How to Correctly Value your Imported Products

When goods are imported it is essential that the correct value of the goods is declared. In most cases, this is quite simple as

the value of the goods is the price paid (plus insurance and freight etc). However, this can become a much more complicated issue if the importer is required to pay licences and royalties for the goods. 

We are aware that import valuations are currently being scrutinised by HMRC which can lead to some difficult and protracted discussions and, in some cases, some expensive assessments.  

We’d urge any importer who pays licences and royalties which have not been declared within the import value should review their position now.  

Background 

The WTO Agreement on Customs Valuation stipulates that the value for customs duty purposes must be based, as far as possible, on the transaction value of the imported goods. This means the total price that will be paid for the goods which may include royalties or licence fees which are paid to the supplier or to a third party. 

The WTO rules are followed across the world. In the UK the legislation is included within Taxation (Cross Border Trade) Act 2018 (“TCTA”) and The Customs (Import Duty) (EU Exit) Regulations 2018. Regulation 113 SI 2020/1643.  

HMRC’s guidance on this matter, which is set out in “How to include royalties and licence fees in the customs value” is that:  

Royalties and licence fees payable to the seller need to be included in the customs value if both the following conditions apply:  

• They relate to the imported goods  

• They are paid as a condition of the sale.  

  
  

Royalties are treated as paid as a condition of sale when any of the following conditions apply: 

• The seller or a person related to the seller requires the buyer to make this payment; 

• The payment by the buyer is made to satisfy an obligation of the seller, in accordance with contractual obligations;  

• The goods cannot be sold to, or purchased by, the buyer without payment of the royalties or license fees to a licensor.  

  
  

These conditions must also be followed if you pay a third party, but if payments are made to a person who is not related to the seller, they are only included in the customs value when the seller requires those payments to be made.  On the face of it, the legislation and the guidance are straightforward, however, the application of the rules is more complicated in reality as licensing agreements are not always clear.  

The question of whether a royalty payment is a ‘condition of the sale’, can be difficult to ascertain. The determining factor is whether the buyer is unable to purchase the imported  goods without paying the royalty or license fee.  The term ‘royalties and license fees’ cover in particular, payment for the use of rights relating to:  

• The manufacture of imported goods, such as patents; 

• Designs, models, and manufacturing know-how.  

  
  

Indicators that the payments should be included within the value include situations where:  

• There is a reference to the royalty in the sales agreement or related documents;  

•  There is a reference to the sale in the royalty agreement;  

• The sales or license agreement can be terminated as a consequence of breaching the royalty agreement;  

• The royalty agreement prohibits the production and sale of the goods incorporating the intellectual property if the royalties are not paid;  

  
  

When the buyer pays royalties or license fees to a third party, they are added to the price actually paid or payable only where the seller or a person related to him requires the buyer to make that payment.  

Areas of difficulty include situations where the importer is required to pay a licence fee to a third party before they are able to sell the goods onwards or where the licence for the goods is held by a third party who is the customer of the importer. 

In these circumstances it would seem that the licence or royalty adds value to the goods only after importation, but we have seen situations where HMRC is linking the licence paid to the goods imported.  

Considerations 

This can be a complex area which is coming under increased scrutiny and can be expensive to get wrong.  

If you import goods and if you pay licence fees to the manufacturer or an unrelated party, or if your customer pays royalties or licences, we recommend that you review all contracts and agreements now in order to ensure that the correct valuation has been applied to the imported goods and you do not have a potential exposure.