Customs Valuation, Related Party Transaction and Royalty and Licence Fee
October 15, 2008 | BY
clpstaff &clp articles &Zhaokang JiangSandler, Travis & [email protected] the corporate world, a different customs value report by the importer of record results…
Zhaokang Jiang
Sandler, Travis & Rosenberg
[email protected]
For the corporate world, a different customs value report by the importer of record results in different customs revenue and internal tax liabilities and capital flow. On the other hand, governments may take advantage of customs valuations in order to increase the importer's duty liabilities for revenue purposes. In developing countries, understanding and supporting procedures for customs valuation are technical and legal challenges that arise for the government and the international trade community. This is particularly true if customs valuation involves related party transactions or other technical issues such as royalties and license fees, which are the focus for customs valuation in Asian countries.
WTO rules emphasise that customs value should be based on the actual value of the imported goods or like goods. Generally, the customs value of all merchandise exported to a country of importation will be the transaction value, price actually paid or payable, for the goods. If the transaction value cannot be used and found, then certain secondary bases are considered in order of precedence: transaction value of identical merchandise; transaction value of similar merchandise; deductive value; and computed value. The order of precedence of the last two values can be reversed if the importer requests.
The transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the country of importation, plus amounts for the items such as packing costs, selling commission and assistance value if they are not already included in the price. The cost of insurance and freight for shipping the goods from the export seller to the first port of entry of the country of importation shall be included under certain circumstances. However, the amount for the following items shall be excluded from the price actually paid or payable: the cost, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the goods from the country of exportation to the place of importation if the country of importation requires that FOB shall be the transaction value term for customs valuation purpose; any reasonable cost or charges incurred for: constructing, erecting, assembling, maintaining, or providing technical assistance with respect to the goods after importation into the country of importation; transporting the goods after importation; and the customs duties and other taxes, including any excise tax, for which sellers in the country of importation are ordinarily liable.
If any of the following limitations are present, then the transaction value cannot be used as the customs value, and the next basis of value will be considered: restrictions on the disposition or use of the merchandise; conditions for which a value cannot be determined; proceeds of any subsequent resale, disposal or use of the merchandise, accruing to the seller, for which an appropriate adjustment to transaction value cannot be made; and related party transactions where the transaction value is not acceptable.
Related Party Transactions
Importers must establish and declare the value of imported goods on an entry-by-entry basis and there are detailed legislative rules for establishing that value. The transaction value between related parties is only conditionally acceptable. If the relationship between the buyer and seller does not influence the price actually paid or payable, the transaction value is “acceptable”. Examining the circumstances of the sale will help make this determination. Alternatively, “acceptable” can also mean that the transaction value of the imported merchandise closely approximates one of the following test values, provided these values relate to merchandise exported to the country of importation at or about the same time as the imported merchandise: the transaction value of identical merchandise or of similar merchandise in sales to unrelated buyers in the country of importation and the deductive value or computed value for identical merchandise or similar merchandise. The test values are used for comparison only – they do not form a substitute of valuation. The importer's dilemma is to demonstrate the absence of influence or that the price meets a particular test value. Many customs authorities have made it clear that transfer price studies for income tax purposes, or even APAs, are not determinative of the acceptability of transfer prices for customs purposes.
Royalty or License Fee
According to the international agreement and the national laws, any royalty or licence fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the country of importation shall be adjusted and added to the transaction value. While the general rules are simple, the implementation of these rules varies in different countries, especially for “as a condition of the sale”, “related to the imported merchandise” and it is even more difficult to argue the case when it involves a related party transaction.
In conclusion, the trade community and government both need to have sound process to ensure customs valuation rules are applied appropriately.
Sandler, Travis & Rosenberg
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