2023 case law on the question of the inclusion of royalties and dividends in the customs value of imported goods. A new round of hearings on the case involving Bershka CIS LLC
23 May 2023
Tax Messenger
Tax Messenger
At the end of 2022 the Russian Supreme Court ordered retrials of three cases with positive outcomes for importers: No. А40−20 125/2021 (Chanel LLC), No. А09−1129/2021 (Pull and Bear CIS LLC) and No. А09−1751/2021 (Bershka CIS LLC), triggering changes in the way arbitration courts approached customs disputes over the inclusion of (i) royalties and (ii) dividends in the customs value of imported goods.
Since that time, two concurrent trends have been observed: (i) higher courts are ordering the review of cases previously settled in favour of companies involved in foreign trade; (ii) most decisions now go against importers.
In April 2023, in a new round of hearings on case No. A09/1751/2021 (Bershka CIS LLC), the trial court rejected the importer’s claims for the invalidation of the customs office’s decisions requiring the inclusion of royalties and dividends in customs value.
Details of the grounds for the court’s decision are presented later in this alert.
Summary of the circumstances of the case involving Bershka CIS LLC
Since that time, two concurrent trends have been observed: (i) higher courts are ordering the review of cases previously settled in favour of companies involved in foreign trade; (ii) most decisions now go against importers.
In April 2023, in a new round of hearings on case No. A09/1751/2021 (Bershka CIS LLC), the trial court rejected the importer’s claims for the invalidation of the customs office’s decisions requiring the inclusion of royalties and dividends in customs value.
Details of the grounds for the court’s decision are presented later in this alert.
Summary of the circumstances of the case involving Bershka CIS LLC
Subject of the dispute
Decisions of the customs authority requiring the inclusion of (i) royalties and (ii) dividends in customs value.
Royalties
Licensing structure
The importer is authorised to use the following IP assets under a franchising agreement:
- trademarks for display on goods (which the Importer included in the customs value);
- know-how about the organisation of effective trade in retail stores, a brand name, software and a website (which were not included in the customs value) («Other IP Assets»).
Arguments of the customs office in requiring royalties to be included in customs value
- The company only imports goods (it does not carry on any manufacturing activities), which proves that all the IP assets relate to the imported goods.
- The fact that the licensor is related to the suppliers and the Importer (the licensee) in the situation concerned is a sufficient basis for royalties to be included in customs value. The arrangements imply that all IP assets are to be used together with the goods.
Dividends
Structure of payment of dividends
The Importer paid dividends to its shareholder, which was also the supplier of part of the goods.
Arguments of the customs office in requiring dividends to be included in customs value
- The dividends represent that part of income which accrues directly or indirectly to the seller (in accordance with clause 1, subsection 3 of Article 40 of the EAEU Customs Code).
- The dividend payment relates to the imported goods and the supply of goods is conditional upon the payment of the dividends, since the Importer did not purchase goods from unrelated suppliers and the dividend payment serves as consideration for the goods.
Outcome of the dispute
Outcome of the dispute in the first round of hearings
The Importer’s claims were upheld by all three court instances. However, the Supreme Court overturned the decisions of the lower courts and ordered the case to be retried.
Position of the Supreme Court in the first round of hearings
In the retrial, the Supreme Court calls for additional factors to be considered and evaluated in relation to both elements of the dispute.
In particular, with regard to the dispute concerning royalties, it is essential to consider:
With regard to the dispute concerning dividends, it is essential to:
In particular, with regard to the dispute concerning royalties, it is essential to consider:
- the economic value of the IP assets transferred;
- the risk of the manipulation of elements of customs value;
- the obligation of the parties to a transaction to comply with intra-group rules on trading activities.
With regard to the dispute concerning dividends, it is essential to:
- consider the risk of the joint manipulation of elements of customs value by the Importer and the seller (a shareholder of the Importer);
- evaluate that risk through the disclosure of information about pricing.
Outcome of the dispute in the new round of hearings
On 24 April 2023 the trial court in the new round of hearings rejected the Importer’s claims.
The position of the trial court in the new round of hearings
The trial court in the new round of hearings on the case involving Bershka CIS LLC rejected the Importer’s claims for the invalidation of the customs authority’s decisions on the following grounds:
The trial court in the new round of hearings on the case involving Bershka CIS LLC rejected the Importer’s claims for the invalidation of the customs authority’s decisions on the following grounds:
Matter 1. Royalties
- Royalties for the Other IP Assets relate to the imported goods since the Other IP Assets are specifically intended to be used to create a particular commercial format for the promotion of goods of a particular brand (the Importer does not import goods of other brands, nor does it purchase them locally or manufacture them internally).
- The licensor, being at the same time the seller, can control the manufacture and supply by other group entities of other goods of the same brand by virtue of its position at the top of the vertical hierarchy of the integrated group.
- The Other IP Assets are indeed intended to give the enterprise a distinct identity and are used in business administration. However, since the Importer’s activities consist exclusively in distributing imported branded goods, there is no scope for them to be sold for distribution in Russia without the payment of royalties.
- The Importer was unable to provide pricing information in relation to the goods, provided no evidence that the goods were available to all other entities at the same prices and failed to provide seller price-lists.
- The activities of companies of the group of which the Importer forms part are focused on selling imported goods and managing sales outlets, including administrative processes related to sales and personnel.
Matter 2. Dividends
- In essence, the dividends constitute a means for the seller to receive a due portion of the Importer’s income (revenue) from the sale of imported goods in the territory of Russia, and that is the function they perform in relations between the parties to the foreign trade contract*.
- The Importer and the shareholder (seller) are related entities*.
- Prices for the goods are set by means of transfer pricing.
- The Importer was unable to provide complete and accurate information to show that pricing was based on an arm’s length mechanism.
- Thus, the payments in question, «which are referred to as dividends but are such only in form», relate to the imported goods and are included in their customs value on the basis of clause 1, subsection 3 of Article 40 of the EAEU Customs Code*.
*These arguments are also supported by the trial court in the new round of hearings on case No. А40−20 125/21−145−141 (Chanel LLC) (Decision of Moscow Arbitration Court of 15.05.2023).
Evaluation of the decision of the trial court on case No. А09−1751/2021 (Bershka CIS LLC)
The trial court’s decision creates more dilemmas than it gives answers to the questions indicated by the Supreme Court as requiring further consideration and evaluation.
For example, the trial court does not give a reasoned explanation as to how the additional aspects indicated by the Supreme Court should be assessed. In particular, it does not explain what is meant by the term «manipulation of elements of customs value» and how it should be interpreted. This phrase is used only once in the court’s decision by way of quoting the Supreme Court.
It may be deduced from an analysis of the court’s position that the question of the risk of the «manipulation of elements of customs value» was examined by assessing indications that the relationship between the parties affected the pricing of transactions. However, it must be asked on what basis the court undertook to consider this aspect given that, judging from the case file, the customs authority, which bears the burden of proof, did not examine this matter at all during its inspection.
For instance, the court asserts that the importer failed to prove that no «manipulation of elements of customs value» had occurred. Much more important, however, is the fact that the court’s decision contains no indication that the customs authority has proved the contrary.
Also of interest is the occurrence throughout the text of the court’s decision of quotations from decisions made by other courts on other disputes, including references to the Importer (which, it will be recalled, is a major retailer) importing components and carrying out manufacturing activities involving the assembly of automobile products in the territory of Russia.
It is too soon at present to speak of the future outlook for disputes regarding the inclusion of royalties and dividends in the customs value of imported goods. We are continuing to monitor developments not only in the three key disputes — cases No. А40−20 125/2021 (Chanel LLC), No. А09−1129/2021 (Pull and Bear LLC) and No. А09−1751/2021 (Bershka CIS LLC) — but in almost a hundred other cases on the same subject. We will keep you fully updated.
Evaluation of the decision of the trial court on case No. А09−1751/2021 (Bershka CIS LLC)
The trial court’s decision creates more dilemmas than it gives answers to the questions indicated by the Supreme Court as requiring further consideration and evaluation.
For example, the trial court does not give a reasoned explanation as to how the additional aspects indicated by the Supreme Court should be assessed. In particular, it does not explain what is meant by the term «manipulation of elements of customs value» and how it should be interpreted. This phrase is used only once in the court’s decision by way of quoting the Supreme Court.
It may be deduced from an analysis of the court’s position that the question of the risk of the «manipulation of elements of customs value» was examined by assessing indications that the relationship between the parties affected the pricing of transactions. However, it must be asked on what basis the court undertook to consider this aspect given that, judging from the case file, the customs authority, which bears the burden of proof, did not examine this matter at all during its inspection.
For instance, the court asserts that the importer failed to prove that no «manipulation of elements of customs value» had occurred. Much more important, however, is the fact that the court’s decision contains no indication that the customs authority has proved the contrary.
Also of interest is the occurrence throughout the text of the court’s decision of quotations from decisions made by other courts on other disputes, including references to the Importer (which, it will be recalled, is a major retailer) importing components and carrying out manufacturing activities involving the assembly of automobile products in the territory of Russia.
It is too soon at present to speak of the future outlook for disputes regarding the inclusion of royalties and dividends in the customs value of imported goods. We are continuing to monitor developments not only in the three key disputes — cases No. А40−20 125/2021 (Chanel LLC), No. А09−1129/2021 (Pull and Bear LLC) and No. А09−1751/2021 (Bershka CIS LLC) — but in almost a hundred other cases on the same subject. We will keep you fully updated.
How can we help?
- Assessing the appropriateness and risk of the inclusion of royalties, other intra-group payments and dividends in the customs value of imported goods. Providing recommendations and strategies to minimise risks.
- Preparing a legal defence for a company’s stance in not including royalties or other intra-group payments, withholding VAT and dividends in customs value.
- Amending the provisions of licensing agreements and other intra-group agreements for the purpose of minimising adverse legal consequences.
- Providing support in relation to the inclusion of royalties and other intra-group payments in customs value (including the preparation of amendments to goods declarations).
- Full or partial support during customs inspections on the matter of the inclusion of royalties, other intra-group payments and dividends in customs value.
- Arranging private meetings with customs authorities on the matters concerned.
- Representing your company’s interests in the pre-litigation and litigation stages of appeals.
Authors:
- Alexandra GorokhovaManagerGlobal trade and Customs
- Vladislava GritskovaAssistant ManagerGlobal trade and Customs
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