On the issue of accounting for royalties in the customs value of goods

Afanasenko Dar'ya Sergeevna Student, the department of Taxes and Tax Administration, Financial University under the Government of the Russian Federation 125167, Russia, Moskovskaya oblast', g. Moscow, ul. Leningradskii Prospekt, 49 dashaafanasenko123@gmail.com Other publications by this author

Title: On the issue of accounting for royalties in the customs value of goodsIntroduction

Currently, trade between the countries of the world is developing rapidly.

Every day, a significant amount of goods are delivered from one country to another. The movement of goods across the border entails the need for control by customs authorities in order to verify the declarability of goods, to combat illegal importation.

Today, within the framework of the Eurasian Economic Union, customs value control is one of the priority issues of customs and fiscal policies of the member states of the Union. The problems of controlling the customs value of goods have an impact on the economic activities of the Member States, since, first of all, damage is caused to the national budget, as well as to bona fide business entities due to underestimation of the customs value of goods.

The formation of the customs value of imported goods is a fundamental issue in the process of taxation of foreign economic activity, since the amount of tax and non-tax revenues paid to the budget of the Russian Federation will depend on the declared customs value. The customs legislation establishes 6 ways of calculating the customs value, applied in a certain sequence. However, if we consider the practice of arbitration courts concerning disputes concerning the adjustment of customs value, then every second case contains information about the declarant's application of the method for the value of the transaction with imported goods (method 1).

This method defines the customs value as the transaction value increased by the amount of additional payments provided for in Article 40 of the EAEU Customs Code. The declarant has the right to apply other methods of customs value formation only if it is impossible to apply method 1. In practice, there are a number of controversial cases regarding the accounting of additional payments when declaring customs value.

The issues of accounting for royalties in the customs value of goods are considered by scientists and practitioners, especially in the context of the formation of a single market for goods and services within the framework of the Eurasian Economic Union. So, in the article of Associate Professor, Candidate of Economics Artemyev A.A., it is told about the essence of license payments, the conditions for their inclusion ^[1]. The author refers to international documents, revealing the complexity of accounting for royalties in the customs value and the ambiguity of their accounting. The head of one of the departments of the Ural Customs Administration Shatskikh A.O., using the example of various intellectual property objects, shows the practical situations of including royalties, also determining the specifics of their analytical accounting and the lack of detailed explanations in the Tax Code of the Russian Federation and supranational tax acts ^[2]. Candidate of Law Kosov A. A. in the article "Recommendations on licensing conducts an analysis of legislative documents both national and international, reveals the features of Comment 25.1 and Advisory Opinions of the Technical Committee on Customs Assessment of the World Customs Organization ^[3]. The analysis of the presented studies made it possible to highlight the ambiguity of approaches to the recognition of royalties as part of the customs value, which determines the need for further study of this topic.

Methodological basisIn the modern world, during the development of international trade in both goods and property rights, an urgent problem that arises when using method 1 is the inclusion of royalties in the calculation of the customs value of imported goods ^[4].

Such payments for the use of intellectual property objects include, in particular, ^[5]:

- royalties,

- payment of the patent cost,

- payment of the cost of the trademark,

- payment for the use of copyrights.

These payments are made by the buyer as a condition for the sale of imported goods to the territory of the EAEU (hereinafter the EAEU, the Union) and should not be included in the transaction price ^[6]. Thus, the following criteria will be important criteria for accounting for royalties in the customs value of imported goods ^[1-3]:

- royalties should relate to imported goods;

- royalties are a condition for the sale of imported goods, that is, this sale must be carried out for export to the territory of the EAEU.

 However, judicial practice shows that there are numerous cases when declarants do not charge these payments in order to understate the customs value.

"Key factors" of inclusion of license fees in the customs valueOne of the key factors is the "ratio of royalties to the assessed goods", which means the purpose of paying these payments, and also determines what the licensee will receive in return for such payment ^[6].

In this situation, it is important to study the details of the license agreement, which intellectual property object is used and what relation it has to the goods being evaluated. Let's consider two examples from practice, when, depending on how royalties relate to imported goods, a decision on the formation of customs value is determined. These examples will be based on the payment of royalties for the provision of know-how, which may be related to imported goods in different ways.

Example No. 1: a Russian organization was provided with a coffee production technology (know-how) under a license agreement. According to this agreement, coffee will be produced in packaging with the trademark of the copyright holder, but at the same time the Russian organization chooses the supplier of coffee beans and equipment for production independently. Thus, there are no requirements of the copyright holder about which coffee beans and from which plantations they need to be collected. Coffee will be produced for retail sale.

Example No. 2: a Russian organization was provided with a coffee production technology (know-how) under a license agreement, according to which the Russian organization must purchase equipment from the copyright holder, as well as certain coffee beans from a certain supplier. This equipment and raw materials should be used by the Russian organization only for the production of coffee.

In these examples, similar activities of a Russian organization are considered, but the ratio of royalties to imported goods such as coffee raw materials and equipment has a different result, since their use is differently provided for in activities that are carried out according to know-how, requiring such a license fee as royalties ^[1-3].

In the first case, a Russian organization can use various raw materials and equipment in the production of coffee, which leads to the absence of payment of royalties for imported coffee beans, the customs value of which will be determined for release into the customs territory. In the second example, the license agreement is constructed in such a way that the Russian organization is obliged to purchase such equipment and raw materials as indicated by the copyright holder. Therefore, in this case, the payment of royalties to imported coffee beans and equipment will be relevant, and their customs value will be increased.

Thus, the problem of the "relation of royalties to the goods being valued" is that it is necessary to correctly interpret the economic meaning of the payment of royalties and their relation to imported goods, based on whether the activity is carried out without the purchase of these goods or not ^[1-3].

The second key factor - "payment of royalties as a condition for the sale of valued goods" - is expressed in the fact that the licensee does not have the opportunity to purchase an intellectual property object without paying royalties. A foreign economic contract may specify the buyer's obligation to pay royalties to obtain an intellectual property object. However, in practice, these instructions are rarely used, especially when the copyright holder and the seller are different persons. Therefore, when considering cases involving the addition of royalties to the customs value, arbitration courts take into account several factors in order to determine the relationship between the payment of payments for the use of intellectual property objects and the sale for export to the customs territory of the Union. These factors include^[6]:

- indication in the foreign economic contract between the buyer and the seller of the provisions that relate to the payment of royalties;

- an indication in the license agreement of the provisions that relate to the sale of imported goods;

- indication in the foreign economic contract and (or) in the license agreement of clauses on termination of the foreign economic contract in a situation when the licensee will not make royalties to the copyright holder;

- an indication in the license agreement of the condition under which, if no remuneration has been paid to the rightholder, then the seller cannot produce and (or) sell goods that are created using intellectual property objects.

- an indication in the license agreement of the terms of the copyright holder's control over the production of goods or their sale, with the possibility of control outside the quality control framework.

Case no. A40-228733/15 is an excellent example of how the copyright holder's control over the production of licensed products caused the inclusion of license fees in the customs value of imported goods. The position of the customs authorities on the need to account for these payments was supported by the courts of all instances, including the Supreme Court of the Russian Federation. Such control was expressed through a number of procedures:

- approval by the copyright holder of licensed products at certain stages of production;

- submission to the copyright holder of the elements that are in the process of development, in order to subsequently review and approve them;

- conducting an audit of enterprises that are engaged in production;

- control of the procurement plan;

- the right holder's ability to prohibit production.

An important problem in this key factor is the expression "the sale must be carried out for export to the territory of the EAEU". Courts and importers interpret this definition differently. It can be interpreted as the purchase of goods containing an object of intellectual property in a foreign country for the purpose of further importation into the customs territory of the EAEU, or it can be considered as the sale of such goods directly on the territory of the Union. Figure 1 shows two positions^[6].

The ruling of the Supreme Court of the Russian Federation in case No. A40-110311/2013 states that royalties for intellectual property objects contained in goods imported directly into the territory of the Union for subsequent sale should be included in the customs value. However, in practice, declarants and customs consultants do not agree with this position, since they believe that the wording "the sale must be carried out for export to the territory of the EAEU" can only be considered as the purchase of goods in a foreign country for import into the customs territory of the Union for sale.

Moreover, in practice, it is difficult to determine the value of royalties, which must be included in the customs value of transported goods – with or without indirect taxes. The fact is that foreign copyright holders are not registered with the tax authorities, but by granting intellectual property rights, they enter into tax relations on the territory of the Russian Federation. Such relations relate to the payment of VAT and corporate income tax.

In accordance with the current version of paragraph 4 of paragraph 1 of Article 148 of the Tax Code of the Russian Federation, the territory of Russia is recognized as the place of realization of the right to an intellectual property object on the basis that a Russian organization acquires these rights as a buyer, at whose location the place of sale of the services of Russia is determined ^[7]. Due to the fact that the Russian Federation is the place of sale, there is such an object of VAT taxation as the realization of property rights. Russian organizations (licensees) in accordance with paragraph 2 of Article 161 of the Tax Code of the Russian Federation become tax agents.

However, in addition to such an object of VAT taxation as sales, there is another object of VAT taxation as the import of goods into the customs territory of the EAEU, which can lead to double taxation. According to the Letter of the Ministry of Finance of the Russian Federation dated 08/04/2016 No. 03-10-11/45719, double taxation does not arise, since in these two cases different organizations act as taxpayers: for importation – a Russian importer organization, and for the realization of property rights – a foreign right–holder organization ^[8].

In addition to VAT, a foreign organization (rightholder) must pay corporate income tax in accordance with subparagraph 4 of paragraph 1 of Article 309 of the Tax Code of the Russian Federation from granting intellectual property rights. Consequently, another logical question arises, in what amount to take into account the royalties. According to Article 8.1 (c) in the General Introductory Commentary to the WTO Agreement on the Application of Article VII of the GATT 1994, whose principles are applicable in resolving court cases and drafting explanatory letters of the Ministry of Finance of the Russian Federation, these taxes should be included in the royalties, which means that important attention should be paid to accounting documents that reflect accrued tax payments ^[9].

Possible solutions to the highlighted problems

The development of ways to improve the regulation of customs value should begin with the analysis of proposals already developed by government agencies. First of all, it is worth noting that was formed The Action Plan for the period 2021-2024 for the implementation of the Strategy for the Development of the Customs Service of the Russian Federation until 2030 (hereinafter referred to as the Strategy), which outlined new measures to modernize the activities of customs authorities.

The main goal of the Strategy within the framework of customs control was the transition to intelligent customs. That is, the modernization of the activities of customs authorities will consist in the introduction of artificial intelligence, which would allow automating the process of controlling foreign trade transactions, as well as information about the goods being moved, which will strengthen control over the customs value.

Development of "intelligent" the checkpoint across the state border of the Russian Federation will not only simplify the control of customs value, but also make it more efficient. An "intelligent" checkpoint implies the introduction of new systems into the activities of customs authorities, automation of processes, as well as the organization of a transport and logistics complex that would help ensure the automatic passage of risk-free supplies without the direct participation and control of customs officials. For an "intelligent" checkpoint, it is planned to create a digital platform in which databases of regulatory authorities and various control systems would be integrated. This innovation would reduce the number of additional checks in terms of control of the declared customs value and create fundamentally new conditions for the development of relations between declarants and customs authorities.

At the same time, to solve the particular problems of forming the composition of the elements of customs value lies in the development of more specific regulatory mechanisms. First, it is necessary to work out certain legislative aspects. In particular, the wording "the sale must be carried out for export to the territory of the EAEU" should be precise. First of all, it is advisable to clearly define how the sale should be carried out:

1) purchase in a foreign country for the purpose of further export to the customs territory,

2) direct sale in the customs territory itself,

3) both options are possible.

In our opinion, it is best to use both options, as this will facilitate the very procedure of court proceedings, and the declarant will have a clear idea of how to account for royalties when purchasing goods. This explanation will affect the control by the customs authorities, and this control will concern not only the formation of the customs value, but also the formation of a unified customs register of intellectual property objects. Article 385 of the EAEU TC regulates information on the unified register of intellectual property objects, but in practice it has not yet started functioning due to the incomplete procedure for harmonizing the legislative and information systems of the EAEU countries. In this connection, it is advisable, as a strengthening of pre-trial control measures, to engage in the development of this unified register, which significantly reduces the time of control at the stage of permitting the release of goods and adjusting the customs value due to royalties. Moreover, with the development of the unified register of intellectual property objects, it is advisable to develop cooperation with the customs authorities of other countries to identify copyright holders and track the chain of contracts between various organizations.

Considering such a key factor as the "ratio of royalties to imported goods", it is necessary to stimulate interaction between the Federal Customs Service of Russia and Rospatent, namely, to compile a "declarant's dossier", as the tax authorities compile a "taxpayer's dossier", and indicate all valid license agreements with a note about the goods involved in the activities and the requirements of which are specified by the copyright holder. This method will help facilitate the formation of the customs value of goods that do not contain an intellectual property object, but are involved in the manufacture of products with an intellectual property object.  Moreover, this "dossier" will help prevent situations when the declarant intentionally does not designate a trademark for the transported products.

Regarding the determination of the amount of royalties that are included in the customs value, there is no explanation at the level of the legislative acts of the EEA on the accounting of VAT and corporate income tax amounts. The solution to this problem is to improve subparagraph 7 of paragraph 1 of Article 40 of the EAEU Customs Code and subparagraph "g" of paragraph 9 of the Decision of the Board of the Eurasian Economic Commission of December 20, 2012 N 283

"On the application of the method of determining the customs value of goods by the value of the transaction with imported goods (method 1)", namely, clarification of the wording of this paragraph: "license and other similar payments for the use of intellectual property, accrued with VAT and corporate income tax, ...".

In conclusion, we note that the directions presented in this study for improving the tax accounting of royalties will reduce the tax risks of taxpayers and the state in cross-border trade.