KPMG Trade & Customs professionals will discuss this guidance in a September 10 webinar. Read more information about the September 10 webinar.
The facts examined in Advisory Opinion 4.15 are as follows:
- An importer in one country enters into a license agreement with licensor established in another country.
- The agreement provides that the importer must pay to the licensor for the right to use its trademark in connection with manufacture and importation of the goods, a royalty consisting of a fixed percentage calculated on the net income obtained from sales in the importer’s country of the products bearing such trademark.
- If the importer fails to pay the royalty, the licensor will have the right to terminate the agreement.
- Both parties are related under the terms of the valuation agreement.
Under a second agreement:
- The licensor signed a supply agreement with a manufacturing company (M) in country X in order for M to manufacture the goods bearing its trademark and then to sell them to the importer.
- Under this agreement, M must follow the specifications relating to quality, design and technology provided by the licensor.
- The agreement specifically states that M undertakes to produce and to sell products with this trademark exclusively to the importer or to other companies determined by licensor. Company M is not related to either party.
The importer enters into a sales contract with M under which M sells to the importer goods bearing the trademark of the licensor. There is no requirement in that contract to pay the corresponding royalty. The price actually paid by the importer to M for the imported goods does not include the royalty payable from the importer to the licensor.
Is the payment of the royalty from the importer to the licensor a condition of sale of the goods that the importer purchases from supplier M, and is this royalty related to the goods being valued?
Advisory Opinion 4.15
The WCO Technical Committee on Customs Valuation concluded:
Because the imported goods bear the trademark of the licensor, it can be stated that the royalties in question are related to the goods being valued.
Under the supply agreement, the licensor controls the production relating to the goods bearing its trademark by authorizing the manufacture of the licensed goods, determining which companies M may sell to, and directly providing the designs and technology for manufacturer M. Since the licensor authorizes the importer to use the trademark in connection with the manufacture and importation of the goods pursuant to the provisions of the license agreement, the licensor further influences and controls the transaction between M and importer by selecting what party may use the trademark and purchase the imported goods.
The sales contract between M and importer does not contain any clause requiring payment of a royalty. However, payment of the royalty is made as a condition of sale of the goods, because the importer would not be able to buy them if it failed to make that payment to the licensor. Nonpayment of the royalty would cause not only the termination of the license agreement but also the withdrawal of the authorization given to M to manufacture and sell to the importer the goods bearing such trademark.
The advisory opinion concludes that the royalties in question, therefore, are to be added to the price actually paid or payable for the goods under Article 8.1(c) of the Agreement.
KPMG Trade & Customs professionals Andrew Siciliano and Todd Smith will discuss during a September 2013 webinar the effects of the recent advisory opinion as well as the following topics:
- How to assess whether royalties and license fees are dutiable or not
- How to properly value U.S. imports, taking into account dutiable royalties and license fees
- How to establish the requisite internal controls and procedures so that customs compliance and duty savings program will stand up to global Customs scrutiny
Read more information about the September 10 webinar.
For more information, contact a professional with KPMG’s Trade & Customs practice:
John L. McLoughlin
Todd R. Smith
Luis A. Abad
Or your local KPMG Trade & Customs professional.