In the international trade, the trade arrangement of royalty is becoming more and more complicated, involving a large amount of money, which is related to the vital interests of enterprises. Whether or not the royalty shall be included in the customs value and how to levy it is a difficult point in law enforcement of customs valuation, and it is also a headache for enterprises. In particular, since March 2016, the Customs has increased the obligation of enterprises to voluntarily declare the royalty, requiring enterprises to voluntarily declare and confirm the payment of royalties when declaring imported goods. Since then, the special investigation and audit of the Customs around the royalty have been increasing day by day. These trends all convey the signal that the Customs has strengthened the supervision and control of the royalty. When the royalty meet the customs valuation, the enterprise first needs to master and understand the customs regulations and standards on royalty, and carry out systematic carding and self-examination from the perspective of compliance operation. If the Customs starts the investigation or audit procedures for the royalty in practice, do not hesitate, in addition to the internal compliance review, enterprises should consult or ask lawyer to intervene as soon as possible to avoid missing the opportunity and enlarging the loss. In this paper, we will briefly sort out main provisions of customs royalty, so that enterprises can have a basic understanding of it.
I. What is the royalty in the customs valuation?
Economic globalization and labor division specialization make the tangible goods, technology trade and service trade interweave in modern international trade. In the process of goods import, various types of concessions are often involved. These rights are closely related to the import, manufacturing, sales or use of goods, especially the growing of multinational companies, which makes this situation more complicated. Since around 2016, the Customs has strengthened the supervision on the customs valuation of royalty by standardizing declaration forms and issuing relevant announcements.
According to the Measures of the PRC Customs on Determination of Dutiable Value for Imports and Exports, the royalty 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 the Customs to levy royalty is the Regulations of the People's Republic of China on Import and Export Duties (State Council Order No. 392), 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 the relevant announcements issued by the General Administration of Customs. The above provisions specify the conditions and standards of the Customs to levy royalty definitely.
II. Which types of royalty may be included in the customs value of imports?
According to the provisions of Article 51 of the Measures, the concessions included in duty include patent right or proprietary technology, trademark right, copyright, distribution right, selling right or other similar rights.
(I) Patent rights. According to the Patent Law, patent shall include inventions, utility models and designs. The patent right is based on the condition that the technology is disclosed to the public, and is granted the right according to the legal procedure after being examined by the relevant state authorities and protected by law.
(II) Proprietary technology. According to the 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. Pursuant to the Article 9 of Law of the People’s Republic of China Against Unfair Competition on commercial secrets, 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 is basically equivalent to commercial secrets, and usually corresponds to the term “know how” in international trade.
(III) Trademark right. Trademark is used to distinguish the producer or provider of goods and services, its core role is to facilitate the identification of the relevant public. According to the Trademark Law, 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.
(IV) Copyright. According to the Copyright Law, works include literature, art and natural science enjoy copyright. Among them, the copyright royalty of graphic works and model works such as engineering design plan, product design plan, map, schematic diagram is more likely to be the target of customs tax collection.
(V) Distribution right, selling right, or other similar rights. We can generally understand the right of distribution and selling herein 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 hereinabove in the Measures, other types of intellectual property not listed are not included in the tax scope of customs royalty, such as plant new varieties, design plan of integrated circuits, trade name right, etc.
2.In practice, when enterprises pay royalty, there are many items’ names listed, such as technology introduction fee, technology transfer fee, technology service fee, technology support fee, promotion support fee, etc. Many fees can not be seen the nature of royalty payment from the name. However, as long as the trade nature meets the above situation, it also belongs to the taxable royalty, which will be counted by the Customs when determining the dutiable price.
III. Under what conditions shall the royalty be included in the customs value?
Not all royalties paid shall be dutiable. Only when the specified conditions are met, the Customs will include the royalty into the customs value and levy taxes. Specifically, when the Customs examines and determines the dutiable value of imported goods on the basis of transaction price, where the royalty is not included in the price actually paid and payable of the goods, the royalty shall be included in the customs value and taxed if it meets the following conditions.
(I) The royalty shall be related to the imported products. Considering the complexity of the relationship between goods and concessions, the Measures specifically sets out how to determine the relationship between the aforesaid two as per different types of concessions.
1.royalty for the right to use patent right or proprietary technology 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.royalty for trademark right 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 right at the time of importation and can be sold following the attaching of a trademark after mild processing;
3.royalty for copyright and the 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 format; or
(2) imports which include copyrighted contents of others; and
4.royalty for distribution right, selling right, 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 the royalty constitutes a condition of the sale of such imports into the People’s Republic of China. As to what constitutes a condition of sale, the Customs stipulates that where the buyer cannot purchase the imports without paying the royalty or the goods cannot be delivered on the terms of the contract if the buyer does not pay the royalty, the payment of royalty shall be deemed as a condition of the sale.
IV. What shall enterprises pay attention to in dealing with the issue of customs royalty valuation?
Recently, we have received customers’ feedback that the Customs has carried out special investigation or inspection on enterprise royalties. In our experience, such special investigations, especially the initiation of inspection procedures, are often actions taken by the Customs after risk analysis and mastery of certain information or evidence. Enterprises must actively cooperate and treat with caution, so as to avoid expanding losses due to missing opportunity or improper response. As for the matters needing attention in the customs royalty valuation, our suggestions can be listed as follows :
(I) Compliance is the guiding principle for enterprises operation. Customs supervision advocates the principle of “convenience for law abiding enterprises, punishment for illegal acts”. In recent years, the Customs has carried out a series of facilitation reforms around the “streamlining administration, delegating powers, and improving regulation and services”, and issued many supporting measures and systems to standardize and guarantee the compliance operation of enterprises. Compliance operation, becoming an AEO certified by the Customs with a good record in the credit management system of customs enterprises, is not only a prerequisite for import and export enterprises to enjoy many preferential and convenient measures, but also a powerful and attractive credit card in the domestic and foreign market competition. Although the royalty is complex and hidden, with the improvement of customs risk management means and technology, as well as the strengthening of information sharing and law enforcement mutual assistance between the Customs and different departments, the Customs has become more and more powerful in supervision and inspection of the price examination fields such as transfer pricing and royalty fees. For enterprises that hope to have a long-term and sound development, they shall bear in mind that compliance is the guiding principle for enterprises operation, not be greedy for short-term interests, and hope that it will not be investigated.
(II) Mastering the rules to adapt to the changes. As mentioned above, with the increasing development of international trade, the transaction arrangement of royalty is also more complicated. Whether and how to collect taxes on the fees is also a difficult issue for customs enforcement. In daily operation, enterprises shall consciously conduct in-depth study on the basis of customs valuation and customs law enforcement cases, find out the ideas and standards for the Customs to levy taxes on royalty, enhance their understanding of relevant rules, and accumulate and archive relevant data and information in real time, so as to be able to reasonably advocate their own views when communicating with the Customs in the future.
(III) Accumulating of documentary evidence in case of emergency. The customs examination of royalty, especially for some large-scale entities involving multinational corporations and key industries, are generally based on documentary evidence and proceeding from the essence of enterprise trade. For example, for the license contract, the contract content, payment content, licensed concession, liability for breach of contract and other terms are often the key content of examination. For concession rights, the key points of examination often include the list of rights and their contents, patent documents, technical details of patents, etc. This requires enterprises to do a good job in sorting out and archiving of documents and materials when the business occurs. When the Customs investigate the situation, they can comprehensively verify and compare, and timely submit supporting materials in favor of enterprises to the Customs. For example, when determining which part of the royalty of goods shall be included in customs value, the Customs can accept the objective quantitative method of generally accepted accounting principles for accounting and reasonable apportionment. If enterprises can provide favorable evidence supporting their own views, the probability of enterprises claiming to be accepted by the Customs will be greatly increased.
(IV) Actively cooperating with customs enforcement and seeking help if necessary. As mentioned above, once a special investigation or inspection procedure is launched, the Customs will always be prepared. Enterprises shall cooperate actively and treat it cautiously. Compliance measures can be taken from both internal and external departments to deal with it. In terms of internal compliance response, personnel in customs affairs, finance, production, procurement, sales, technology, equipment management and other positions shall be immediately organized to conduct demonstration and research. Focusing on the actual situation of imported goods, international trade and enterprise financial data to explain to the Customs whether the relevant royalty shall be taxed. Externally, in view of the complexity and professionalism of the customs valuation of royalty, it is recommended to consult or invite lawyers to intervene in compliance review, risk assessment and response.