November 5, 2004
U.S. Customs & Border Protection (Customs) recently issued a ruling (HQ548568, dated October 19,2004), wherein it concluded that the value of an assist must include payments to third parties for any royalties, licenses or patent fees, when those payments relate to the right to exercise design, manufacture, or process technology embodied in the assist.
The ruling concerned how an importer should determine the value of a semiconductor wafer that is manufactured in the United States and consigned to a foreign assembler, free of charge, for assembly into a finished integrated circuit. The finished device will then be exported back to the United States and other third countries.
According to the ruling, the U.S. manufacturer produces the wafers using technical design, manufacturing, and process rights obtained through a licensing agreement with a third party. In exchange for the design, manufacturing, and process rights, the Importer pays the third party a license fee. The importer inquired whether the license fee payments for design, manufacturing, and process rights should be included in the valuation of the assist, for customs valuation purposes.
In confirming that license fee payments for design, manufacturing, and process rights are part of the value of an assist, Customs said that the term "assist" refers to a statutorily enumerated good or service that is supplied . . . by the buyer free of charge or at a reduced cost, for use in connection with the production or sale for export of the imported merchandise. It then said that the type of assist at issue in the case was the wafer, which belongs in the category of materials, components, parts, and similar items incorporated in the imported merchandise.
Citing 19 C.F.R. 152,103(d)(1), Customs said that the value of an assist is its cost of acquisition, or, if the assist is produced by the buyer or a party related to the buyer, its value would be its cost of production, plus the transportation cost to the place of production.
Citing HQ ruling 544192, dated June 16, 1989 (which held that the cost of production of an assist includes design and development costs, regardless of whether incurred within or outside the U.S.), Customs held in HQ548568 that the license fees paid by the importer to the 3rd party, in return for the right to use the technical know-how to produce the assist in the U.S., is a part of the value of that assist. It concluded that "[a]ccordingly, the value of the assist includes the amount of the license fees paid . . . regardless of how the importer treats the license fees on its books", and, therefore, must be reported as a part of the total price paid or payable for the imported devices.
Commentary on Customs Ruling HQ548568 And The
Treatment of Royalties, License Fee & Patent fee Payments
Payments to third parties for royalties, licenses, or patent fees for the right to make use of design, manufacture, or process technology is commonplace in today's business environment. These costs, however, are almost universally overlooked by importers when declaring the Customs value of goods, which incorporate materials, parts, and components that were made using this purchased technology. This is particularly true in the computer, electronics, and integrated circuit manufacturing industry. It also has considerable relevancy in the biotechnology, pharmaceutical, and medical instrument industries. As a general rule, these costs are not normally included in intercompany transfer prices, and, therefore, like reticles, NRE expenses and tooling costs, represent a potential undervaluation of imported merchandise.
Please feel free to contact us if you would like to know more about Customs' treatment of assists and payments to third parties for the right to make use of design, manufacture, or process technology.
If you have questions on any of the issues raised in this newsletter, please contact George R. Tuttle, III at (415) 288-0428 or via email at firstname.lastname@example.org.
George R. Tuttle, III is an attorney with the Law Offices of George R. Tuttle in San Francisco. The information in this article is general in nature and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.
© 2005 by Tuttle Law Offices.
rights reserved. Information has been obtained from sources believed
to be reliable. However, because of the possibility of human or
mechanical error by our offices or by others, we do not guarantee
the accuracy, adequacy, or completeness of any information and are
not responsible for any errors, omissions, or for the results obtained
from the use of such information.