All you should know about royalty fees

There are many ways for South African Revenue Service (Sars) to increase revenue. One is to increase the customs value of imported cargo – and sections 41 and 67 of the Customs & Excise Act 91 of 1964 (“the Act”) allow Customs to do this by adding royalties and licence fees, amongst other costs and charges, to the value of the imported goods. South Africa is a signatory to the WTO Agreement on Customs Valuation (ACV) and as such Article VII of the ACV has been taken up into our legislation as Sections 41 and 67 of the Customs & Excise Act 91 of 1964 (“the Act”). The two most important things to remember are that the royalty fee must relate to the goods being valued, and must be a condition of sale of the goods being valued, to the extent that the royalty fee is not already included in the price actually paid or payable. For example, company A manufactures branded caps and sells the caps for export to company B at a price exclusive of the royalty fee. The caps are sold for export on the condition that company B pay a royalty fee to a third party who holds the copyright. In this case the royalty fee should be included in the dutiable value as it relates to the goods being valued and is a condition of sale. It is unfortunately not always this cut and dried. For example, what if company B only paid royalty fees every three months? The royalty fee is now no longer related to the goods being valued, but is still a condition of sale. In this case it would be advisable to contact Customs and request a Value Determination. One could also calculate the royalty amount payable on each imported consignment and request this amount be included in the invoice as a separate amount. In terms of Section 84 of the Act, if a royalty fee is payable by the importer and this information is not reflected on the invoice, Customs will deem this to be a false declaration. If it is found that an importer has made a false declaration to Customs, not only will that importer be liable to a fine and possible imprisonment, but the goods will also be liable to forfeiture. If you have any queries regarding royalties or value determinations, please do not hesitate to contact the Customs @ Wylie team at customs@wylie.co.za.