[Basic Information]
During an audit of Company B within its jurisdiction, Customs A found that Company B had cumulatively paid RMB 490 million to foreign entities as royalty fees associated with imported chips. In accordance with the Tariff Law of the People's Republic of China and the Administrative Measures of the People's Republic of China on Customs for Determining Taxable Prices of Imported and Exported Goods, RMB 13.67 million of these royalty fees were deemed taxable. Company B failed to properly declare this portion of expenses as the regulations require, resulting in an underpayment of import duties totaling approximately RMB 2.08 million. Customs A lawfully pursued the recovery of the underpaid duties.
[Key Points Analysis]
Q1: What is royalty fee?
According to the Administrative Measures of the People's Republic of China on Customs for Determining Taxable Prices of Imported and Exported Goods (GACC Order No. 273), royalty fee refers to payment made by the buyer of imported goods to the holder of intellectual property rights—or to the holder’s authorized representative—for the licensing or transfer of patents, trademarks, proprietary technologies, copyrights, distribution rights, or sales rights.
Q2: What are the taxable conditions for royalty fee?
As per Articles 11, 13, and 14 of the Administrative Measures of the People's Republic of China on Customs for Determining Taxable Prices of Imported and Exported Goods, royalty fee is considered taxable if the following two conditions are simultaneously met:
I. Related to the imported or exported goods
Royalty fee shall be deemed related to imported goods if they meet any of the following criteria:
(I) Payment for patent or proprietary technology usage rights, and the imported goods meet one of the following conditions: 1. Incorporate patents or proprietary technologies; 2. Are manufactured through patented methods or utilizing proprietary technologies; 3. Are specifically designed or manufactured for the execution of patents or proprietary technologies.
(II) Payment for trademark rights, and the imported goods meet one of the following conditions: 1. With a trademark attached; 2. Can be sold directly after import by affixing the trademark; 3. Already include trademark rights upon import and can be sold after minor processing and trademark application.
(III) Payment for copyrights, and the imported goods meet one of the following conditions: 1. Imported goods containing software, text, music, pictures, images, or other similar content, including magnetic tapes, disks, CDs, or other similar carriers; 2. Imported goods containing other content protected by copyright.
(IV) Payment for distribution rights, sales rights, or other similar rights, and the imported goods meet one of the following conditions: 1. Can be sold directly after import; 2. Can be sold after minor processing.
II. Constituting a condition for domestic sale
If the buyer cannot acquire the imported goods without paying the royalty fee, or if the goods cannot be sold under the contract terms unless the buyer pays it, then payment of that royalty fee is regarded as a condition for domestic sale of the imported goods in the People's Republic of China.
Q3: What are the proper steps to declare royalty fees?
As specified in Announcement No. 58 [2019] by the General Administration of Customs, for cases where taxable royalty fees related to imported goods are paid directly or indirectly to the seller or other related parties, regardless of whether such fees are included in the actual or payable price of the imported goods, the declaration box for “Confirmation of Payment of Royalty Fees Related to the Goods” must be filled with “Yes.” Depending on whether the taxpayer has paid the royalty fees at the time of import declaration, there are two declaration modes as follows:
1. If the taxable royalty fees have been paid at the time of import declaration, the paid amount should be reported in the “Miscellaneous Fees” section of the customs declaration form and does not need to be included in the “Total Price” section.
2. If the taxable royalty fees have not been paid at the time of import declaration, the “Confirmation of Payment of Royalty Fees Related to the Goods” box on the original import customs declaration form must be marked “Yes.” The taxpayer must, within 30 days after each payment, complete the declaration and tax payment procedures with customs and submit the Taxable Royalty Fees Declaration Form. When preparing the customs declaration form for royalty taxation, enter "Subsequent Taxation on Royalties"(code 9500) in the "Supervision Method" section, specify the original imported goods' name in the "Commodity Name" section, input the code of the original imported goods in the "Commodity Code" section, mark "0.1" in the "Legal Quantity" section, record the amount of the taxable royalty fees for each occurrence in the "Total Price" section, and enter "1" in both the "Gross Weight" and "Net Weight" sections.
[Enlightenment from the Case]
Customs inspections and supervision of royalty fees not only help safeguard national tax revenues but also promote corporate compliance and a fair trading environment. This case highlights that the violations by Company B reveal potential risks associated with international trade activities, such as insufficient understanding of regulations or lack of robust internal controls. Customs reminds enterprises to strengthen compliance awareness during the import process, accurately declare all taxable fees, and establish sound financial internal control systems. This is to avoid legal issues arising from underpayment of taxes and to ensure the seamless and regulated conduct of trade activities.
(Nanchang Customs: Peng Wanqing, Wen Chenglin)
Disclaimer：The above content is translated from Chinese version of China Inspection and Quarantine Times. The China Inspection and Quarantine Times version shall prevail.
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