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Duty on royalty payments.

Organizations that pay royalties on merchandise imported into the United States may face a significant duty liability based on a new U.S. Customs Service (Customs) interpretation. Earlier this year Customs issued a long-awaited notice, holding that certain royalty payments are a part of customs value of imported merchandise and thus subject to customs duty. This change applies to merchandise entered with Customs on or after May 11, 1993 (90 days from the date of publication of the notice in the Customs Bulletin) and may have far-reaching implications for companies on a worldwide basis.

Importers should reexamine their royalty and license fee agreements and be prepared to support or reconsider any position inconsistent with this new interpretation. In any event, importers should take steps to ensure proper customs values are declared on their filings with Customs made on or after May 11, 1993. Two years ago, Customs issued Ruling 544436 (Customs Service Decision (C.S.D.) 91-6, 2/4/91), which involved a determination of whether certain royalty payments associated with imported merchandise would be subject to customs duty. This ruling reversed a series of earlier Customs rulings that generally held that royalties paid by the importer, based on the resale of the merchandise in the United States, were not subject to duty. After Ruling 544436, Customs also issued a notice soliciting public comments on whether royalties of various types were properly included in customs value. A Feb. 10, 1993 notice provides an analysis of the received and confirms the determination set forth in the 1991 ruling. In addition, the notice established certain criteria for evaluating the treatment of royalties for customs purposes.

Generally, Customs's position had been that royalty or license fee payments based on sales in the United States or other post-importation events were not subject to customs duty. Customs Ruling 544436 determined that while these types of royalty payments may not be subject to duty as royalty payments, they may be subject as "proceeds of the subsequent resale, disposal or use" of the imported merchandise that are dutiable under the GATT customs valuation code. As set forth in the notice, Customs has now determined that the method of calculating the royalty (e.g., on the resale price of the goods in the United States) is not relevant in determining if the royalty payment is subject to customs duty.

Three questions are relevant to this determination:

* Was the imported merchandise manufactured under patent?

* Was the royalty involved in the production or sale of the imported merchandise?

* Could the importer purchase the product without paying the royalty? Customs concluded that, based on the facts presented in Customs Ruling 544436, royalty payments could have been considered dutiable as either royalties or proceeds. Under this new interpretation, most royalty or license fees paid for merchandise that is imported and resold without further processing will be considered an element of customs value and thus subject to duty. Royalty payments made to a foreign seller based on a manufacturing process in the United States using imported materials may remain nondutiable; however, this issue was not specifically addressed.

It is important to note that the 120-member-nation Customs Cooperation Council (CCC) had postponed an analysis of the issue of whether royalty payments of certain types are a part of customs value pending a U.S. determination. The CCC determination could potentially go further than the United States and attempt to subject all royalty and license fees to customs duty in all member nations. Such an interpretation by the CCC would have far-reaching implications to most companies doing business on a worldwide basis, particularly in those countries in which a company's products are subject to rates of duty higher than those applicable to imports into the United States.
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Author:Gambardella, Domenick
Publication:The Tax Adviser
Date:Nov 1, 1993
Previous Article:Disguised sale final regulations.
Next Article:Revenue Reconciliation Act of 1993; Voluntary Compliance Resolution program; fiduciary responsibilities; distribution rules; excise taxes.

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