The court’s position
VAT on royalties should not be included in the customs value of imported goods for the following reasons:
- From a tax law perspective, VAT does not affect the core price of a service (tax law views the transfer of licence rights as a service).
Thus, VAT payable to the Russian budget has no bearing on customs matters in terms of the determination of the customs value of imported goods.
- VAT is a form of withdrawal to the budget, not an economic benefit accruing to the licensor.
VAT is an indirect tax (unlike profits tax), i.e., a tax on consumption, which is effectively collected from the buyer of goods (work or services) in addition to the cost of the goods (work, services) being sold and is remitted to the budget by the seller. In other words, VAT is added to the cost of a product and does not form part of the price of the product, which may be considered as economic income/revenue of the licensor.
- According to Article 40(1)(7) of the EAEU Customs Code, royalties are included in the customs value where they are a payment which the buyer must make, directly or indirectly, as a condition of sale of imported goods. However, VAT payable to the Russian budget is not a payment (or part of a payment) required to allow goods to be imported from the country of export.
- At the same time, Article 40(2)(3) of the EAEU Customs Code provides that taxes and levies charged in connection with the importation and sale of goods in the territory of the EAEU (i.e., Russian domestic taxes in the case at hand) should not be included in the customs value of imported goods.
Thus, current customs law does not establish that taxes charged in the country of import (i.e., Russia in the case at issue) should increase or reduce the customs value of imported goods. The customs value should include the amount of the royalty itself which is determined in accordance with the terms of the licensing agreement.
- The importer (licensee) should add VAT to the royalty amount only for the purposes of calculating the tax base for VAT according to Article 161(1) of the Tax Code.
This entails not a change (increase) in the amount of royalties under the licence agreement, but rather the making of an artificial/technical addition to the remuneration solely for the purpose of determining the tax base for VAT and for the purpose of paying VAT.
- Including VAT in the customs value of the imported goods results in tax being charged on tax: (i) withholding VAT is charged on the royalty, after which (ii) import VAT is charged on the customs value of the imported goods which includes that withholding VAT on the royalty.
Furthermore, a situation where VAT on royalties forms part of the royalties themselves (from a civil law standpoint) would also lead to profits tax being paid on VAT (i.e., another instance of the payment of tax on tax).