The Technical Committee on Customs Valuation of the World Customs Organization (WCO) has approved a revised “advisory opinion” on the Valuation Agreement in relation to trademark royalties. An advisory opinion of the WCO is not binding on its member countries but would be used as a guide by the customs authorities in many jurisdictions. The advisory opinion relates to the valuation of imported goods that incorporate a trademark, where the contract is between unrelated parties and the terms of the contract do not refer to the trademark.

The Valuation Agreement provides that royalties paid by the importer to a third party (i.e. a party who is not the vendor of the product) should be taken into account in determining the transaction value for customs duty purposes if the royalty is related to the product and is required to be paid as a condition of the sale. Although it is clear that the royalty must be paid if the contract of sale stipulates this, it is not clear when a royalty should be taken into account if it is not referred to in the contract of sale. In this case the customs authorities would have to determine if there is an implied requirement to pay the royalty as a condition of sale.

The new Advisory Opinion 4.15 concerns a situation where the licensor of the trademark is related to the importer of the goods but neither is related to the exporter of the product; the license agreement for the trademark requires the importer to pay a royalty as a percentage of income from resale of the product in the country where it is imported; and the licensor of the trademark has signed a supply agreement with the manufacturer setting out design and quality standards, stating that the product may only be sold to the companies approved by the licensor. The contract between manufacturer/exporter and the importer in this scenario does not contain any provision requiring payment of the royalty.

The advisory opinion considers that the licensor in this situation is effectively controlling the production of the goods that will carry the trademark because it stipulates to which companies the manufacturer may supply the products. The licensor also authorizes use of the trademark by the importer and is influencing the transaction between the manufacturer and importer by determining which party may purchase the goods and use the trademark. If the importer did not pay the royalty in this situation the result would be that the importer is no longer authorized to sell the product and the manufacturer would no longer supply the product to the importer.

This type of control by the licensor is therefore clearly identified as a situation where the royalty should be taken into account in computing the transaction price for customs duty purposes. Importers may therefore need to review their royalty arrangements for elements that may indicate that the licensor has control along the lines of the situation in the advisory opinion. In some cases importers may wish to adjust their royalty arrangements to ensure that there is no implied control by the licensor.