Computation of royalties to be considered when determining customs value under the new Customs Code of Ukraine
We avail ourselves of this opportunity to express to you assurances of our highest consideration and deem it necessary to bring to your attention the outline of the novelties, envisaged by the Customs Code of Ukraine as of 13.03.2012 No. 4495-VI (hereinafter referred to as the “Customs Code”) concerning the inclusion of royalties (license payments) to the customs value of goods.
The methods of assessment of the customs value of the goods, imported to the customs territory of Ukraine, and the procedure of their application are regulated by Chapter 9 of the Customs Code.
In the same way as before, the main method of assessment of the customs value is the transaction value method (estimation by the contractual price of the goods imported) (Article 57 of the Customs Code).
The general rule on addition of expenses on royalty payments (license payments) to the price of goods is stipulated in subpara.3 of para.10 of Article 58 of the Customs Code and remained almost unchanged in comparison with what was envisaged by the previous Customs Code. Thus, royalty and other license payments shall be added to the contractual price provided that they are related to the goods being valued and are paid by the buyer directly or indirectly as a condition of sale of such goods and unless such payments are already included to the contractual price.
In the same manner as before, the Customs Code itself does not provide for any explanations on the indicators to be followed while determining whether royalties (license payments) are related to the goods being valued and whether they are a condition of sale of such goods. In other words, this issue still triggers ambiguity.
At the same time, the Customs Code provides for an important novelty in this sphere – at last there is an attempt to regulate the situations when at the moment of importation the amount of royalties (license payments) that shall be included into the customs value is unknown. Partially these questions are regulated by the Customs Code itself by setting forth the mechanism of additional declaring with the use of the new type of declarations.
The obligation to elaborate the procedure of inclusion of royalties and license payments to the contractual price has been assigned by the Customs Code to the Cabinet of Ministers.
In pursuance of Article 58 of the Customs Code, the Cabinet of Ministers has issued the Order on including the amount of the royalties and other license payments to the price which is actually paid or is to be paid for the goods being valued during the assessment of their customs value (hereinafter referred to as the “Order”) approved by the Regulation No. 446 of May 21, 2012.
The above mentioned Order provides for the mechanism of adding the amounts of the license payments (royalty) to the price of the goods being valued in two cases:
- when at the moment of the customs clearance the declarant (authorized person) possesses the data on the amount of license payments (royalty);
- when at the moment of customs clearance such information is not available.
In the first case (that is, when the information on the amounts of royalties is available at the moment of customs clearance) no complex questions arises. Thus, the respective amount is considered during the assessment of the customs value of the estimated goods during customs clearance. The new is the requirement, established in the Order, according to which in order to prove the calculation and payment of the royalty amount not only the license agreement shall be submitted but also other available documents verifying the stated values of this element of the customs value.
More interesting is the sequence of actions, envisaged by the Order, for the case where at the moment of customs clearance of the estimated goods the amount of royalty and other license payments is unknown. In such case while assessing the customs value of the goods being valued the declarant (authorized person) accomplishes the calculation of royalties’ amount considering:
- planned data based on the amount of royalties (license payments) paid for identical goods in the previous period if the license agreement stipulates for the payment of royalties and other license payments depending on the received profit;
- estimated figures of the base of royalties (license payments) which is used for evaluating the royalties and other license payments according to the conditions of the license agreement.
Therefore, in accordance with the Order, if at the moment of customs clearance the amount of royalties is unknown due to peculiarities of their calculation, then the planned (estimated) figures are determined for the purposes of customs clearance. The regulator, at the same time, has distinguished the case when royalties (license payments) are calculated depending on the received profit – in this case royalties, paid regarding identical goods in the previous period, are used for customs valuation. In other cases the estimated figures of the base of the royalties (license payments) are used. For instance, if the license payments are calculated depending on the revenue, then the estimated figures of the royalties’ base may be calculated from the prices of goods according to the price-list.
Paragraph 7 of the Order envisages that upon the results of actual payment of royalties (license payments) the additional declaration with adjustment of the customs value of the estimated goods shall be submitted. The declarant or his authorized person shall submit such additional declaration within the terms stipulated by part. 2 of Article 261 of the Customs Code of Ukraine – within 180 days from the goods’ release date.
We draw your attention that according to part 5 of Article 261 of the Customs Code it is allowed to submit one additional declaration with respect to several preliminary, temporary or periodic customs declarations, submitted to one customs authority within one foreign economic activity agreement and one customs regime.
In general, the algorithm, provided by the Customs Code and the Order, is clear. And thus we may conclude that with the adoption of the said acts the issues of declaring royalties (license agreements), which amounts are unknown at the moment of importing, have finally found their regulation at the normative level.
At the same time, the envisaged algorithm also has adverse features. In particular, special attention shall be drawn to provisions of para.9 of the Order, according to which:
“If actual payment of the royalties and license payments is accomplished within the terms exceeding those set up by part two of Article 261 of the Customs Code of Ukraine, the declarant or the authorized person carries out the measures envisaged by Article 50 of the Tax Code of Ukraine“.
In practice this means that in case of actual payment of royalties concerning the goods in more than 180 days after their importation, the rules of the Tax Code on adjustment of the tax return shall be applied. Thus, as it follows from para.50.1 of Article 50 of the Tax Code, the said rules of the Tax Code are established for the cases when the taxpayer discovers the mistakes in the previously submitted tax return. In such case the taxpayer is obliged to send the amendment to such tax return.
Moreover, the rules of Article 50 of the Tax Code also provide that in case of discovery of the understatement of the tax liability, the taxpayer shall submit the amendment and pay the penalty at the rate of 3 % from the understated amount.
Therefore, if according to the conditions of the license agreement royalties may be paid in more than 180 days after importation of goods, then it shall be taken into consideration that according to the Order, discrepancies between declared and actual amount of royalties (license payments) will be considered as a mistake. If such mistake causes understatement of the customs payments (the actual amount of royalties exceeds the declared amount), the fine at the rate of 3% from the amount of understatement shall be applied.
Thus, in order to avoid the 3 % fine one shall either declare the calculated amounts of royalties during importation so that to avoid understatement of actual customs payments or change the conditions of the license agreement (so that the payment of royalties is accomplished within 180 days after importation).
If it turns out that customs payments were actually overpaid, since the actual amounts of royalties were smaller than the ones declared, then the overpaid amounts are returned to the declarant under the procedure, established by the Customs Code.
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.