We would like to bring to your notice comments of MinTax Group to clarifications of the Customs Control Committee of the RoK Ministry for Finance (hereinafter – the “CCC MF RoK”) received by us for participants of Foreign Economic Activity (hereinafter – the “FEA”) on matters concerning inclusion of license or other payments for the use of items of intellectual property and trade mark (hereinafter – the “royalty”) into a customs value of goods, and concerning determination of customs value on customs procedure of temporary import of goods, and current comments of MinTax LLP on this issue.
According to clarification by the CCC MF RoK , the RoK Code “On Customs in the RoK”, Agreement on Customs Valuation in respect of goods that are moved across the customs border of the Customs Union, principles and provisions on customs valuation for customs purposes of General Agreement on Tariffs and Trade dated 1994 (GATT, 1994), importers of products produced by entities, owners of worldwide known brands that pay royalty to a rights holder (licensor) are obliged to include royalty into a cost of such products and pay customs duties, VAT and excises, arising in import into the customs territory of the Customs Union.
If royalty cannot be determined as of the date of declaration of imported goods, and if violation of the customs laws are independently identified with respect to failure to include royalty into the customs value of goods, it is recommended that FEA participants should apply to the customs authority empowered to execute it in order to present a form of adjustment of customs value and ensure additional payment of customs duties, import taxes, tax fees paid for execution, should it be assessed and paid according to the RoK Government Decree No. 1479 dated 7 November 1995, and fines on it as well.
Therefore, in independent adjustment of a customs value of imported goods and payment of customs duties, import taxes and fines on it, according to clarification of CCC MF RoK, one can avoid administrative fines for presentation of inaccurate information on customs value of goods according to article 429 of the RoK Code on Administrative Offences.
At that, we would like to pay your attention to the following risks with respect to tax liabilities that arise due to failure to comply with provisions of the CCC MF RoK clarifications enclosed.
Considering that granting rights to item of intellectual property is also considered to be a turnover on sale of services which place of sale is a customer’s place of activities (entities paying royalty), failure to include the specified payments into a customs value of imports would entail liability on payment of VAT for a nonresident as it is stated by provisions of article 241 of the Tax Code.
According to subparagraph 2) of paragraph 6 of Article 241 of the Tax Code, an independent adjustment of customs value of imports and VAT payment for import according to an amount of the adjustment made shall exempt an entity from payment of VAT for a nonresident.
Also, failure to include royalty into customs value of imports will not entitle a taxpayer to apply exemption from royalty received from CIT assessment withheld at the source of payments from income of a nonresident in the form of royalty, should it comply with the requirements of subparagraph 1) of paragraph 5 of Article 193 of the Tax Code.
According to clarifications of CCC MF RoK, administrative fines, in connection with adjustment of customs value of imports, including procedure of temporary import shall not be subject to deductions when assessing taxable income, i.e. it should be paid by net income of a taxpayer.
At the same time, an independent adjustment of customs value of imports to an amount of royalty excludes the said risks, but, may require submission of an additional tax reporting.
It should also be noted that, necessity of adjustment of customs value of imports and application of exemption from CIT at the source of payment of royalty requires the correct understanding of customs and tax laws.
Should you have any questions, please feel free to apply to the Tax Department of MinTax LLP for clarifications. We are pleased to discuss the matters at any time convenient for you.
