Malaysia: Royalty Adjustment For Customs Valuation

Recently, the High Court in UC Sdn Bhd v Ketua Pengarah Kastam, Malaysia set aside the uplifting of customs value by including royalty payments by the Customs. We successfully represented the taxpayer in this appeal.


(a) Among others, the taxpayer imported and distributed baby care products in Malaysia. The taxpayer executed a Licence Agreement with the foreign holding company for the exclusive use of trademarks owned by the latter. The taxpayer also obtained marketing know-how and techniques. In return, the taxpayer paid royalty equal to 1% of the net sale price of the products.

(b) The taxpayer also obtained the rights to use cartoon characters belonging to a third party on its products. Royalty was paid to the third party for this.

(c) The taxpayer imported the products via:

(i) Procurement from third-party manufacturers.

(ii) Direct procurement from related foreign manufacturers.

(d) The procurement is entirely based on commercial considerations like price, quality, commercial friendliness and economies of scale. The related manufacturers have to compete with unrelated manufacturers in terms of price, quality and other intrinsic factors such as efficiency.

(e) Consent of the holding company is not required for the third-party procurements. The holding company also has no control over the procurement.

(f) Customs conducted a post-importation audit and decided that the royalties paid would be added to the transaction value for customs valuation. They alleged that royalty is an adjustment element under Regulation 5(1)(a)(iv) of the Regulations.1 No other reason was given.

(g) The taxpayer submitted that the royalty was not a condition of sale of products. Royalty to obtain trademark or other proprietary rights were not part of the customs value of the products. Aggrieved by Customs' decision, the taxpayer commenced judicial review proceedings.

Valuation of goods

The valuation methodologies in Malaysia follow the WTO's Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994.

The prima facie valuation is the transaction value. This means "the price for which the goods are actually sold when sold by the taxable person to the purchaser". In layman's terms, "transaction value" means the invoice price or sale price of the goods exported to Malaysia.

Where Customs has reason to doubt the accuracy and truth of the declared value, it may seek further explanation and supporting evidence.

Regulation 5(1)(a)(iv) allows the transaction value to be adjusted by adding the royalty if these were a condition of the sale of the goods for export to Malaysia. To invoke this, Customs must establish that:

(a) Royalty was paid in respect of the goods imported to Malaysia; and

(b) Royalty is paid by the buyer directly or indirectly as a condition of the sale of the goods for export to Malaysia.

Our arguments

We successfully argued that:

(a) The royalty paid by the taxpayer were not a condition to sell the products in Malaysia but to enable the exploitation the trademarks and licensing rights granted to the taxpayer. Additionally, the taxpayer had no contractual requirement to appoint related parties to manufacture the products. Procurement was the taxpayer's sole discretion based on commercial reasons.

(b) Customs' allegation that the royalty were a condition of the sale of the products was not supported by evidence.

c) Our courts have previously ruled that royalty paid should not be incorporated into the customs value of the goods if unrelated to the sale or importation of the goods. We referred to the Levi Strauss case, in which we successfully argued on this point before.

(d) Our courts recognise that "condition of sale" has a settled legal meaning and that the words are unambiguous. In its usual meaning, a condition is a term which, without being the fundamental obligation imposed by the contract, is still of such vital importance that it goes to the root of the transaction.

(e) Rather than creating a complex series of tests, courts preferred on the common law and sales of goods law to determine whether royalty are paid as a condition of sale. Hence, the courts have rejected the economic realities test advanced by Customs in the previous cases.


The High Court allowed the taxpayer's application. Customs' decision was set aside, among others, on the premise that it was illegal and unreasonable. Customs did not appeal to the Court of Appeal.


Customs' decision and conduct were so unreasonable that no right-minded person could have come to that decision. This was especially since it had failed to construe Regulation 5(1)(a)(iv) appropriately and ignored the binding precedents of our superior courts. This was despite all the representation made by the taxpayer during the audit.

This case is a timely reminder for importers to ensure that:

(a) Purchasing and licensing agreements are unambiguous and not intertwined.

(b) Related party transactions are at arm's length, including pricing and commercial terms.

(c) Provide robust supporting documents to Customs during the audit process.

(d) Letters issued to Customs contain sound legal analysis and are able to subtly demonstrate that the Customs' decision-making process is flawed and arbitrary.


1 Customs (Rules of Valuation) Regulations 1999

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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