Import News from the Importers Institute
7 April 2000 - By Invitation: Jules Croft on Customs Valuation
International trade in goods is dictated by rules which, while they may seem baffling to an outsider, are serious enough
to cripple a successful business. A company can be earning enough to support its employees and suppliers (and sometimes
its shareholders) and then receive a demand for taxes in the form of Customs duties that it genuinely believed had been
properly paid. By the time Customs has issued the demand it is too late for the extra costs to be recovered from the
firm's customers. The goods in question will have been sold and it is now a cost to the importer. That demand for taxes
will have to be funded out of retained earnings or debt - a position companies would prefer not to be in.
The calculation of the amount of duty to be paid is usually based on the invoice price less certain adjustments if
applicable. One of the most common adjustments is for royalties. A lot of attention has been paid to this issue of
royalties and New Zealand Customs has been successful in a number of legal proceedings which have found that royalties
in certain circumstances do form part of the value for duty. So if an importer had paid duty of $1.00 on a $10.00 pair
of shoes and Customs then found that a royalty of $2.00 per pair of shoes should have been added to the $10.00, the new
value for duty becomes $12.00 and the duty to be paid has gone up from $1.00 per pair to $1.20 per pair. Customs will
then ask for that extra $0.20 per pair. Think of the number of pairs of shoes in a 20 foot container and consider that
Customs can and do, ask for duties short paid from four years earlier and the size of the problem becomes significant.
The latest royalty decision is the Court of Appeal Avon case (November 1999) which overturned the High Court's decision
that a royalty did not have to form part of the value for duty. In the Court of Appeal case the interrelationship
between the Avon companies ultimately dictated the outcome. Avon argued that because it did not pay royalties to the
related company supplying the goods that it could import the goods without paying the royalty. This brings to attention
a key element of whether or not a royalty is payable. One criterion is that the royalty must be paid as a condition of
the sale of the exported goods. That is, if you can't buy the goods without paying a royalty then you must pay duty on
the value of the goods plus the royalty. In the Avon case, Avon New Zealand did not pay a royalty to Avon Australia.
Therefore, Avon argued, the payment of a royalty was not a condition of the export sale. Not so said the Appeal Court.
The Court considered that Avon New Zealand did pay, although not all the time, royalties to the parent company Avon
Products (USA). So, although Avon New Zealand did not pay royalties to the seller the payment of the royalties was
considered to be a condition of the export sale.
In arriving at this decision the Court of Appeal incorporated the reasoning in the adidas New Zealand case. There the
question of whether or not a degree of control exists over the manufacturer of the goods was raised. That is, there must
be a clear indication that without the payment of the royalty by say, adidas New Zealand, the goods could not be
purchased. This is a difficult area to analyse, not only for Customs, but also for the Courts. In the Avon case, the
Court of Appeal sought assistance from a Canadian decision involving royalties paid to the Mattel Group (the owners of
Barbie and other toys and games). In that case attention was focused on how to interpret the condition of sale
requirements. In our view, this is an important development. The reference to these Canadian decisions brings to the
attention of New Zealand Customs that not all royalties are dutiable. There seems to be a developing policy within
Customs that if there is a royalty then it is fair game for the taxman. However, what the Canadian cases say is that
there must be a degree of control that would "... prevent the importation of the goods by the purchaser or seriously
compromise the ability of the purchaser to buy the goods for export in cases where he has failed to pay the royalties."
This is a sign of some relief for those importers/exporters who have read the Advisory Opinions of the World Customs
Organisation and the WTO Valuation Agreement. Not surprisingly, these bodies do not believe that royalties are always
dutiable. When a royalty payment has been made for the right to sell a trademarked product then this payment is not
always seen as a condition of the export sale. New Zealand's legislation allows this interpretation and importers should
look carefully at their Agreements (or lack of Agreements) should Customs give them a call.
Jules J Croft Blackburn Croft & Co bcc@tradecon.co.nz
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