Court clarifies conditions for including IP licence fees in customs value of imported goods
A September 28 2015 decision by the Florence Tax Court of Appeal – whose grounds were released in January 2016 – established an important principle regarding the relevance of licence fees for IP rights when estimating the customs value of goods manufactured for a licensee by another party outside the European Union.
Facts
The case involved Monnalisa Spa, an Italian clothing company and the Italian licensee for the use of Disney characters on items of apparel, some of which are manufactured in China. The court upheld Monnalisa’s argument that the amount it paid in royalties was not relevant when estimating the financial value of goods it imported, as they were manufactured for it by a foreign party. However, in previous similar cases local Italian Customs Agency offices had argued that royalties should be included when calculating the customs value of imported goods. The decision in the Monnalisa case drew on a local measure granted by the Prato Customs Agency which was later cancelled by the Prato Tax Court of first instance.
Decision
The Florence Tax Court of Appeal’s decision was consistent with EU customs law. Article 32(c) of EU Regulation 2913/92 (ie, the applicable version of the Community Customs Code) states that:
“In determining the customs value under Article 29, there shall be added to the price actually paid or payable for the imported goods … c) royalties and licence fees related to the goods being valued that the buyer must pay, either directly or indirectly, as a condition of sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.”
Conversely, Article 157 of EU Regulation 2454/93 (which implements EU Regulation 2913/92) states that a royalty or licence fee will be added to the price paid or payable only when the payment “is related to the goods being valued, and – constitutes a condition of sale of those goods”. This point is specified in Articles 159 and 160, which state that:
“A royalty or licence fee in respect of the right to use a trade mark is only to be added to the price actually paid or payable for the imported goods where: – the royalty or licence fee refers to goods which are resold in the same state or which are subject only to minor processing after importation; – the goods are marketed under the trade mark, affixed before or after importation, for which the royalty or licence fee is paid; and
– the buyer is not free to obtain such goods from other suppliers unrelated to the seller. “Article 160 further states that “when the buyer pays royalties or licence fees to a third party, the conditions provided for in Article 157 (2) shall not be considered as met unless the seller or a person related to him requires the buyer to make that payment”.
With regard to these standards, the Customs Code Committee has clarified that:
“The question to be answered in this context is whether the seller would be prepared to sell the goods without the payment of a royalty or licence fee. The condition may be explicit or implicit. In the majority of cases it will be specified in the licence agreement whether the sale of the imported goods is conditional upon payment of a royalty or licence fee. It is not however essential that it should be so stipulated.”
The November 30 2012 Revenue Agency circular (Customs Value – Royalty and Licence Fee – Guidelines) added that the licensor must be able to exercise in law or in fact “compulsion or guidance power” over the manufacturer or supplier to prevent the latter “from selling the goods if the buyer does not pay royalties”. The circular therefore specifies that only “a combination of elements, which go beyond mere quality controls, show that there is a relationship pursuant to Article 143, paragraph No. 1, letter e) of the DAC [ie, the Provisions implementing the Community Customs Code] and that the payment of license rights is a condition of sale in accordance with Article 160”.
In order to exclude the possibility that royalties were due, the decision also considered the fact that pursuant to the licence agreement in question, royalties were payable only for goods sold by the licensee and not for their production.
Comment
The decision clarified a controversial issue and underlined the importance of drafting licence agreements correctly; parties should consider customs-related issues when drafting licence agreements.