China: Customs Duty to be Paid on Royalties

On 1 July 2003, the PRC Customs Procedures Concerning Imported Goods License Fees commenced operation. These new regulations will increase the dutiable value of many imported products, given that the regulations require that the dutiable value of an imported good include any intellectual property or distribution right royalty payment that must be paid to a foreign exporter. Consequently, where a foreign company supplies goods and licenses intellectual property to the same PRC customer, there is a high risk that the license fees will be included in the goods’ dutiable value.

These new regulations will have major ramifications for software providers given in the past, the value of the media was dutiable, rather then the value of the (substantial) copyright royalty fee. Further, the PRC’s rapidly developing ecommerce market has been affected by the regulations, given that royalty payments relating to the download of software and other products by satellite or via the Internet are expressly caught by the new regulations.

The regulations need further clarification in many regards, since upon an expansive reading of them, it could be argued that they breach China’s WTO obligations. Further, double taxation may also arise given that when remitting royalty payments, PRC companies must pay withholding tax. Further, business tax will also have been paid by PRC companies in relation to the royalty income stream at some stage – the full royalty payment (rather than the after tax royalty payment) will apparently be used when calculating customs duty.