Are Royalties Dutiable? A Tango between Transfer Pricing and Customs Valuation

Sebastiaan Kuijper, Elaine Long, Martijn Schippers, Bram van den Bongard

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Abstract

The tax and global trade landscape has evolved significantly in the past few years, with more information oversight by governments on the value creation of multinational companies and increased scrutiny on cross-border movements of tangibles and intangibles. This trend is likely to continue to evolve, with governments looking to make up for the budget deficits generated by actions to fight the costly global pandemic. In that context, cross-border royalty payments are put on a microscope, and customs authorities have put greater focus on royalties to ascertain that the correct value is reflected in the customs value of imported goods. For both the customs valuation and transfer pricing (TP) treatment of cross-border royalty payments it is important to understand the economic value chain which is driving these in order to respond to audits initiated by the customs authorities. A holistic approach whereby customs and TP are assessed in tandem, can greatly strengthen the response to complex customs valuation cases as well as provide opportunities for multinational enterprises (MNEs) to better streamline their intangible pricing mechanism.

This article provides a theoretical framework on the interaction between TP and customs valuation. The customs analysis whereby royalty is added to the customs value is provided in section 2., followed by the customs and TP analysis of a case study, including a fixed-rate royalty model and a residual royalty model in section 3. The article concludes with the authors’ main observations in section
Original languageEnglish
Pages (from-to)345-352
Number of pages11
JournalInternational Transfer Pricing Journal
Volume30
Issue number6
Publication statusPublished - 15 Nov 2023

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  • SAI 2007-05 FA

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