Tax Messenger

Case law on disputes over the inclusion of royalties and withholding VAT in the customs value of goods

09.04.2024

Following the Russian Supreme Court’s rulings on Cases Nos. А09-129/2021 and А09-1751/2021, case law on the issue of the inclusion of royalties in the customs value of goods has changed in favour of the customs authorities.

It should be added that the courts often take a formalistic approach to the hearing of such cases: (1) they do not consider all the facts that should be considered when hearing disputes over the inclusion of royalties in the customs value of imported goods, (2) they ignore evidence showing that the relationship between the seller and the buyer does not affect the price of goods, and (3) they use the conclusions contained in the above-mentioned Supreme Court rulings even when there are substantial differences in the circumstances of the cases concerned.

Exceptions do occur, however. On 21 March 2024, in the second round of hearings on Case No. А56-114310/2021, the Thirteenth Arbitration Appeal Court adopted a ruling in favour of a foreign trade company, overturning the adverse decision of the lower court.

Facts of the case

A Russian importer (“the Importer”) imported food products, dietary supplements, personal hygiene products and other products bearing trademarks of a well-known brand into Russia.
The Importer was a party to a sublicensing agreement and paid royalties for the use of trademarks:
- when importing goods into Russia (“Royalties I”)
- when promoting the brand (“Royalties II”)
The Importer voluntarily included the full amount of Royalties I in the customs value.
The customs authority carried out a desk customs audit, as a result of which it concluded that Royalties II were related to the imported goods and were a condition of sale of the imported goods.

Royalties II are not related to the imported goods	Royalties II are used (1) in administrative activities and (2) for the promotion of trademarks on the market (this directly follows from the sublicensing agreement).
	Neither the foreign trade contracts nor the sublicensing agreement contain provisions regarding activities to be carried out to promote the imported goods.
	The Importer provided evidence that the trademarks had been used in various general-purpose ways not connected with the importation of goods (in managing social media accounts, in marketing activities, etc.).
	The Importer purchases goods with the trademarks in question both from foreign and from Russian sellers (on the domestic market). It follows from this that Royalties II cannot be attributed exclusively to imported goods.
The payment of Royalties II is not a condition of sale of the imported goods (directly or indirectly) in order for them to be exported to the customs territory of the EAEU	The non-payment of Royalties II in 2019 (1) did not make it impossible to purchase the goods under review and (2) did not cause the seller to increase the prices of the imported goods (as is confirmed by the seller’s price lists for the period from 2018 to 2020).
	The Importer only found out about the obligations to pay Royalties II in 2018 after receiving invoices dating to the end of September and the end of December, while goods declared in the 3^rd and 4^th quarters of the same year had already been imported into Russia.
No indication that the transaction parties manipulated value elements	The Importer provided documents confirmingcircumstances surrounding the sale (relating to pricing for the exportation of goods to Russia and for sales within Russia), which is proof that no understatement of the customs value of goods took place. The trial court gave no consideration to these facts.
	The customs authority provided no evidence that it had analysed information on the prices of similar goods or evaluated circumstances surrounding the sale of goods and supporting documents.
Since there were no grounds for Royalties II to be included in the customs value of goods, it follows that amounts of VAT on Royalties II which the Importer withheld as a tax agent should not be included either.
References to the rulings of the Supreme Court of Russia on Cases Nos. А09-1129/2021 and А09-1751/2021 must be rejected since each individual case has specific circumstances relating to the terms on which foreign trade contracts and licensing agreements are concluded and performed, which determine whether or not royalties may be attributed to imported goods.

The case is still ongoing, and the customs authority has the right to appeal against the ruling of the appellate court.

We will monitor the progress of this court case as well as general developments in case law regarding the inclusion of royalties in the customs value of imported goods.

Important!

When preparing to adopt the licensing structure disputed by the customs office, the Importer, aided by our staff, held a meeting with one of the customs offices at which clearance took place and, in answer to its inquiry about the rules for the inclusion of royalties, received a letter stating that (1) there were no grounds for Royalties II to be included in the customs value of goods since the necessary conditions were not met in the specific case concerned, and (2) in general terms, royalties are determined in an amount proportional to the ratio of the value of each item of goods to the total value of goods to which the royalties relate.

Incidentally, the appellate court took the above letter into consideration since it expresses the customs authority’s position regarding the substance of the obligation to pay customs charges.

Outlook

In view of (1) the findings of the Accounts Chamber regarding risks to the budget arising from the small number of audits of low- and medium-risk importers, and (2) the updating of the Federal Customs Service’s target for the collection of customs charges to a new historical high (7.4 trillion rubles), the number of inspections of foreign trade companies, including on the issue of the inclusion of royalties in the customs value of goods, is expected to rise.

We advise importers to make an advance assessment of the risks of the inclusion of royalties in the customs value of goods and to prepare documents showing that no manipulation of elements of customs value occurred, taking into consideration the positions expressed by the courts.

How can we help?

Assessing the appropriateness and risk of the inclusion of royalties, other intra-group payments and dividends in the customs value of imported goods. Providing recommendations and strategies to minimise risks.
Preparing a legal defence for a company’s stance in not including royalties or other intra-group payments, withholding VAT and dividends in customs value.
Amending the provisions of licensing agreements and other intra-group agreements for the purpose of minimising adverse legal consequences.
Providing support in relation to the inclusion of royalties/intra-group payments in customs value (including the preparation of amendments to goods declarations).
Full or partial support during customs inspections on the matter of the inclusion of royalties, other intra-group payments and dividends in customs value.
Arranging private meetings with customs authorities on the matters concerned.
Representing your company’s interests in the pre-litigation and litigation stages of appeals.

AUTHORS

Wilhelmina Shavshina

B1 Partner

Global Trade and Customs, Tax, Law and Business Support. Over 25 years of experience as an expert in customs regulation and global trade. Active involvement in working groups and business platforms

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