Valuation pre- and post UCC - From First Sale and Royalties to Assists

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© 2015 Baker & McKenzie LLP
Jennifer Revis, Of Counsel,
Baker & McKenzie LLP (London)
Valuation Pre and Post UCC from First
Sale and Royalties to Assists
8th Advanced Forum on Customs Compliance: Held in
Partnership with HMRC
Tuesday 17 November 2015

Agenda
2
• Earlier sale (also referred to as ‘first sale’)
• Royalties and licence fees
• Simplifications
• Dealing with provisional values
• Assists

DM Ref:
Basic Rule | Transaction value (Method 1)
3
The customs value of imported goods shall be the
transaction value, that is, the price actually paid or payable for the
goods when sold for export to the customs territory of the
Community, adjusted, where necessary, in accordance with Articles
32 and 33“
“
– Art. 29(1) CC
Transaction value preferred to other methods of valuation where there
is a sale and certain requirements are met, including:
buyer and seller are not related and, if they are, the
transaction value is still acceptable
“
“

DM Ref:
Basic rule| What items should be added?
Additions to the “price actually paid or payable” (where not already
included in the price): (Article 32 CC)
1. commissions and brokerage (exc. buying commission)
2. cost of containers / packing
3. materials, components, tools, dies, engineering, development, plans,
sketches etc. (“assists”) – supplied by buyer to seller free of charge or
at a reduced cost
4. royalties and licence fees - condition of sale
5. proceeds of subsequent sale accruing to seller
6. delivery costs i.e. transport/insurance/loading and handling charges to
the place of introduction into the EU
4

DM Ref:
Basic rule| What items can be left out?
Not added to “price actually paid or payable” where shown
separately on invoice: (Article 33 CC)
1. transport after arrival at place of introduction in EU
2. charge for construction, maintenance etc. after importation
3. interests under financing arrangement
4. charges for right to reproduce in EU
5. buying commission
6. import duties
5

DM Ref:
Current legislation | Earlier sale
• Where a sale is one of a chain of sales that leads to the introduction of
the goods into EU, then the importer may elect to use any sale within
that chain as the customs value
• There are a number of conditions to fulfil before the earlier sale can be
used
• Must be a sale of the goods
• Sale must be a sale “for export to the EU” (within the meaning of
Commentary No. 7 of EU Customs Code Committee)
• Importer (declarant) must be able to attest to the value of the
earlier sale in the same way that he can attest to the value of the
final sale
7

DM Ref:
Current legislation | Earlier sale
8
Both Sale 1 and Sale 2 could constitute a “sale for export”
Using Sale 1, the amount used for customs purposes is 25% lower (and
excludes the parent’s costs and margin)
OEM
(China)
Parent
(US)
EU
retailer
EU
distributor
Sale 1
75
Sale 2
100
Physical delivery

DM Ref:
UCC (IA) | New definition of transaction value
9
• Definition provided for “transaction value” (Article 128) states:
• “The transaction value (…) shall be determined at the time of
acceptance of the customs declaration on the basis of the sale
occurring immediately before the goods were brought into [the
EU]”
• Special provision relating to goods sold while in Temporary
Storage or while placed under a special procedure other than
internal transit, end-use or outward processing

DM Ref:
UCC (IA) | New definition of transaction value
10
• What does “sale occurring immediately before the
goods were brought into [the EU]” mean?
• No definition of what is meant by “sale” in customs legislation
• Will timing of title transfer and/or payment be determinative?
• What about the time of when the
order is placed?
• Does it matter on whose behalf the
import declaration is filed?
• Commission’s aim is to remove “earlier sale”

DM Ref:
UCC (IA) | Impact of the removal of earlier sale (1)
11
Higher customs value
Other possible impact: TP/ TP adjustments; royalties/ licence fees
Mexico USA EU
USA EU
£90
Customs Value
£110
£110
Customs Value
Before
After

DM Ref:
UCC (IA) | Impact of the removal of earlier
sale (2)
12
USA
German
entity
UK entity
Customs Value
Customs Value?
Before
After
EU end
Customer
USA
German
entity
UK entity
EU end
Customer
• Customs value based on sales between EU entities? (Unifert ECJ case (C-
11/89) – transaction value takes no account of the place of establishment of
the parties to the contract of sale)
• Consider impact of removals from Temporary Storage and customs
procedures

DM Ref:
UCC (IA) | Guidelines; Transitional measures
13
• Wording has been amended but remains unclear. Expect valuation
guidelines will be issued providing examples of how these rules are to
be applied
• Transitional Article (Article 341) applies until 31 December 2017
• No prior agreement from HMRC required
• Importer / declarant must be bound by a contract clearly specifying
a start date
• Contract should make reference to the earlier sales agreement, but
need not specify the value of each expected shipment or
consignment
• Contract must be in place before the entry into force of the
Implementing Regulation (20 days after its publication in the Official
Journal)

DM Ref:
Independent
Manufacturer
XYZ Sales Co
XYZ Sourcing Co
(Agent)
Sourcing, Quality
Control, etc.
Buying Commission
(Sale 2 minus Sale 1?)
Sale
Independent
Manufacturer
XYZ Sourcing Co
importing into the EU*
XYZ Sales Co
Customer
Sale 1
Sale 2
Sale 3
* if not established in the EU, using a
customs agent acting as indirect
representative
Alternative Supply Chains?
14

DM Ref:
Current Legislation | Royalties and Licence fees
16
Royalties and licence fees are to be included in the value for customs duty
where:
• they are a condition of sale of the goods; and
• are related to the imported goods
If royalty is in respect of right to use a trademark, following conditions must
also be met:
• The goods must be resold in the same state
• The goods are marketed under the trademark affixed
• The buyer is not free to obtain the goods from other suppliers unrelated to
the seller

DM Ref:
Current Legislation | Royalties and Licence fees (2)
17
Even if sales contract does not explicitly require buyer to make
these payments, it can be an implicit condition of sale, if buyer
cannot buy goods from seller without this payment
Country of residence of recipient of payment is irrelevant
Where buyer pays royalties or licence fees to seller of goods
imported – highly likely that royalties or licence fees are dutiable

DM Ref:
18
Royalties payable to a third party will be dutiable where the seller or
person related to him requires the buyer to make that payment
(Article 160 CCIP)
‘Related’ also includes ‘control’, Commentary 11 EU Customs Code
Committee
Planning options in correlation with ‘earlier sale’

DM Ref:
19
Licensor charges
Royalties
Export of the manufactured
goods to the EU
Examples of controls exerted by the Licensor over the Manufacturer:
• sourcing of materials and components used in manufacturing process
• characteristics of goods and technology used
• clients of the Manufacturer for exported goods
• selling price of exported goods
• Manufacturer’s accounting records

DM Ref:
Current Legislation | Royalties and Earlier Sale
20
• Earlier sale: customs value is Price 1
• Royalties payment is not CoS: seller is
not related to XYZ Intellectual Property
• Last Sale: customs value is Price 2
• Royalties payment is CoS: seller is
related to XYZ Intellectual Property

DM Ref:
UCC (IA) | Royalties / Licence Fees (1)
21
• Royalties are deemed to be related to the goods when
rights transferred are embodied in the goods
• Method of calculation is generally not a factor. If the
royalty is based on the price of the imported goods, it can
be assumed that it is related to the goods (same as
current legislation)
• Condition of sale has been redefined – broader (see next
slide). Introduction of a catch-up all provision (condition
(c)) – more closely aligned with WCO Commentary 25.1)

DM Ref:
22
When the buyer pays royalties or licence
fees to a third party, the conditions provided
for in Article 157 (2) shall not be considered
as met unless the seller or a person related
to him requires the buyer to make that
payment
Royalties and licence fees are considered
to be paid as a condition of sale for the
imported goods when any of the following
conditions is met:
a. the seller or a person related to the
seller requires the buyer to make this
payment
b. the payment by the buyer is made to
satisfy an obligation of the seller, in
accordance with contractual obligations
c. the goods cannot be sold to, or
purchased by, the buyer without
payment of the royalties or license fees
to a licensor
Currently (Art. 160 IPCC): New wording (Art. 136 IA):

DM Ref:
• Broader definition of “condition of sale” will bring more agreements into the
duty calculations, particularly situations where payment is made to a third
party licensor
• Under current rules, royalties/ licence fees would only be dutiable if
“control” by licensor over seller could be demonstrated e.g. quality control
is not enough to show control
• No longer a requirement under proposed legislation – royalties/ licence
fees dutiable irrespective of “control” so long as goods cannot be sold
or purchased without payment of royalties/ licence fees – SIGNIFICANT
CHANGE WHICH WILL HAVE MAJOR IMPACT
23
Anticipated Impact:

DM Ref:
24
• No separate conditions for trademark royalties so if they are a condition of sale and
relate to the goods, they are dutiable
• Guidance received so far from HMRC is that if royalty / licence fee is due, it is up to the
importer to prove that this should not be included in the customs value
• Expect:
• Difficulties in challenging that a royalty/ licence fee is not a “condition of sale”
• Think about apportionment – does the royalty/ licence fee only relate to imported
goods or does it also relate to services?
• Can royalty/ licence fee be calculated at the time of import? If not, alter this?
• Communication needed within company to identify dutiable charges
Anticipated Impact:

DM Ref:
Pre and post UCC | Simplifications
26
• The customs authorities may authorise that certain amounts be
determined on the basis of specific criteria, where they are not
quantifiable on the date on which the customs declaration is accepted
• Fixed adjustment rate agreed with Customs - applied to each import to
reflect the potential uplift in the customs value due to the later
payment made for the goods. No need for later reconciliation
Simplification (Art. 73 UCC)

DM Ref:
Pre and post UCC | Simplifications (2)
27
• Pre UCC – only available for additions / deductions under Art. 32 and
33 of the Customs Code (e.g. royalties and licence fees)
• Post UCC – available for transaction value as well (e.g. provisional
price)

DM Ref:
UCC | Conditions for obtaining simplification
28
Art. 71 (DA)
• application of the ‘Simplified declaration’ procedure would, in the
circumstances, represent disproportioned administrative costs
• the customs value determined, will not significantly differ from that
determined in the absence of an authorisation
• applicant meets compliance criteria for AEOC; acceptable accounting
system; and suitable administrative organisation and internal controls

Dealing with provisional
values

DM Ref:
Pre and post UCC | How to deal with provisional
value at time of import
30
1. Simplification
2. Incomplete declaration / simplified declaration – time limits?
3. Prior agreement with Customs – declare entries as final at the time of
import and reconcile at a later date
• Currently available in the UK
• No clear legal basis for this
• Unclear whether applicant will need to meet similar criteria for this
post UCC as for simplifications

DM Ref:
Pre and post UCC | Transfer pricing adjustments
example
HealthCo Limited (a UK company) imports products into the UK from its direct US parent,
HealthCo Inc.
Total value of imports at the time of importation is EUR 100,000
Applicable duty rate is 10%
At the end of the financial year, HealthCo Inc. determines the margins its global subsidiaries
should be making
HC Inc.
(US)
HC Ltd
(UK)
EUR 100,000
A
B
Two alternatives:
A: HealthCo Limited’s margin is lowered and it pays an additional EUR 20,000 to HC Inc.
B: HealthCo Limited’s margin is raised and it receives a refund of EUR 20,000 from HC Inc.
31

DM Ref:
Pre and post UCC | Transfer pricing adjustments
example (cont’d)
1. Can transfer prices (TP) be used as a basis for customs value?
2. If so, what is impact of retrospective TP adjustments?
HealthCo Limited’s margin is raised and
it receives a refund of EUR 20,000
• Duty payable is 10% of 80,000 =
EUR 8,000
• Potential overpayment claim
• HMRC likely to require a line-by-line
adjustment illustration and evidence
of transfer pricing agreements in
force at time of import
HealthCo Limited’s margin is lowered
and it pays an additional EUR 20,000 to
HC Inc.
• Duty payable is 10% of 120,000 =
EUR 12,000
• Underpayment of EUR 2,000 in
customs duty plus additional VAT
NB: Import VAT consequences?
32

DM Ref:
Pre and post UCC | Assists
“The value, apportioned as appropriate, of the following goods and
services where supplied directly or indirectly by the buyer free of charge
or at reduced cost for use in connection with the production and sale for
export of the imported goods, to the extent that such value has not been
included in the price actually paid or payable:
1. materials, components, parts and similar items incorporated in the
imported goods,
2. tools, dies, moulds and similar items used in the production of the
imported goods,
3. materials consumed in the production of the imported goods,
4. engineering, development, artwork, design work, and plans and
sketches undertaken elsewhere than in the Community and
necessary for the production of the imported goods”
34

DM Ref:
How to reconcile customs value
Apportionment can get very complicated, but possible savings opportunities...
Apportionment
• What types of costs are dutiable?
• Exclude costs incurred in EU
• Only costs relating to goods imported into the EU are dutiable
• Apportionment is permitted based on the generally accepted accounting
principles of the importing country (e.g. quantity imported vs. worldwide
production)
35
Where importer is part of group of companies, not unusual for parent
company to seek to recover R&D costs through “cost sharing” arrangement

DM Ref:
Example 1 | Assists
• China Steel Co. manufactures steel products for UK Construct Ltd using a
mould provided by UK Construct Ltd
• UK Construct Ltd provides the mould free of charge
• The mould is valued at EUR 25,000 and can be used to make 100,000
products
• China Steel Co. produces the first batch of 5,000 products and supplies these
to UK Construct Ltd on CIF Southampton terms
• Applicable duty rate is 5%
China Steel
Co.
UK Construct
Ltd
5,000 products:
EUR 50,000
Mould (EUR 25,000, makes 100,000 products)
36

DM Ref:
Example 1 | Assists (cont’d)
Value of the mould must be reflected in the value declared for customs purposes
when goods imported to the UK
Three options:
China Steel Co. UK Construct Ltd
5,000 products:
EUR 50,000
Mould (EUR 25,000, makes 100,000 products)
Pay duty on products + one-
off payment for total value of
mould
• 50,000 + 25,000 @ 5% =
EUR 3,750
• Provides for certainty
(particularly for
accountancy purposes)
Pay duty on products +
apportioned value of mould
(paid in respect of each
import transaction)
• 50,000 +
(25,000/100,000 x 5,000)
@ 5% = EUR 2,562.50
• Benefit from flexibility
(e.g., if you move the
mould to another
supplier)
Pay duty on products +
agree in advance with HMRC
to reconcile apportioned
value of mould on an annual
basis
37

DM Ref:
Example 2 | Assists
US Parent Co.
Brazilian
Subsidiary
Indian
Manufacturer
UK
Subsidiary
product
flows
payment
Payment towards
Group’s R&D costs
Machinery +
Components +
designs
Responsible for research,
development, brands etc. Payment towards
Group’s R&D costs
payment
product flows
38

DM Ref:
Example 2 | Assists (cont’d)
• How do we go about including the R&D costs/machinery in the
customs valuation of an individual product imported by UK
subsidiary?
• What benefit does UK subsidiary obtain for its R&D payment?
Remember that not all of the elements are necessarily
dutiable (e.g. marketing costs)
• US parent co. is also supplying machinery (assists)
to India manufacturing co. – assists used in the
production of the imported goods and so
value needs to be attributed to them
for customs purposes
39

DM Ref:
Any Questions
40

Valuation pre- and post UCC - From First Sale and Royalties to Assists

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