Notes on royalties and license fees in the GATT/WTO Value Code and their relationship to the customs value of imported goods

1. Brief introduction to customs valuation.

In customs matters, the taxation system fundamentally governs ad valorem, which involves the application of a duty on the value of the merchandise. This tariff mechanism requires clear rules for valuation, since tariffs would have little relevance if the values ​​on which they were applied were allowed to be abused. 

Valuation is therefore a particularly important function of Customs, given that the amount of taxes collected by customs administrations is obtained by applying a percentage to the customs value of the merchandise. 

In Argentina, the valuation rules applicable to imported goods are the rules of the GATT Value Code. The Value Agreement, applicable for the valuation of imported goods, follows the transaction value criterion.

With this valuation pattern, Customs must value imported goods, respecting the positive valuation concept of the GATT, accepting —beforehand— the transaction value of the imported goods. That is, if this transaction value is in accordance with the parameters defined in the Agreement, it must be accepted as a tax base, regardless of the existence of other import values ​​that may exist for similar goods. 

Within the framework of this Value Agreement, Customs must then fulfill the valuation function, starting from a positive value standard: the transaction value, defined as the price paid or payable for goods when they are sold for export to the country of importControl, then, revolves around the transaction value. 

It is clear that this change does not imply the outright acceptance of the value documented by the importer on the basis that the declared value is that of the transaction. Customs has the right and, obviously, the obligation to control the values ​​declared by importers, in order to determine whether they are acceptable as the customs value of imported goods and, thus, whether they can be used as a taxable base on which customs duties must be applied. 

Furthermore, the Agreement itself has established that none of its provisions may be interpreted in a way that restricts or calls into question the right of Customs to verify the truthfulness and accuracy of all information, documentation or declaration related to value.

However, and of course, in such work, customs administrations must fully respect the provisions established in the Value Agreement. Any deviation from this order results, beforehand, objectionable and questionable.

The Agreement aims to establish a fair, uniform and neutral system of customs valuation of goods which, to the greatest extent possible, is the transaction value, based on simple criteria, which are in accordance with commercial practices.

If the goods cannot be valued at the transaction value, the Agreement establishes an order of priority for the application of secondary valuation methods. The General Note entitled “Successive application of valuation methods” clearly reflects the basic rule of the “cascade” system, stating that the first method of customs valuation is the transaction value and that, when the customs value cannot be determined by this method, the values ​​shall be determined by successively using each of the subsequent methods until the first one that allows the value to be determined is found.

Another important point of the Agreement is related to the consultation regime. The General Introduction establishes that when the customs value cannot be determined on the basis of the transaction value, consultations must be held between the Customs Administration and the importer, with the aim of establishing a valuation basis according to the subsidiary methods. This principle, defined in the Agreement, is essential. 

The customs service cannot reject the transaction value and value the goods according to a subsidiary value method, without initiating consultations with the taxpayer. Exchange of information that will shed light on the correct valuation. 

It is worth recalling Ibáñez Marsilla, who in his study on the valuation of imports, highlights the Valuation Code's level of detail and plenitude of precepts as the greatest virtues, so that it restricts the need to specify the content of its mandates or to fill gaps, the establishment of an international body in charge of resolving technical issues and interpreting the meaning of the Code's precepts and an international mechanism for conflict resolution. Of these virtues, he extols the level of detail as the greatest, insofar as this is the best guarantee that the Code has to protect itself against abuses in its interpretation by the States that undertake to apply it.

On the other hand, Lascano highlights the general principles that govern the subject matter of customs valuation and whose purpose is to ensure its uniform and objective application. 

The Agreement also provides that, when drafting its domestic legislation, each member nation shall provide that all or part of the following elements shall be included or excluded from the customs value of the merchandise: a) the costs of transporting the imported goods to the port or place of importation; b) the costs of loading, unloading and handling arising from the transport of the imported goods to the port or place of importation; and c) the cost of insurance.

In the case of Argentina, these elements are included in the customs value on which import duties are determined, regardless of the agreed sales condition. Therefore, for the purposes of determining the tax base, it will be necessary to take into account the loading costs, freight and insurance up to the port or place of import.

2. The transaction value.

As we anticipated, to determine the customs value of the goods, the real price of the transaction is taken into account, that is, the price actually paid or payable for the goods, when they are sold for export to the country of import, a sale that responds to very precise conditions.

In the definition of the transaction value, The Value Agreement makes express reference to the price actually paid or payable. This is because payment does not necessarily have to take the form of a transfer of money. The price actually paid or payable comprises all payments actually made or to be made, as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller.

We can, then, conclude that the price actually paid or payable corresponds to the payments made and to be made for the imported goods and as a condition of sale thereof.

Now, at this point, we must analyze the second part of the definition of transaction value; that is, when a merchandise is sold for export to the country of import. In this regard, we agree with the broad thesis set forth by Sherman and Glashoff, who, as González Bianchi points out, invoke Article 6 of Regulation 1495/80 of the Commission of the European Communities and consider that once the goods have been sold, they comply with the requirements mentioned in section 1 of Article 1 of the Value Agreement.

It should be noted that, in order to apply the transaction value method, this value must not be conditioned, according to the following detail: a) there must be no restrictions on the use or disposal of the goods; b) there must be no conditions or considerations that prevent the value from being determined; c) no proceeds from resale, transfer or use after importation must be returned; and d) there must be no link that influences the price.

The customs value of the imported goods will then be the transaction value, provided that the above conditions are met.

However, this transaction value may contain some adjustments. The system adopted in the Agreement responds to a concept that allows for the resolution of the greatest number of cases based on the method of the price actually paid or payable by the buyer to the seller or by the buyer to a third party as a condition of the sale of the imported merchandise, in which the total price must be adjusted in the cases expressly provided for in the Agreement. 

The transaction value method will then be applied with the allowed adjustments or discarded if any reason justifies it., but no adjustments not provided for in the Agreement may be made. Where appropriate, the application may be assessed, in order of priority, of another valuation method, but an unauthorized adjustment may not be applied.

These are: a) commissions and brokerage fees, except for purchase commissions; packaging or packing costs; c) other costs generated by goods and services not included in the price and d) royalties and license fees.

3. Adjustment to transaction value. The case of royalties and license fees

For the purposes of these lines, when the valuation is carried out in accordance with the transaction value method, payments relating to patents, trademarks, copyrights and other royalties and license fees, not included in the price paid or payable, must be added to the price. The royalties and license fees mentioned may include, among other things, payments relating to patents, trademarks and copyrights. 

In order for these concepts to be added to the transaction value, it is necessary that they are payments related to the merchandise being valued, actually made or to be made as a condition of the sale of the imported merchandise, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller.

The interpretation of the concept of "related payments" is not peaceful. Indeed, a broad or extensive interpretation of this concept could justify that all payments made between related companies are related. Based on this interpretation, it could be considered that the relationship is given by the commercial link itself. 

We do not share this interpretation. The payment made as a royalty must be related to the merchandise itself, with a condition of sale of these for export to the importing country. 

The analysis must be different when the royalty is paid on a final good (e.g. a car) and what is imported are parts (e.g. a nut). We understand that the issue deserves a special analysis since it would not be reasonable to add to the price of the part that is imported, the royalty paid for the sale of the final good produced.

There has also been much debate regarding the concept of "condition of sale." Some authors consider that it should be understood as an express contractual stipulation; and others understand that it can be inferred from commercial reality. 

4. The condition of sale in the doctrine of the Supreme Court.

In Argentina, the concept of “condition of sale” has gained some notoriety, following the ruling Ford Argentina SCAThe High Court has stated that although there was no document linking the payment of the royalty to the imported goods, the importer has not been able to refute the customs agency's claim that the agreement on the aforementioned royalty, which arises from the license contract, constitutes the condition of sale required by the Agreement for the adjustment to be admissible, since producing a Ford brand product requires the importation of parts and pieces that can only be supplied by companies belonging to or linked to the Ford International group.

Certainly controversial, we do not share the Court's opinion. The existence of a condition of sale has been considered proven, on presumptive bases. Customs has affirmed its existence, without proving it, and the Court has validated this dogmatic assertion, for the sole reason that the importer has not refuted it. In our opinion, the condition of sale must be proven by whoever invokes its existence. It is not appropriate to presume that there is a condition of sale simply because the companies are related. 

On the other hand, royalties are related to the sale of the final product produced in Argentina (in the case of cars) and not to the imported parts and pieces that have been acquired abroad. And this has not been analyzed in depth by the High Court.

Expanding the analysis regarding the "condition of sale", it is appropriate to highlight Jovanovich when he points out that many times it is omitted to examine what the condition is, that is, whether the purchase of the merchandise is a condition for the granting of the license or whether the granting of the license (and payment of the fee) is a condition for the sale of the merchandise. 

Ibáñez Marsilla has expressed a similar opinion, highlighting that what must be analysed to determine the valuation of the goods is whether their acquisition has been conditioned to the joint acquisition of the royalty. This means that if it has been the acquisition of the royalty that has been conditioned to the acquisition of some goods, the royalty is not a "condition of sale" of the same, but the other way around. 

According to Zolezzi, the Court understood that a written clause was not necessary to demonstrate that there is a condition of sale. However, the author continues, this does not imply that the condition of sale“exists every time a royalty is paid in connection with imported goods. In each case, the factual circumstances of the specific case must be considered and the possible connection between the purchase and the license agreement must be analyzed.”

5. The doctrine of our courts.

In short, and for the reasons set out here, we consider that it will be up to the judges, in each specific case, to carry out a thorough analysis of the factual situations surrounding the operations brought to the study. Fortunately, this is what has occurred in the rulings after Ford Argentina SCA. 

In general terms, the Tax Court has pointed out that it is necessary to analyse the contracts and the particular circumstances of the case in order to determine whether or not the royalty is a condition of sale. It is clear that it is not when it is simply a payment in the form of remuneration for the use of the trademark, regardless of who the suppliers of the goods were and not in order to import the goods whose manufacture was commissioned.

The Federal Court ruled in the same direction.

Chamber IV, after analyzing the factual situation raised, concluded that the royalties paid were not related to the imported merchandise. "because the licensee could have manufactured them himself or acquired them from third parties not related to the licensor." He also noted that there was no condition of sale. "because it was not proven that there was any connection and/or agreement between the licensor and the seller that would prevent the latter from selling the merchandise without payment of the royalty." Furthermore, I point out that "There is no direct link between the licensor and the buyer-importer himself and the activities that the former is authorized to carry out (quality control of models, authorization of samples, etc.) do not exceed mere quality controls and, therefore, are insufficient to infer a condition of sale..."

The same Chamber IV, in the Nestlé Argentina case, further expanded the analysis by indicating that it could not be considered that there is a relationship between merchandise and license when "These are goods in common use (not patented) and the buyer can use the trademark whether he or she acquires them from the licensor, another related seller or an independent seller." He also pointed out that "The condition of sale requirement refers to the impossibility of separating the purchase of the imported goods from the payment of the fees or royalties, so that the seller can refuse the business if they are not paid, or that the buyer is prohibited from acquiring or importing the merchandise being valued, legally and definitively, if they are not paid.", to conclude that "The addition of the royalty could only be justified to the extent that situations occurred that went beyond mere quality controls and allowed us to presume that the licensee effectively controlled the conditions of sale of the goods."

Similarly, in the “World Sport” case, Chamber III noted that "The position held by the customs service that 'a fee is always a condition of sale' is not correct, is extreme and deviates from the guidelines arising from the Agreement" and that “In order to determine whether or not there is a condition of sale within the meaning of art. 8.1.c), a careful analysis of the contracts involved and the specific aspects of each transaction must be made.” Taking these premises into account, he pointed out that the importer “You do not have to pay a fee to be able to buy the goods, but rather you pay it on the proceeds of the sales…” and that, "In the event of not making sales in the domestic market, the importer does not have to pay royalties to the licensor, but nothing prevents the purchase from its foreign supplier from continuing. Likewise, the royalty for the use of the Quicksilver license is paid whether the clothing sold is imported or manufactured in the country." 

For its part, in the "Zara" case, Chamber V pointed out that the adjustment was based on insufficient estimates, assessments or presumptions and that it had not been corroborated that "The fee that is intended to be added is related only to imported goods and, as explained, its quantification is not only difficult but was not properly justified by the customs service at the time of making the adjustment or at the time of appealing to this instance."

Likewise, in the Maestri case, Chamber II held that, since they were not required by the seller, the payment of royalties did not constitute a condition of sale and that what was relevant was that the payment of royalties had not been made to comply with an agreement with the seller (nor at the seller's request), but rather by virtue of a license agreement between the buyer and the licensor that was unrelated to the sales contract.

Up to this point, the jurisprudence has certainly been peaceful, forceful and in line with the specialized doctrine on the subject.

A few weeks ago, however, Chamber G of the Tax Court established a new and innovative doctrine in the “Basf Argentina” case.

The ruling holds that, regardless of whether the imported products or inputs are affected by License contracts and/or accrue royalties payable, the fact that they are imported from companies in the same economic group (or with a similar name) leads to the inference that they carry the intangible of the brand and, therefore, the adjustment is validated for the universe of those imports. It was held there that "My understanding is not distorted by the fact that the inputs in crisis are not later used in the production processes subject to any of the 6 technology transfer contracts signed by BASF ARGENTINA, since the technology that represents the intangible is already added, inseparable, to the object of import, and both, in their integral completeness, constitute the product that is imported: tangible good + intangible good. and that imports from other companies that include the name of the economic group in their corporate name, "allow us to conclude, with a reasonable degree of certainty, that the universe of import shipments whose value adjustment was challenged and which is the subject of this case, correspond to inputs acquired from companies in the same economic group whose corporate name includes the name "BASF", so it is accurate to infer that such products carry the "BASF" technology and, therefore, the "BASF" brand of their manufacturer."

In this regard, we share Lascano's comment on this ruling, given that the interpretation of Chamber G on intangibles associated with brands or supplier names is based on a presumptive basis, without the existence of a quantifiable fee to be added to the value of related goods and accrued/paid as a condition of sale thereof, thus opposing the provisions of the Agreement on the appropriateness of the adjustment in terms of royalties and license fees. 

6. As a summary.

Valuation is a particularly important function of Customs. Within the framework of the Value Agreement, Customs must perform the valuation function, based on the new positive value standard. 

The control revolves around the value of the transaction. If it is in accordance with the parameters defined in the Agreement, it must be accepted as a tax base, regardless of the “normal value” that may correspond to the merchandise.

The Agreement aims to establish a more equitable, uniform and neutral system of customs valuation of goods which, to the greatest extent possible, is the transaction value, based on simple criteria, which are in accordance with commercial practices.

Adjustments to the transaction value may only be made if they are permitted by the Agreement and if there is objective and reasonable evidence. When the valuation is made in accordance with the provisions of the first method, i.e. the transaction value, payments relating to patents, trademarks, copyrights and other royalties and license fees not included in the price paid or payable must be added to the price.

In cases of adjustments for royalties and licenses, there are controversies regarding the correct interpretation of the concept of a condition of sale. The doctrine of our courts requires us to analyze each case individually to determine whether the payment of royalties has been required by the seller as a condition of sale of the goods. 

It is clear to understand that the mere verification of the payment of royalties does not justify per se its addition to the transaction value, even between related companies. It is necessary to note the impossibility of separating the purchase of the imported goods from the payment of royalties for their addition. But in this task, the adjustment cannot be based on presumptions and opinions about what should have been paid, since this would configure an arbitrary or fictitious value, contrary to the provisions of the Value Agreement.