Customs Treatment of Related Fees: Tax Planning Under WTO

By Neal Stender & Wang Dong, Coudert Brothers, Hong Kong and Beijing

The newly issued PRC General Administration of Customs Procedures Concerning Imported Goods Royalty Valuation (the Royalty Procedures, effective July 1 2003) are the most recent in a series of regulatory changes that aim to bring PRC law into closer conformity with WTO requirements.¹ The Royalty Procedures provide important details on implementation of the previously issued PRC General Administration of Customs Procedures Regarding Determination of Customs Value of Imported and Exported Goods (the Value Procedures, effective January 1 2002).

The Royalty Procedures detail the criteria for increasing the customs value of imported goods by including not only the goods' purchase price but also certain royalties. "Royalties" are defined to include payments for distribution rights and resale rights, along with patents, trademarks, copyrights and proprietary technology, and "other similar fees".² Royalty payment obligations that are related to and are a condition of sale of goods will be included in the goods' customs value.³ Not included are fees for technical training, overseas inspection and rights to reproduce goods in the PRC, if these fees are listed separately.⁴ Royalties should not be included in goods' customs value unless they are payable by the same PRC buyer and to the same foreign seller as were parties to the goods' sale into the PRC. But it is not always clear which entities the Customs administration will regard as the "buyer" and the "seller" when numerous parties are involved in complex supply chains.