New Advisory Opinion 4.18
Royalties and licence fees under Article 8.1(c) of the Agreement (Royalty – Income Tax)
Work on this instrument was completed at the 52nd Session of the Technical Committee, which took place in Brussels from 5 to 19 May 2021.
This Advisory Opinion derives from a technical question submitted by China and depicts a situation in which the royalty payment for the use of a patent is subject to income tax in the country of importation, where the income tax amount is based on a percentage of the total royalty income paid. In other words, in addition to the royalty payment, the licensee pays the royalty income tax on behalf of the licensor to the Tax Authority of the country of importation.
Following analysis of the situation, the Technical Committee concluded that, in accordance with Article 8.1(c) of the Agreement, the payment by the buyer/licensee to the Tax Authority on behalf of the licensor should be regarded as part of the royalty payment, and thus the total gross payment of royalty inclusive of income tax should be added to the Customs value.
Bearing in mind the complex nature of the Customs valuation treatment of royalties and licence fees, each situation comprises an individual set of circumstances calling for detailed analysis in order to determine whether they are to be included in the Customs value.