Valuation pre- and post UCC - From First Sale and Royalties to Assists

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In

accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or

equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.

© 2015 Baker & McKenzie LLP

Jennifer Revis, Of Counsel,

Baker & McKenzie LLP (London)

Valuation Pre and Post UCC from First

Sale and Royalties to Assists

8th Advanced Forum on Customs Compliance: Held in

Partnership with HMRC

Tuesday 17 November 2015


Agenda

2

• Earlier sale (also referred to as ‘first sale’)

• Royalties and licence fees

• Simplifications

• Dealing with provisional values

• Assists

© 2015 Baker & McKenzie LLPDM Ref:

Basic Rule | Transaction value (Method 1)

3

The customs value of imported goods shall be the

transaction value, that is, the price actually paid or payable for the

goods when sold for export to the customs territory of the

Community, adjusted, where necessary, in accordance with Articles

32 and 33““

– Art. 29(1) CC

Transaction value preferred to other methods of valuation where there

is a sale and certain requirements are met, including:

buyer and seller are not related and, if they are, the

transaction value is still acceptable“

“


Basic rule| What items should be added?

Additions to the “price actually paid or payable” (where not already

included in the price): (Article 32 CC)

1. commissions and brokerage (exc. buying commission)

2. cost of containers / packing

3. materials, components, tools, dies, engineering, development, plans,

sketches etc. (“assists”) – supplied by buyer to seller free of charge or

at a reduced cost

4. royalties and licence fees - condition of sale

5. proceeds of subsequent sale accruing to seller

6. delivery costs i.e. transport/insurance/loading and handling charges to

the place of introduction into the EU

4


Basic rule| What items can be left out?

Not added to “price actually paid or payable” where shown

separately on invoice: (Article 33 CC)

1. transport after arrival at place of introduction in EU

2. charge for construction, maintenance etc. after importation

3. interests under financing arrangement

4. charges for right to reproduce in EU

5. buying commission

6. import duties

5

Earlier sale


Current legislation | Earlier sale

• Where a sale is one of a chain of sales that leads to the introduction of

the goods into EU, then the importer may elect to use any sale within

that chain as the customs value

• There are a number of conditions to fulfil before the earlier sale can be

used

• Must be a sale of the goods

• Sale must be a sale “for export to the EU” (within the meaning of

Commentary No. 7 of EU Customs Code Committee)

• Importer (declarant) must be able to attest to the value of the

earlier sale in the same way that he can attest to the value of the

final sale

7


Current legislation | Earlier sale

8

Both Sale 1 and Sale 2 could constitute a “sale for export”

Using Sale 1, the amount used for customs purposes is 25% lower (and

excludes the parent’s costs and margin)

OEM

(China)

Parent

(US)

EU

retailer

EU

distributor

Sale 1

75

Sale 2

100

Physical delivery


UCC (IA) | New definition of transaction value

9

• Definition provided for “transaction value” (Article 128) states:

• “The transaction value (…) shall be determined at the time of

acceptance of the customs declaration on the basis of the sale

occurring immediately before the goods were brought into [the

EU]”

• Special provision relating to goods sold while in Temporary

Storage or while placed under a special procedure other than

internal transit, end-use or outward processing


UCC (IA) | New definition of transaction value

10

• What does “sale occurring immediately before the

goods were brought into [the EU]” mean?

• No definition of what is meant by “sale” in customs legislation

• Will timing of title transfer and/or payment be determinative?

• What about the time of when the

order is placed?

• Does it matter on whose behalf the

import declaration is filed?

• Commission’s aim is to remove “earlier sale”


UCC (IA) | Impact of the removal of earlier sale (1)

11

Higher customs value

Other possible impact: TP/ TP adjustments; royalties/ licence fees

Mexico USA EU

USA EU

£90

Customs Value

£110

£110

Customs Value

Before

After


UCC (IA) | Impact of the removal of earlier

sale (2)

12

USAGerman

entityUK entity

Customs Value

Customs Value?

Before

After

EU end

Customer

USAGerman

entityUK entity

EU end

Customer

• Customs value based on sales between EU entities? (Unifert ECJ case (C-

11/89) – transaction value takes no account of the place of establishment of

the parties to the contract of sale)

• Consider impact of removals from Temporary Storage and customs

procedures


UCC (IA) | Guidelines; Transitional measures

13

• Wording has been amended but remains unclear. Expect valuation

guidelines will be issued providing examples of how these rules are to

be applied

• Transitional Article (Article 341) applies until 31 December 2017

• No prior agreement from HMRC required

• Importer / declarant must be bound by a contract clearly specifying

a start date

• Contract should make reference to the earlier sales agreement, but

need not specify the value of each expected shipment or

consignment

• Contract must be in place before the entry into force of the

Implementing Regulation (20 days after its publication in the Official

Journal)


Independent

Manufacturer

XYZ Sales Co

XYZ Sourcing Co

(Agent)

Sourcing, Quality

Control, etc.

Buying Commission

(Sale 2 minus Sale 1?)

Sale

Independent

Manufacturer

XYZ Sourcing Co

importing into the EU*

XYZ Sales Co

Customer

Sale 1

Sale 2

Sale 3

* if not established in the EU, using a

customs agent acting as indirect

representative

Alternative Supply Chains?

14

Royalties / licence fees


Current Legislation | Royalties and Licence fees

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Royalties and licence fees are to be included in the value for customs duty

where:

• they are a condition of sale of the goods; and

• are related to the imported goods

If royalty is in respect of right to use a trademark, following conditions must

also be met:

• The goods must be resold in the same state

• The goods are marketed under the trademark affixed

• The buyer is not free to obtain the goods from other suppliers unrelated to the seller

http://www.google.nl/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=9dDX0_ZPahO_XM&tbnid=fs74-fZ55gqXRM:&ved=0CAUQjRw&url=http://www.knowthemusicbiz.com/category/week-in-review/&ei=lBp5UqvUIMqb0AWfioHoAw&psig=AFQjCNFmwh1zWD73nUD2oQDHko-x6cSdog&ust=1383753645683549

http://www.google.nl/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&docid=9dDX0_ZPahO_XM&tbnid=fs74-fZ55gqXRM:&ved=0CAUQjRw&url=http://www.knowthemusicbiz.com/category/week-in-review/&ei=lBp5UqvUIMqb0AWfioHoAw&psig=AFQjCNFmwh1zWD73nUD2oQDHko-x6cSdog&ust=1383753645683549


Current Legislation | Royalties and Licence fees (2)

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Even if sales contract does not explicitly require buyer to make

these payments, it can be an implicit condition of sale, if buyer

cannot buy goods from seller without this payment

Country of residence of recipient of payment is irrelevant

Where buyer pays royalties or licence fees to seller of goods

imported – highly likely that royalties or licence fees are dutiable



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Royalties payable to a third party will be dutiable where the seller or

person related to him requires the buyer to make that payment

(Article 160 CCIP)

‘Related’ also includes ‘control’, Commentary 11 EU Customs Code

Committee

Planning options in correlation with ‘earlier sale’



19

Licensor charges

Royalties

Export of the manufactured

goods to the EU

Examples of controls exerted by the Licensor over the Manufacturer:

• sourcing of materials and components used in manufacturing process

• characteristics of goods and technology used

• clients of the Manufacturer for exported goods

• selling price of exported goods

• Manufacturer’s accounting records


Current Legislation | Royalties and Earlier Sale

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• Earlier sale: customs value is Price 1

• Royalties payment is not CoS: seller is

not related to XYZ Intellectual Property

• Last Sale: customs value is Price 2

• Royalties payment is CoS: seller is

related to XYZ Intellectual Property


UCC (IA) | Royalties / Licence Fees (1)

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• Royalties are deemed to be related to the goods when

rights transferred are embodied in the goods

• Method of calculation is generally not a factor. If the

royalty is based on the price of the imported goods, it can

be assumed that it is related to the goods (same as

current legislation)

• Condition of sale has been redefined – broader (see next

slide). Introduction of a catch-up all provision (condition

(c)) – more closely aligned with WCO Commentary 25.1)



22

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

Royalties and licence fees are considered

to be paid as a condition of sale for the

imported goods when any of the following

conditions is met:

a. the seller or a person related to the

seller requires the buyer to make this

payment

b. the payment by the buyer is made to

satisfy an obligation of the seller, in

accordance with contractual obligations

c. the goods cannot be sold to, or

purchased by, the buyer without

payment of the royalties or license fees

to a licensor

Currently (Art. 160 IPCC): New wording (Art. 136 IA):



• Broader definition of “condition of sale” will bring more agreements into the

duty calculations, particularly situations where payment is made to a third

party licensor

• Under current rules, royalties/ licence fees would only be dutiable if

“control” by licensor over seller could be demonstrated e.g. quality control

is not enough to show control

• No longer a requirement under proposed legislation – royalties/ licence

fees dutiable irrespective of “control” so long as goods cannot be sold

or purchased without payment of royalties/ licence fees – SIGNIFICANT

CHANGE WHICH WILL HAVE MAJOR IMPACT

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Anticipated Impact:



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• No separate conditions for trademark royalties so if they are a condition of sale and

relate to the goods, they are dutiable

• Guidance received so far from HMRC is that if royalty / licence fee is due, it is up to the

importer to prove that this should not be included in the customs value

• Expect:

• Difficulties in challenging that a royalty/ licence fee is not a “condition of sale”

• Think about apportionment – does the royalty/ licence fee only relate to imported

goods or does it also relate to services?

• Can royalty/ licence fee be calculated at the time of import? If not, alter this?

• Communication needed within company to identify dutiable charges

Anticipated Impact:

Simplifications


Pre and post UCC | Simplifications

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• The customs authorities may authorise that certain amounts be

determined on the basis of specific criteria, where they are not

quantifiable on the date on which the customs declaration is accepted

• Fixed adjustment rate agreed with Customs - applied to each import to

reflect the potential uplift in the customs value due to the later

payment made for the goods. No need for later reconciliation

Simplification (Art. 73 UCC)


Pre and post UCC | Simplifications (2)

27

• Pre UCC – only available for additions / deductions under Art. 32 and

33 of the Customs Code (e.g. royalties and licence fees)

• Post UCC – available for transaction value as well (e.g. provisional

price)


UCC | Conditions for obtaining simplification

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Art. 71 (DA)

• application of the ‘Simplified declaration’ procedure would, in the

circumstances, represent disproportioned administrative costs

• the customs value determined, will not significantly differ from that

determined in the absence of an authorisation

• applicant meets compliance criteria for AEOC; acceptable accounting

system; and suitable administrative organisation and internal controls

Dealing with provisional

values


Pre and post UCC | How to deal with provisional

value at time of import

30

1. Simplification

2. Incomplete declaration / simplified declaration – time limits?

3. Prior agreement with Customs – declare entries as final at the time of

import and reconcile at a later date

• Currently available in the UK

• No clear legal basis for this

• Unclear whether applicant will need to meet similar criteria for this

post UCC as for simplifications


Pre and post UCC | Transfer pricing adjustments

example

HealthCo Limited (a UK company) imports products into the UK from its direct US parent,

HealthCo Inc.

Total value of imports at the time of importation is EUR 100,000

Applicable duty rate is 10%

At the end of the financial year, HealthCo Inc. determines the margins its global subsidiaries

should be making

HC Inc.

(US)

HC Ltd

(UK)

EUR 100,000

A

B

Two alternatives:

A: HealthCo Limited’s margin is lowered and it pays an additional EUR 20,000 to HC Inc.

B: HealthCo Limited’s margin is raised and it receives a refund of EUR 20,000 from HC Inc.

31


Pre and post UCC | Transfer pricing adjustments

example (cont’d)

1. Can transfer prices (TP) be used as a basis for customs value?

2. If so, what is impact of retrospective TP adjustments?

HealthCo Limited’s margin is raised and

it receives a refund of EUR 20,000

• Duty payable is 10% of 80,000 =

EUR 8,000

• Potential overpayment claim

• HMRC likely to require a line-by-line

adjustment illustration and evidence

of transfer pricing agreements in

force at time of import

HealthCo Limited’s margin is lowered

and it pays an additional EUR 20,000 to

HC Inc.

• Duty payable is 10% of 120,000 =

EUR 12,000

• Underpayment of EUR 2,000 in

customs duty plus additional VAT

NB: Import VAT consequences?

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Assists


Pre and post UCC | Assists

“The value, apportioned as appropriate, of the following goods and

services where supplied directly or indirectly by the buyer free of charge

or at reduced cost for use in connection with the production and sale for

export of the imported goods, to the extent that such value has not been

included in the price actually paid or payable:

1. materials, components, parts and similar items incorporated in the

imported goods,

2. tools, dies, moulds and similar items used in the production of the

imported goods,

3. materials consumed in the production of the imported goods,

4. engineering, development, artwork, design work, and plans and

sketches undertaken elsewhere than in the Community and

necessary for the production of the imported goods”34


How to reconcile customs value

Apportionment can get very complicated, but possible savings opportunities...

Apportionment

• What types of costs are dutiable?

• Exclude costs incurred in EU

• Only costs relating to goods imported into the EU are dutiable

• Apportionment is permitted based on the generally accepted accounting

principles of the importing country (e.g. quantity imported vs. worldwide

production)

35

Where importer is part of group of companies, not unusual for parent company to seek to recover R&D costs through “cost sharing” arrangement


Example 1 | Assists

• China Steel Co. manufactures steel products for UK Construct Ltd using a

mould provided by UK Construct Ltd

• UK Construct Ltd provides the mould free of charge

• The mould is valued at EUR 25,000 and can be used to make 100,000

products

• China Steel Co. produces the first batch of 5,000 products and supplies these

to UK Construct Ltd on CIF Southampton terms

• Applicable duty rate is 5%

China Steel

Co.

UK Construct

Ltd

5,000 products:

EUR 50,000

Mould (EUR 25,000, makes 100,000 products)

36


Example 1 | Assists (cont’d)

Value of the mould must be reflected in the value declared for customs purposes when goods imported to the UK

Three options:

China Steel Co. UK Construct Ltd

5,000 products:

EUR 50,000

Mould (EUR 25,000, makes 100,000 products)

Pay duty on products + one-

off payment for total value of

mould

• 50,000 + 25,000 @ 5% =

EUR 3,750

• Provides for certainty

(particularly for

accountancy purposes)

Pay duty on products +

apportioned value of mould

(paid in respect of each

import transaction)

• 50,000 +

(25,000/100,000 x 5,000)

@ 5% = EUR 2,562.50

• Benefit from flexibility

(e.g., if you move the

mould to another

supplier)

Pay duty on products +

agree in advance with HMRC

to reconcile apportioned

value of mould on an annual

basis

37


Example 2 | Assists

US Parent Co.

Brazilian

Subsidiary

Indian

Manufacturer

UK

Subsidiary

product

flows

payment

Payment towards

Group’s R&D costs

Machinery +

Components +

designs

Responsible for research,

development, brands etc. Payment towards

Group’s R&D costs

payment

product flows

38


Example 2 | Assists (cont’d)

• How do we go about including the R&D costs/machinery in the

customs valuation of an individual product imported by UK

subsidiary?

• What benefit does UK subsidiary obtain for its R&D payment?

Remember that not all of the elements are necessarily

dutiable (e.g. marketing costs)

• US parent co. is also supplying machinery (assists)

to India manufacturing co. – assists used in the

production of the imported goods and so

value needs to be attributed to them

for customs purposes

39


Any Questions

40

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In

accordance with the common terminology used in professional service organisations, reference to a "partner" means a person who is a partner, or

equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.


Jennifer Revis, Of Counsel,

Baker & McKenzie LLP (London)

Valuation Pre and Post UCC from First

Sale and Royalties to Assists

8th Advanced Forum on Customs Compliance: Held in

Partnership with HMRC

Tuesday 17 November 2015

Law

Valuation pre- and post UCC - From First Sale and Royalties to Assists