The basis of the customs value is the transaction value, i.e. the price actually paid by the buyer for the imported goods. The Union Customs Code, however, requires certain costs not included in the invoice price to be added. Two of them are particularly often overlooked by companies: royalties and assists. Both usually arise in departments other than customs processing – in purchasing, in development, in the legal department. That is precisely why they are missing from the declaration.
Royalties
Royalties are to be added to the customs value where two conditions are met together:
- Relation to the goods: The fee relates to the imported goods themselves – for example a patent, a design or a trade mark embodied in the goods.
- Condition of sale: The buyer must pay the fee in order to be able to buy the goods. This is typically the case where the fee goes to the seller or a person related to the seller, or where the seller would not deliver without the payment.
Classic cases are trade mark licences for clothing or consumer goods, technology licences within a group and software licences for devices that do not function without the software. By contrast, fees for the right to reproduce the goods in the customs territory, or fees unrelated to the imported goods – for example for a trade mark that is applied to a different product only after import – are not to be added.
Group structures make things difficult: the licence is often agreed not with the supplier but with the parent company and calculated as a flat percentage of turnover. It must then be determined which part relates to the imported goods.
Assists
Where the buyer supplies the manufacturer, free of charge or at reduced cost, with something that is used in the production of the goods, its value forms part of the customs value. This includes:
- materials, components and parts incorporated in the goods,
- tools, dies and moulds used in production,
- materials consumed in production,
- development, plans, designs and drawings undertaken outside the EU and necessary for production.
An example: a company has plastic parts manufactured in Asia and pays for the injection mould itself. The mould stays with the manufacturer, and the parts are imported over several years. The value of the mould must be apportioned to the imported parts and added to the customs value – even though the mould has never crossed the border.
An important distinction: development work carried out in the EU is not to be added. Where the design department is located can therefore determine the customs value.
Transfer prices
Within a group, a further level is added: transfer prices are frequently adjusted at year-end to meet tax requirements. Such adjustments can change the customs value retrospectively – upwards as well as downwards. That is why customs expertise belongs at the table when the transfer pricing agreement is drawn up – so that later problems do not arise in the first place. And before adjustments are booked, the tax and customs departments should coordinate.
Why this so often goes wrong
In customs audits, auditors specifically ask for licence, development and tooling agreements. If additions are overlooked, this affects not a single import but all imports over years. Customs duty is claimed back, plus interest. Import VAT only carries weight if the company is not entitled to deduct input tax or acted intentionally – so rarely in the case of businesses. Anyone who deliberately omits the costs risks criminal proceedings for evasion of import duties.
How to keep track
- Collect contracts. Draw up an overview of all licence, development, tooling and manufacturing agreements relating to imported goods.
- Record assists. Tools and materials you provide to suppliers should be held in the system with their value and allocation to items.
- Create interfaces. Purchasing, development, tax and legal must know that their contracts may be relevant for customs – and whom to inform.
- Document the method. How do you apportion tooling costs, how do you convert royalties? A written, comprehensible method is persuasive in the audit.
- Correct errors. If you have overlooked additions, this can be corrected – provided it is done in good time and properly.