New instrument on royalties and licence fees
13th June 2018
An important new instrument was finalized at the May 2017 session of the WCO Technical Committee on Customs Valuation (TCCV). The instrument, Advisory Opinion 4.17, deals with a scenario where royalties have been paid by a franchisee to a franchisor for the use of the brands and system connected to the operation of stores under a franchise agreement.
Under Article 8.1(c) of the World Trade Organization’s (WTO) Agreement on Customs Valuation, the Customs value of imported goods should include royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale, to the extent that such royalties and fees are not included in the price paid or payable. Royalties and licence fees may be paid by the buyer either to the seller/licensor or to a third party.
This issue is one of the more complex areas of Customs valuation, and has been widely addressed by delegates attending the TCCV. For example, a previous TCCV instrument – Commentary 25.1 – provides guidance on the interpretation and application of Article 8.1(c) in cases where a royalty or licence fee is paid to a third-party licensor unrelated to the seller.
The case analysed in the Advisory Opinion features Company A (an importer, buyer and franchisee in country I), who entered into a franchise agreement with Company B (an exporter, seller and franchisor in country E) concerning the operation of stores under the brand of Company B in country I.
Under the franchise agreement, Company A may buy the inputs that it must use to manufacture products that will be sold in the stores in country I only from Company B, or from companies authorized by Company B. In addition, Company A may purchase the inputs from third-party suppliers selling at lower prices, where duly authorized by Company B, in order to meet quality requirements.
The question under consideration was whether the royalties paid under the franchise agreement for the imported goods should be added to the price actually paid or payable under Article 8.1(c) of the WTO Agreement on Customs Valuation.
The Advisory Opinion concludes that, as the payment of royalties in this particular case is not related to the imported goods but to the use of the brands and system of the franchisor in the country of importation for the manufacture and sale of products bearing the intellectual property of the franchisor, the royalties are not to be included in the Customs value of the imported goods.
Advisory Opinion 4.17 was approved by the WCO Council in July 2017 and has been published in the WCO Customs Valuation Compendium, which contains all the instruments of the TCCV, including several relating to royalties and licence fees.