Development of case law involving customs disputes over the inclusion of royalties and "agent VAT" in customs value

9 August 2022
Tax Messenger
On 3 August 2022 the Moscow Arbitration Court adopted a ruling on case No. A40−33 892/2022, which involved a dispute over whether royalties for the right to use trademarks in business activities and amounts of VAT on royalties paid by an importer as a tax agent should be included in the customs value of imported goods.

The trial court upheld the importer’s claims in full.
Facts of the case

A Russian importer (“the Company”) imported various kinds of trademarked goods into Russia under foreign trade contracts with related suppliers.

The Company was licensed to use the trademarks under a licensing agreement with a foreign licensor which is part of the same corporate group as the Company.

The licensing agreement divides licence fees up according to how the rights conferred are used: (1) payments for the use of trademarks in relation to goods purchased for sale in Russia (“Royalties 1”); (2) payments for the use of trademarks in business activities not related to goods purchased for sale in Russia (“Royalties 2”).

The Company included Royalties 1 in the customs value of goods but did not include Royalties 2 in the customs value of goods.
The customs authority carried out an in-house customs audit of the Company as a result of which it concluded that Royalties 2 and also amounts of VAT paid by the Company as a tax agent on Royalties 1 and Royalties 2 should be included in the customs value of imported goods. See the flowchart below for more details.
Believing the customs authority’s decisions to be unlawful, the Company appealed to an arbitration court.
The court’s position

The arbitration court agreed with the Company’s arguments, giving the following reasoning for its decision:

Inclusion of royalties in the customs value of goods
  • The licensing agreement explicitly divides the scope of trademark rights conferred by setting separate fees for each type of use of rights and describing the scope of rights in each case.
  • It is obvious from a literal reading of the provisions in question that Royalties 1 are directly related to the Goods since they are paid for the right to use the TM on the Goods in carrying out particular activities that will enable the Goods to be sold in the territory of Russia. In the case of Royalties 2, not only are they not directly connected with the importation of the Goods, but the agreement specifically excludes the use of the TM in activities supporting the sale of the Goods in the territory of Russia.
  • The exercise of the scope of rights for which Royalties 2 are paid is not dependent on what goods and what quantity of goods are imported by the Company.
  • Irrespective of the quantity and qualitative characteristics of imported goods and irrespective of whether or not any goods are imported, the Company may carry out advertising and marketing activities and activities involving the preparation of required documentation in the territory of Russia and use the rights conferred in carrying out those activities.
  • There is no rule in current customs law which states that if a rights holder grants a package of various rights to use intellectual property and the royalty payable for one such right is included in the customs value of imported goods, then royalties paid for the remaining rights must also automatically be included in the customs value of those goods.

Inclusion of amounts of VAT paid by the Company as a tax agent
  • The list of additions to price established by Article 40 of the EAEU Customs Code is exhaustive: no other expenses incurred by a buyer, including payments made for particular services provided by the seller, should be included in the customs value of imported goods. It is not acceptable to apply an expansive interpretation of those provisions.
  • It is not specifically provided in clause 1 of Article 39 and Article 40 of the EAEU Customs Code that the custom value of imported goods must include amounts of taxes paid on royalties in the importing country. In the absence of a specific requirement for the customs value of imported goods to include amounts of VAT paid on royalties in the importing country, imposing additional charges of this kind is contrary to customs law.
  • VAT is a form of collection to the budget of a part of added value and is added to the prices (tariffs) at which goods (work, services) are sold. It follows that VAT on the payments in question should not be included in the customs value of imported goods.
  • Including VAT on the royalty payments in question in the customs value of goods would lead to a situation whereby one and the same amount of VAT on the payments is first paid and reclaimed in internal commerce (the licensing of the trademarks) and is then taken into account in calculating input VAT in external commerce (the importation of goods).
Current trends

This ruling continues the positive trend in court decisions on disputes over the inclusion in customs value of royalties paid or payable for the right to use IP in activities not related to goods in general or to the importation of goods in particular. A similar approach was supported by all three court instances in cases Nos. A09-1751/2021 and A09-1129/2021.

It should also be noted that the ruling continues the emerging positive stance to the effect that there are no grounds for amounts of VAT paid by an importer (licensee) as a tax agent to be included in the customs value of imported goods. That approach has already been confirmed by trial court rulings on cases Nos. A40−286 907/2021, A40−4727/2022, A40−10 498/2022, A40−3225/2022 and by appellate court rulings on cases Nos. A56−114 310/2021 and A40−3225/2022.
How we can help

  • Assessing whether royalties and other intra-group payments and taxes paid by a company as a tax agent should be included in customs value and what risks might arise.
  • Formulating recommendations on modifying the provisions of licensing and other intra-group agreements to minimise adverse legal consequences.
  • Preparing a legal position to support the non-inclusion of royalties and other intra-group payments in the customs value of goods.
  • Developing approaches to the inclusion of royalties and other intra-group payments in the structure of customs value (including analysing whether the mechanism of deferred determination of customs value could be applied).
  • Providing support with the inclusion of royalties 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 in customs value.
  • Representing your company’s interests in the pre-litigation and litigation stages of appealing against decisions of customs authorities.

  • Inna Elisanova
    Global trade and Customs
  • Vladislava Gritskova
    Global trade and Customs
  • Ekaterina Mazurova
    Global trade and Customs
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