South African importers may soon find themselves with more questions than answers when it comes to duties following a ruling by the Supreme Court of Appeal in a long-running dispute between Levi Strauss SA and the South African Revenue Service (Sars).According to Quintus van der Merwe, a partner at Shepstone & Wylie, importers who pay royalties to IP owners or licensors are best advised to take note of the judgement in the case as it could have severe consequences for duties payable. “Importers need to do a health check and make sure they are paying the correct duties,” he told Freight News. “This judgement changes the law and people’s understanding of the law and applies to all importers that pay royalties.”Whilst some consider the ruling far-reaching, Van der Merwe said importers needed to understand the impact of the ruling on their businesses as it could change how much duty importers paid. “It not only carries more duties for importers who pay royalties, but the lack of payment could result in penalties and potentially forfeiture.”The Supreme Court of Appeal recently concluded in the Levi Strauss SA/Sars case that the obligation to pay royalty should not necessarily be a term of the contract between the supplier and purchaser. If it is a term, then the payments must be directly linked to the export sale and be dutiable, ie, to be added to the invoice price.“As the royalty payments are concerned with the contract in terms of which goods are imported into South Africa, and even if payable to a third party other than the seller, it can still be due indirectly. It will be due indirectly as a condition of sale when the goods cannot be procured effectively unless the royalty is paid.”In the case of Levi Strauss, which is a multinational with subsidiaries throughout the world of which Levi SA is one, the Supreme Court of Appeal held that the payments were indirectly linked to the sale for export of the goods to South Africa as without such payment the goods would not be exported to Levi SA.“The question that arises from this decision,” said Van der Merwe, “is when will royalties then not be dutiable?”Van der Merwe explained that in the past royalties were widely considered a valid deduction when the royalty was not payable to procure the goods, but rather as a condition of the sale of the goods in South Africa. “Goods were declared for customs purposes at the actual price at which they were procured; royalties in many instances are paid to the licensee dependent on the number of sales made in any specified period.”This judgement in effect will now require importers to add the royalty at the import stage to pay duties then and there, long before they know how many items have been sold and how much royalty is owed.“The judgement will have far-reaching effects,” warned Van der Merwe. “Anyone deemed not to be dealing with royalties correctly is at r isk.”Van der Merwe said the court had not addressed the practicalities of making value determinations. “At the time of importation, it is not known what royalty will be paid as this might only be determined when the goods have been sold in South Africa. As stated, the liability will only arise if sold locally – and it remains uncertain how the initial transaction value will have to be corrected. Also, for instance, if the goods are lost, damaged or destroyed before they are sold, then the royalty is not payable. How do you thus make a correct declaration at the time of importation before you know what royalty will be payable?”FN9037Tigers is a client interfacing development company specialising in bespoke supply chain solutions, customs brokerage, e-fulfilment, perishables and transportation by air, sea and road.www.go2tigers.com | za-info@go2tigers.com | 011 923 4200FN9145www.cfrfreight.co.zaWe have over 100 ocean freight import services to offer you.Experts at Imports! The ruling not only carries more duties for importers who pay royalties, but the lack of payment could result in penalties and potentially forfeiture.– Quintus van der Merwe