Implications of WCO advisory opinion in China | KPMG | US

China: Implications of WCO advisory opinion, royalties and license fees

Implications of WCO advisory opinion in China

An advisory opinion of the World Customs Organization (WCO) on the inclusion of royalties and license fees in the customs value of imported goods has implications for China customs-related matters.

1000

Related content

The opinion (Advisory Opinion 4.17) will be included in the WCO Valuation Compendium, and could be influential as guidance for China Customs in dealing with similar cases. Advisory Opinion 4.17 cannot be regarded as having a direct enforceable legal basis in China; still, it provides new sample cases and may have a positive influence in resolving interpretation issues, between China Customs and enterprises, as to whether royalties are subject to customs duty. 

Customs guidelines

Under current China Customs guidelines, royalties are to be included in the customs value of imported goods if the following two conditions are both met:

  • The royalties are related to the imported goods
  • The payment of royalties constitutes a condition for the sale of such goods 

In practice, China Customs and enterprises (especially manufacturing enterprises) hold different views when determining whether a payment of royalties is related to the imported goods. The most controversial issue concerns the correlation between the license fees for technical assistance and the imported production inputs. For instance, when purchasing parts from overseas suppliers, a Chinese importer may set basic requirements for the technical specifications and the quality of goods for its further use. This may be considered by China Customs as being equivalent to the circumstance that the importer provides patent rights or proprietary technology for the suppliers to manufacture the required parts. Accordingly, China Customs will determine that the royalty payments are related to the imported parts.  In addition, from a practical point of view, China Customs barely pays attention to whether the payment of royalties constitutes a condition of sales of the goods being valued. 

Advisory Opinion 4.17 clarifies that the royalties paid by the importer are unrelated to imported goods, when the goods are not branded goods, or are not patented or manufactured under a patented process. It is also clearly stated that since the importer can still purchase imported goods, under the same commercial conditions without paying royalties, the royalties paid cannot be deemed as a condition of sale of the goods.

In the past two years, China Customs carried out a nationwide inspection on the payment of royalties in the industries of auto parts and electronics. Certain enterprises paid substantial royalties in instances when they were considered by China Customs as part of customs value for the imported goods, China Customs could request that the enterprises make tax repayment in relation to the royalty payments in the past, which would result in an impact on the operating status of enterprises involved. 

KPMG observation

Advisory Opinion 4.17 provides useful technical guidance for China Customs and enterprises in dealing with similar cases, although it has no enforceable legal impact in China. 

 

Read an August 2017 report prepared by the KPMG member firm in China

© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit