corresponds to the term “Know-how” in international trade.
(III) Trademark Rights
Trademark is used to distinguish the producers or providers of goods and services, its core function is to facilitate relevant public identification. According to the Trademark Law of the People's Republic of China (Revised in 2019), text, graphics, alphabets, numbers, three-dimensional mark, color combination and sound, etc, and a combination of the aforesaid elements, may be registered as a trademark.
According to the Copyright Law of the People's Republic of China (Revised in 2020), literary, artistic and scientific works enjoy copyright. The copyright royalties of graphic works and model works, such as engineering design plan, product design plan, map, and schematic diagram, are more likely to be the target of Customs tax collection.
(V) Distribution Rights, Selling Rights, or Other Similar Rights.
We can generally understand distribution rights and selling rights as the qualification to engage in certain sales, such as agency, wholesale, retail, franchise, etc.
1.In addition to the types of intellectual property stipulated in the above-mentioned Measures, other types of intellectual property not listed are not included in the tax scope of the Customs royalties, such as plant varieties, layout designs of integrated circuits, trade name rights, etc.
2. In practice, enterprises pay royalties externally, and there are various project names to be paid, such as, technology entry fee, technology transfer fee, technical service fee, technical support fee, promotion support fee, etc. Many of them do not indicate the nature of royalties from the name, but as long as the trade substance meets the aforementioned circumstances, it is also a taxable royalty, which will be included in the determination of dutiable value by Customs.
III. Conditions for Customs to impose duties on royalties
Not all royalties shall be taxed, and Customs will only include royalties in the dutiable value and levy tax when specified conditions are met. To be specific, when Customs examines and determines the dutiable value of imports based on the transacted price, if the royalties are not included in the actual and payable price of the goods, the royalties will be included in the dutiable value and levied tax if the following conditions are met.
(I) Royalties shall be related to the imports. Considering the complex relationship between the goods and the rights, the Measures stipulates how to determine the relationship according to the different types of rights:
1.Royalties for the right to use patent rights or proprietary technologies and the imports fall under any of the following categories:
(1) inclusive of a patent or proprietary technology;
(2) manufactured using a patented method or proprietary technology; or
(3) specially designed or manufactured for the implementation of a patent or proprietary technology;
2 Royalties for trademark rights and the imports fall under any of the following categories:
(1) attached with a trademark;
(2) attached with a trademark following importation and can be sold directly; or
(3) attached with trademark rights at the time of importation and can be sold following the attaching of a trademark after mild processing;
3. Royalties for copyright and imports fall under any of the following categories:
(1) imports which include software, text, tunes, pictures, images, or other similar contents, including magnetic tape, magnetic disc, laser disc, or other similar media formats; or
(2) imports which include copyrighted contents of others; and
4. Royalties for distribution rights, selling rights, or other similar rights and the imports fall under any of the following categories:
(1) can be sold directly following importation; or
(2) can be sold following mild processing.
(II) The payment of such royalties shall constitute a criterion for sale of the goods within the territory of China. As to what constitutes the sale of goods, Customs stipulates that the buyer cannot purchase the imports without paying the royalties, or the goods cannot be traded on the terms of the contract if the buyer does not pay the royalties, it shall be deemed as a criterion for sale of the goods.
IV. Compliance advice for enterprises
In recent years, many clients have successively sought help for special investigations and Customs checks and inspections on royalties. It should be reminded that such special investigations, especially Customs checks and inspections are usually conducted by the Customs after risk analysis and the acquisition of certain information or evidence. Enterprises must actively cooperate and be cautious in handling such investigations, so as not to delay the opportunity or respond improperly, which may lead to increased losses.
(I) Compliance is the cornerstone of enterprise management
Customs supervision advocates law-abiding convenience and punishment for violations of the law. In recent years, Customs has carried out a series of facilitation of reforms centering on the “Streamlining Administration, Instituting Decentralization and Improving Regulation and Services”, and introduced many supporting measures and systems to standardize and guarantee the compliance of enterprises. The compliant operation, becoming AEO certified enterprise of Customs, and maintaining a good record in the Customs enterprise credit management system is not only a prerequisite for import and export enterprises to enjoy a lot of preferential and convenient measures but also a powerful gold-drawing signboard and credit card in the competition of domestic and foreign market. Although the royalties are complex and hidden, with the improvement of the Customs risk management measures and technology, the strengthening of information sharing and law enforcement assistance between Customs and different law enforcement departments, Customs has become more and more effective in supervising transfer pricing, royalties and other valuation areas. For Enterprises that hope for long-term healthy development, keep in mind that compliance management is the source of foundation, and do not covet for short-term profits, and do not take chances and hope that you won’t be inspected.
(II) Master the rules in response to change
As mentioned above, with the development of international trade, the transaction arrangement of royalties have become more complex, whether and how such fees are taxed is also a difficult issue for Customs law enforcement. In daily management, enterprises should consciously conduct in-depth research on the basis of Customs price inspection and Customs law enforcement cases, find out the ideas and standards of Customs royalties tax collection, enhance their understanding of relevant rules, accumulate and archive data and information in real-time, so as to be able to claim own views with reasonable grounds in the future when communicating with the Customs.
(III) Pay attention to the accumulation of documentary evidence in case of Customs inspection
In the examination of the royalties, especially for some large-scale reviews involving multinational companies, key industries and other entities, the Customs generally conducts a comprehensive examination based on documents and evidence materials and from the essence of the enterprise trade. For example, for the licensing contract, the contents of the contract, the payment terms, the concession of the license, the liability for breach of contract and other clauses are often the key of review. For licensing rights, the review often focuses on the list of rights and their contents, patent documents, technical details of the patent, etc. This requires enterprises to do a good job in organizing and archiving their documents and materials when business occurs, and being able to fully verify and compare when Customs investigates the situation, and submit supporting materials to Customs promptly that will benefit the enterprises’ claims. For example, when determining which part of the royalties of which goods should be taxed, Customs can accept objective and quantifiable methods of accounting and reasonable apportionment in accordance with generally accepted accounting principles. If the enterprise can provide favorable evidence to support its view, this will greatly increase the chances of the claim being accepted by Customs.
(IV) Actively cooperate with Customs enforcement and seek assistance when necessary
As mentioned above, once a special investigation or inspection is initiated, Customs is often prepared, so enterprises must actively cooperate and be cautious. They can take measures both internally and externally to comply with the law. In terms of internal compliance, the company immediately organize personnel in Customs, finance, production, procurement, sales, technology and equipment management to conduct a demonstration study, focusing on whether the relevant royalties should be taxed in light of the actual situation of imported goods, international trade and enterprise financial data. Externally, in view of the complexity and professionalism of the issue of Customs valuation of royalties, it is suggested to consult or invite lawyers to intervene promptly for compliance review, risk assessment and response.
1.Since March 2016, Customs has increased the obligation of enterprises to take the initiative to declare regarding royalties, requiring enterprises to take the initiative to declare the confirmation of payment of royalties at the time of Customs declaration of imports. Since then, Customs has increasingly conducted special investigations and Customs checks and inspection on royalties, and these movements all convey the signal that Customs is strengthening its supervision of royalty inspection.
2. When royalties are subject to Customs inspection, enterprises need to first grasp and understand the Customs regulations and standards on royalties, and conduct a systematic review and self-examination from the perspective of compliance, in order to identify and resolve compliance risks at an early stage.
3. If Customs initiates an investigation or inspection of the royalties, enterprises should pay close attention to the issue, in addition to conducting an internal compliance review, consult or seek the intervention of a lawyer as soon as possible to avoid delaying opportunities and expanding losses.