Update on case law regarding the inclusion of trademark royalties and agent VAT in the customs value of imported raw materials

On 23 August 2022 the Arbitration Court of the Voronezh Oblast adopted a ruling on Case No. A14−2192/2022 involving a dispute over whether royalties for the use of a trademark and VAT paid on those royalties by the importer as a tax agent should be included in the customs value of imported goods.

The trial court upheld the importer’s claims in full.

Facts of the case

Under a foreign trade contract with a seller, a Russian company ("the Importer") imported parent forms of sunflower, corn and pea seeds ("Parent Seeds") from France into Russia for use in producing hybrid seeds ("Finished Products") which would then be sold.

The Importer also concluded an agreement with a sublicensor on the use of trademarks in connection with the production, export, storage, sale and other disposal, promotion and/or distribution of goods. However, the Parent Seeds were imported without a trademark.

The trademark in question was displayed on packages containing Finished Products. The Importer paid royalties to the sublicensor on net sales of those products.

Neither royalties nor VAT on royalties which the Importer pays to the federal budget as the sublicensor’s tax agent were included in the customs value of imported goods.

After carrying out an in-house customs audit of the Importer, the customs authority concluded that royalties and VAT on royalties should have been included in the customs value of imported goods.
Disagreeing with the customs authority’s decision, the Importer filed an arbitration appeal.

The court’s position

The Arbitration Court took the Importer’s side, basing its decision on the following arguments:

With respect to the inclusion of royalties in the customs value of goods:

• The Parent Seeds are raw materials for the production of Finished Products, and royalties are calculated based on net revenue from sales of Finished Products, i.e., obligations to pay royalties exist only in relation to seeds produced in the territory of the Russian Federation, whose country of origin is the Russian Federation.
• The imported Parent Seeds do not bear trademarks.
• The Importer does not resell imported Parent Seeds in the Russian Federation, but specifically sells Finished Products obtained from Parent Seeds.

With respect to the inclusion of amounts of VAT on royalties:

• The amounts of "agent" VAT did not form part of royalties and were not owed to the sublicensor by way of a reciprocal obligation, but were paid to the federal budget by the Importer at its own expense and subsequently recovered from the budget.
• Since royalties were calculated and paid based on revenue from Finished Products, and not on the value of imported Parent Seeds, it follows that domestic taxes connected with the payment of royalties should not and cannot be included in the customs value of imported goods.
• In Advisory Opinion 4.16 the Technical Committee of the World Customs Organisation was responding to a question about whether corporate income tax withheld on royalty payments in the country of importation should be included in the customs value of imported goods, and made no reference to VAT matters.

Current trends

This ruling continues the positive trend for participants in foreign trade in court decisions over the inclusion in the customs value of imported goods of royalties and VAT on royalties paid for the right to use trademarks in selling finished products manufactured out of imported raw materials.