Licence payments: Tougher customs controls in 2021

Background

As a result of a decline in turnover in 2020 caused by COVID-19 and the general global economic situation, the Federal Customs Service (FTS) faced a significant drop in federal government revenues.

The Russian customs service's development strategy for up to 2030 reinforces the principle of the randomness of customs controls based on a risk-oriented approach while shifting the focus of customs controls towards the post-release stage and stressing an increase in the efficiency of controls.

As a consequence of this, we can now see a trend towards increasing the efficiency of customs controls amid a reduction in the number of audit exercises.

In February 2021, it became known that the FTS of Russia initiated criminal proceedings under article 194 of the Russian Criminal Code in connection with the non-inclusion by major retailer Hennes & Mauritz (H&M) of royalties in the customs value of goods totalling over RUB3 billion (over USD4 million).

On 25 February 2021, the Accounts Chamber of the Russian Federation published a Report on the Findings of an Audit into the Completeness of Payment of Customs Charges to the Federal Treasury in relation to Goods in the Category of Intellectual Property (IP)¹.

It was established in the course of the audit that 1,062 foreign trade operators failed to include licence payments in the customs value of imported goods. The potential loss to the treasury is reported to exceed RUB98.5 billion.

In connection with the insufficiency of past audits identified by the Russian Accounts Chamber, the FTS of Russia was instructed to check companies that have licence agreements with foreign right holders to verify whether the customs valuation of imported goods is correct.

Practice

The recommendations of the Accounts Chamber set out in the Report have already resulted in a huge increase in the number of FTS audits resulting in surcharges and sanctions. As a matter of fact, audits are reported to cover all transactions associated with the use of IP. In the last two to three years, courts have formed new judicial approaches towards the inclusion of licence payments and similar fees for the use of trademarks, know-how, software and other IP in the customs value of imported goods on the basis of Recommendation 20 of the Board of the Eurasian Economic Commission dated 15 November 2016.

One landmark case is that of SCHOTT Pharmaceutical Packaging LLC (А43-49692/2019), which demonstrated that there is no place for a formalistic approach (on the part of the customs authorities) towards including additional licence payments in the customs value of goods and that such approach is to be used exclusively where there is statutory criteria in place.

In the given case, the courts concluded that, since the importer may use raw materials of not only the licensor but of other suppliers as well and the supply contract relating to the goods supplied does not stipulate any requirements relating to the trademark, the supply of imported goods does not depend on the fulfilment of the duty to make licence payments. In addition, it was established in the course of judicial proceedings that the licence payments do not relate to the imported goods since the imported goods do not bear the trademark and licence payments are calculated on the basis of the total amount of income from the sale of the end product made in the Russian Federation from the imported goods using other resources (employees' labour, operation of equipment, etc). Considering the aforesaid, the courts ruled that the licence payments should not have been included in the customs value of the imported goods.

Furthermore, judicial practice in relation to the inclusion of dividends in the customs value of goods is currently being shaped. In 2021, in a key case the Supreme Court of the Russian Federation upheld the position of courts that such an element as dividends may only influence the customs value structure if the payment of dividends is a stipulated condition for selling the particular imported goods (Ruling of the Supreme Court of the Russian Federation of 7 April 2021 in respect of the SSAB Swedish Steel CIS case No. А56-137218/2019).

In the meantime not only customs, but also tax authorities are conducting audits on a mass scale, requesting clarifications and documents from companies concerning the calculation and payment of licence fees and payments outside Russia in relation to other types of arrangements, including intragroup deals (dividends, fees for software, IT services, maintenance services, advertising, etc). Such requests contain a requirement to produce:

• licence agreements and other agreements whereunder IP is used/intragroup services are supplied;
• documents and information on the calculation and payment of fees of this kind; and
• a calculation of proceeds from the sale of goods (with an indication of the IP) in relation to which licence payments are not calculated and paid.

Recommendations

Considering the current trends in customs controls, where a company uses IP held by foreign right holders or makes any other intragroup payments, we would recommend:

1) comprehensively analysing agreements on the basis of which licence or other payments are made in terms of whether they carry risks of such payments being included in the customs value of imported goods, and devising options for mitigating such risks; and

2) where regulatory agencies request clarifications and documents -

• producing a complete set of the requested documents and clarifications to the regulatory agency;
• drafting and furnishing clarifications together with your legal position on the inclusion/non-inclusion of licence and other payments in the customs value of imported goods; and
• drawing on competent legal expertise immediately after receiving the request with a view to:
  • assessing the customs risks that may arise and devising recommendations on how to mitigate historical and future risks;
  • preparing the requested documents and detailed clarifications with legal reasoning;
  • obtaining assistance during audits; and
  • appealing decisions passed as a result of customs control.

¹ Report on the Findings of an Audit into the Completeness of Payments of Customs Charges to the Federal Treasury during 2018–2019 and the Elapsed Period of 2020 in relation to Goods that are Imported into the Eurasian Economic Union in the Category of Intellectual Property (including Patents, Trademarks and Copyright (Report).