The Technical Committee on Customs Valuation of the World Customs Organization issued Advisory Opinion 4.17 on royalties and license fees. It provides an opinion on a scenario where a franchisee (or importer, buyer, manufacturer) has paid royalties to a franchisor (or exporter, seller) under a franchise agreement, and concludes that the royalties should not be included in the customs value of imported goods.
With the complex web of international trade agreements and ministerial regulations issued by the Thai government, and with no official guidelines addressing this scenario in Thailand, determining whether royalties should be included in the customs value of goods imported into Thailand can be challenging. Through hands-on experience, however, it may be possible to discern an approach to this issue.
Under the General Agreement on Tariffs and Trade (the "GATT"), a legal agreement between a multitude of countries that promotes international trade, if a royalty is a part of the terms of sale between an importer and a licensor and the royalty is related to the imported product, then the royalty must be included in the customs value of imported goods.
Similar to this provision under GATT, a Ministerial Regulation of the Customs Department in Thailand provides that royalties and license fees which are related to goods being imported and serve as a condition of sale of the goods being imported must be included in the calculation of the customs value.
In the scenario Advisory Opinion 4.17 provides an opinion on mentioned above, the franchisee pays the franchisor royalties to use its brand and system, and under the franchise agreement, the payment of royalties is calculated as a percentage of the franchisee's gross sales of the final products in its retail store(s). If the franchisee does not pay the royalties, it would not be allowed to use the brand and system of the franchisor, but the franchisee would still be able to import inputs from the franchisor or vendors authorized by the franchisor for manufacturing the final products bearing the brand of the franchisor under the same conditions. The payment of royalties would, therefore, not be deemed to be a condition of sale of the imported products.
In conclusion, if any one of the following conditions is met, royalties should not be included for the purpose of customs valuation in Thailand:
- the royalties are not related to the manufacture or sale of imported goods; and/or
- the payment of royalties does not serve as a condition of sale of the imported goods.
This is a complex area of customs valuation, and it is prudent to approach every case on an individual, case-by-case basis. Blumenthal Richter & Sumet will keep you up-to-date on any developments in this area and how Advisory Opinion 4.17 is practically implemented in Thailand.
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.