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WCO Advisory Could Have Significant Impact on Dutiability of Licensed Imports

Friday, August 23, 2013
Sandler, Travis & Rosenberg Trade Report

A new advisory opinion from the World Customs Organization could add to the financial burdens of importers of licensed products. Advisory Opinion 4.15, the product of eight years of work by the WCO’s Technical Committee on Customs Valuation, holds that a license fee is dutiable even when a sales contract between the producer and the importer contains no language obligating the payment of that fee. This holding seems to be at odds with the manner in which U.S. Customs and Border Protection and other countries’ customs authorities have traditionally viewed the dutiability of certain royalties.

The WCO Valuation Agreement and U.S. customs valuation law provide that royalties paid by the importer of goods to a party other than the seller of the goods must be added to the price actually paid or payable for the goods (which is the value upon which duty is based) if the royalty (a) must be paid as a condition of the sale to the importer and (b) is related to the imported product.

In the scenario at issue in the WCO opinion, the trademark license agreement between the licensor and the importer, which were related parties, required the importer to pay a license fee to the licensor based on a fixed percentage of the net income generated from the importer’s resale of the goods in the country of importation. The licensor had a separate supply agreement with an unrelated third-party producer permitting it to manufacture the trademarked products, subject to design and quality requirements, but limiting the producer to selling those goods only to companies specified by the licensor.

The WCO opinion found that, in accordance with the supply agreement, the licensor controls the production of the goods bearing its trademark by authorizing the production of the licensed product, determining which companies the manufacturer may sell to and directly providing the designs and technology for the manufacturer. Since the licensor authorizes the importer to use the trademark in connection with the manufacture and importation of the goods pursuant to the license agreement, the licensor further influences and controls the transaction between the manufacturer and the importer by selecting which party may use that trademark and purchase the goods.

In light of this opinion, says Sandler, Travis & Rosenberg member Chuck Crowley, “it would not be surprising to see more scrutiny and eventually customs rulings and possibly case law that reference the concept of ‘control’ with respect to importations involving a related licensor. This could be a significant consideration when companies are evaluating royalty/trademark agreements.”

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