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New Developments in Assessing Customs Duties
on Royalty for Imported Goods in China
By R.Z.
Margaret Lu and Yuping
Wang
[December 2003]
Following China's accession to the World Trade
Organization (WTO) in December 2001, the Customs General Administration
of the People’s Republic of China promulgated Measures
of the People’s Republic of China Customs on Examination
and Determination of Customs Duties Levied against Imported
and Exported Goods (the “Measure”). The Measure
replaced two pre-WTO regulations on the same subject, and set
forth the rules, among others, for assessing customs duty on
royalties to be paid by buyers of imported goods and the payment
of such royalties is the seller’s condition to selling
the goods into China.
The concept of levying customs duty on royalties and license
fees in connection with imported goods was first codified in
the Interim Measures of the People’s Republic of China
Customs Concerning the Levying and Exemption of Customs Duty
on Software Fees for Imported Goods in 1993 (1993 Interim
Measure). It contained 11 articles in very broad terms, had
a limited scope of application and was virtually useless in
practice. To be more in line with WTO requirements, Article
4(3) of the Measure adopted language contained in WTO’s
Agreement on Implementation of Article VII of the 1994 General
Agreement on Tariffs and Trade, permitting member countries
to levy customs duties on royalties and license fees for imported
goods to the extent that they are not already included in the
sale price, if such royalty and license fees are related to
the goods and the payment of the royalty and license fee is
a condition to the sale. The Measure, however, is a general
law which encompasses a much broader scale of matters concerning
customs duties on imported and exported goods.
On May 30, 2003, the Customs General Administration of the
People’s Republic of China issued a specific law –
the Methods for the Assessment of Customs Duties on Royalties
to Imported Goods (Assessment Method). The Assessment Method
repealed the 1993 Interim Measure, and provided definitions
for “royalty” which is “related to”
imported goods, and the payment of which is a “condition
to sale” of imported goods by seller.
What is “Royalty”
The Assessment Method defines “royalty” as fees
payable by buyers of imported goods for the right to use a patent,
trademark, know-how and copyright, or the right to distribute
or re sell the imported goods and other similar rights (“Royalty”).
Article 3 of the Assessment Method provides that the amount
of Royalty shall be included in the price of the imported goods
for the purpose of calculating applicable customs duties, if
the Royalty is “related to” the imported goods and
the payment of the Royalty is the seller’s “condition
to sale” of imported goods into China.
Royalty as “Related to” Imported Goods
Relevant parts of the Assessment Method provide that the following
types of Royalty to be paid for certain types of imported good
are Royalty “related to” such imported goods pursuant
to Article 3:
- Royalty to be paid for the right to use certain patents
or know-how, where the imported goods: i) contain such patents
or know-how; ii) are made by using such patents or know-how;
or iii) are machinery and equipment specifically designed
and manufactured for the implementation of such patents or
know-how; regardless whether such patents or know-how are
imported in a form of a magnetic tape, diskette, CD or other
similar media, or imported by down-load or transmission through
network or satellite.
- Royalty to be paid for the right to use certain trademarks,
where the imported goods: i) contain such trademarks when
hey are imported; ii) can be re-sold once imported with such
trademarks affixed thereon; or iii) contain such trademarks
when they are imported, and can be re-sold after being lightly
processed with such trademarks affixed thereon.
- Royalty to be paid for copyrights, where the imported goods
contain: i) software, language, music, graphics, image or
other similar contents in the form of magnetic tape, diskette,
CD or other media; or ii) other copyrighted contents.
- Royalty to be paid for distribution, re-sale right or other
similar rights owned by sellers of imported goods in China,
where the imported goods can be: i) sold directly once imported;
or ii) re-sold upon light processing.
Which Royalty Payments Constitute a “Condition to Sale”
Article 9 of the Assessment Method provides that the requirement
for a “condition to sale” under Article 3 is met
if a Royalty payment by the buyer of imported goods is a condition
precedent to seller’s selling of goods into China. In
other words, the sales transaction will be impossible to close
pursuant to the terms and conditions of the contract governing
the sale unless buyer pays a Royalty.
Although this Article 9 seems straight-forward, the determination
of whether a Royalty payment constitutes a condition to sale
can be complex and is subject to the discretion of the responsible
People’s Republic of China Customs at the national, provincial
or city levels (Customs). According to the United States Trade
Representative 2003 National Trade Estimate Report on Foreign
Trade Barriers, China section, importers have reported that
“many Customs officials are still inappropriately applying
royalty and software fees to the dutiable value even if these
fees are not a condition of the particular sale in question.”
How Customs Duties Are Assessed on Royalty Payments
Buyers and importers in China are required to declare Royalty
payments for imported goods and to provide objective and quantifiable
data/information for the Royalty payments at the same time they
file a customs declaration for imported goods. Customs is authorized
to examine and determine whether a declared Royalty payment
or a portion thereof satisfies the requirements under Article
3 of the Assessment Method, based upon the objective and quantifiable
data/information provided. If so, the Royalty or a portion thereof
will be included in the price of imported goods for the purpose
of assessing applicable customs duties.
In the event the buyer/importer fails to provide objective
and quantifiable data/information, the Customs is to refer to
Article 3 of the Measure and make an assessment based on the
transaction price of the imported goods declared for customs.
In the event it is unable to make an assessment by using this
method, Customs then refers to Article 7 of the Measure to make
an assessment by choosing one of the methods in the same order
listed as follows: using transaction price of same types of
goods, transaction price of similar types of goods, off-set
price or computed price; or other reasonable methods.
Payments of fee for reproducing/copying the imported products
in China, and for technical training or off-shore studying/inspection
should be itemized and listed separately for verification by
the Customs, and are not subject to customs duty.
Upon finding that a declared Royalty payment does not satisfy
the requirements under Article 3, the Customs shall exclude
the Royalty payment from the price of imported goods for the
purpose of assessing applicable customs duties, or to deduct
the Royalty payment if it is already included in the sales price.
However, a non-itemized royalty payment included in the sale
price of the imported goods will not be deducted from the price
unless the Customs is able to ascertain the amount using data/information
provided by buyer or importer, even if such royalty payment
does not satisfy the requirements under Article 3 and should
not have been included in the sales price otherwise.
Applicable Rate
Royalty payments meeting requirements under Article 3 of the
Assessment Measure will be subject to customs duty at the same
rate applicable to the imported goods.
Penalties
A buyer or importer will be subject to monetary penalties for
failure to declare, or falsification of declarations on, Royalty
payments; and will be subject to criminal penalties in the event
its conduct constitutes a crime under pertinent Chinese laws.
Illegal gains will also be confiscated by Customs.
Concluding Observations
It seems that in a sale transaction to import goods in China,
Royalty payments are best itemized and listed separately from
the prices of the imported goods to prevent the avoidable financial
burden of customs duty on Royalty payments which a buyer or
importer should not have to bear otherwise. Furthermore, current
Chinese laws and regulations require withholding taxes on Royalty
payments in foreign currency by a licensee/payer in China to
a licensor/payee outside of China before such payments are remitted.
Thus a Royalty payment satisfying the requirements under Article
3 may be subject to customs duty as well as withholding taxes.
Even though customs duty is paid by buyers/importers whereas
the withholding tax is taken from licensors/payees’ receipts,
the exposure may have impact on the over-all economics of sales
transactions involving importation of goods to China.
Customs decisions are subject to administrative and/or judicial
review in China. Nevertheless, in light of the May 2003 Assessment
Method, it is advisable for multinational companies to review
their existing sales practices or devise future transactions
with the goal to minimize exposure to customs duty/tax and to
avoid unnecessary exposure because of inappropriate documentation.
Published by DWT's
China Practice Group
For further information, please contact:
R. Z. Margaret
Lu (Author), New York, (212) 603-6447, margaretlu@dwt.com
Yuping Wang
(Author), Shanghai, (011) 8621-6279-8438, yupingwang@dwt.com
Rongwei (Ron) Cai,
Shanghai, (011) 8621-6279-8541, roncai@dwt.com
Allen D. Clark,
Shanghai, 011-8621-6279-8560, alclark@dwt.com
Zhi-Yin James Fang,
Los Angeles, (213) 633-6847, jimfang@dwt.com
James M. Mei, Portland,
(503) 778-5315, jimmei@dwt.com
Norman
B. Page, Seattle, (206) 628-7740, normpage@dwt.com
Ronald K. Ragen,
Portland, (503) 778-5301, ronaldragen@dwt.com
J. H. Jerry Zhu, New
York, (212) 603-6458, jerryzhu@dwt.com
This China Practice Advisory is a publication of the China Practice/Shanghai
Office of Davis Wright Tremaine LLP. Our purpose in publishing
this Advisory is to inform our clients and friends of recent
legal developments in China. It is not intended, nor should
it be used, as a substitute for specific legal advice as legal
counsel may only be given in response to inquiries regarding
particular situations.
Copyright © 2003, Davis Wright
Tremaine LLP.
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