The customs valuation of the “intangible assist”

By: Mr, NC, Collart, Nicolas, EU Customs Post-Master, 2017

Table of contents

Table of contents ........................................................................................................ 1

Abbreviation................................................................................................................ 3
1. Introduction ............................................................................................................. 4
2. Customs valuation .................................................................................................. 5
2.1 Background.................................................................................................................. 5
2.1.1 General background .............................................................................................. 5
2.1.2 Historical background ............................................................................................ 5
2.2 Valuation methods ....................................................................................................... 6
2.2.1 Transaction value .................................................................................................. 6
2.2.2 Transaction value of identical goods ...................................................................... 7
2.2.3 Transaction value of similar goods ........................................................................ 7
2.2.4 Deductive value ..................................................................................................... 7
2.2.5 Computed value .................................................................................................... 7
2.2.6 Fall back method ................................................................................................... 8
3. Transaction value ................................................................................................... 9
3.1 General principles ........................................................................................................ 9
3.2 Elements to be included in the transaction value.........................................................11
3.3 Elements not to be included in the transaction value ...................................................13
4. Assists .................................................................................................................. 14
4.1 General principles .......................................................................................................14
4.2 Conditions ...................................................................................................................14
4.3 Categories ..................................................................................................................14
4.3.1 Items incorporated into the imported goods ..........................................................15
4.3.2 Items used in the production of the imported goods..............................................15
4.3.3 Materials consumed in the production of the imported goods ...............................15
4.3.4 Design and development necessary for the production of the imported goods .....15
4.4 Valuation and apportionment ......................................................................................15
4.4.1 Valuation ..............................................................................................................16
4.4.2 Apportionment ......................................................................................................16
5. The intangible assist ............................................................................................. 17
5.1 General principles .......................................................................................................17
5.2 Challenges ..................................................................................................................17
5.2.1 Research vs Development....................................................................................18
5.2.2 Activities undertaken both in the country of importation and in another country ....20
5.2.3 The Skechers Canada Case .................................................................................21
6. Conclusion ............................................................................................................ 23

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 6.1 Research costs should in principle be excluded ..........................................................23
6.2 Necessary for the production ......................................................................................23
6.3 Final conclusion ..........................................................................................................23
Literature list ............................................................................................................. 24

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Abbreviation
EU: European Union
GATT: General Agreement on Tariffs and Trade
BDV: Brussels Definition of Value
UCC: Union Customs Code
WTO: World Trade Organisation
CCC: Community Customs Code
UCC: Union Customs Code
UCC IA: Union Customs Code Implementing Act
OECD: Organisation for Economic Co-operation and Development
EC: European Commission
GAAP: Generally Accepted Accounting Principles
IAS: International Accounting Standards
TCCV: Technical Committee on Customs Valuation
EEC: European Economic Community
OJ: Official Journal of the European Union
EC DG Taxud: Directorate General for the Taxation and Customs Union at the level of the
European Commission
EUCU: European Union Customs Union
CBSA: Canada Border Services Agency
CITT: Canadian International Trade Tribunal

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1. Introduction
Whether it takes place in a B2B or B2C scenario, the basic principle of importation consists of
the introduction of goods, produced in a foreign country, within the customs territory of a union.
The EU Customs Union is an example of a territory where a number of countries apply a
uniform system for handling the import, export and transit of goods. Its common set of rules
are captured in the Union Customs Code1, which became applicable in 2016.

Within the EUCU, a uniform system of customs duties is used to tax the import of goods
originating from outside the EU whereby a duty is to be paid upon the moment of first entry.
However, no customs duties are due when crossing the borders of the different EU member
states.

It should be borne in mind that the objective of EU law on customs valuation is to introduce a
fair, uniform and neutral system excluding the use of fictitious customs values. The customs
value should thus reflect the real economic value of imported goods and therefore take into
account all of the elements of such goods that have economic value.2

The calculation of duties generally requires the determined value of the goods. Our first action,
in the process of determining the value of the goods, is usually to refer to the invoice price.
However, in practice this value is in some cases not representative for the entire value which
is to be used for the purpose of determining the customs value. For this reason, a clear set of
rules has been issued by the WTO stipulating that some elements, which are not incorporated
in the invoice price, should be added to or excluded from the value of the goods.

Taking now a practical example where a buyer purchases goods which are produced outside
the EU. In this scenario, the buyer supplies certain goods or services which are supplied, free
of charge or at a reduced cost, to the seller or manufacturer to use these for the production
process of the relevant goods. When such goods or services meet specific conditions, they
are be referred to as “assists” for customs purposes.3 The effect of providing these “assists”
make the cost of production less than what it would have been had the seller or manufacturer
acquired these from a third party. Once such goods or services are considered as “assists”,
their value should be added to the customs value of the finished goods.

So which type of goods or services fall within the category of “assists” and which are the
conditions to determine what constitutes an “assist”?

In the present work, I would like to analyse and focus on the “intangible assist”. In a nutshell, I
ask myself how we should deal with R&D/design work which can be provided for free or at a
reduced rate by the buyer in order for him to acquire the specific goods he wishes to purchase.
Additionally, I will focus on the link between the different accounting rules and intangibles a
company may have.

Finally, this work will cover the question of what should be done with the different types of
research and development costs and which of those actually qualify as necessary for a
production process. This, to be able to determine what should and should not actually be added
to the customs value of imported goods.

1 UCC Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013
laying down the Union Customs Code
2 Case C-173/15 GE Healthcare GmbH v Hauptzollamt Düsseldorf [2017] EU:C:2017:195 para 30
3 Commentary No 1 of the Customs Code Committee (Customs Valuation Section) on the application

of Article 32(1)(b) of the Customs Code on the valuation of goods for customs purposes, para 2

4
2. Customs valuation
2.1 Background
2.1.1 General background

To start with, let me explain what customs duties are and when they can be applicable.
Customs duties are indirect taxes that can be levied on goods that are brought into a customs
territory for example upon importing goods into the European Union. Nevertheless not all
imports should be subject to customs duties.

There are two main methods to determine and calculate customs duties, being specific and ad
valorem terms.

Specific terms
Taking the scenario of a specific duty, an amount is charged to a specified quantitative
description of a good for example 1 EUR per kilogram. Thus this scenario does not require a
customs value as the price is set, irrespective of the value of the goods, by a concrete sum
which is defined by the responsible Customs authority importing the goods in its Customs zone.

Ad valorem terms
In contrary to customs duties set by specific terms, the determination of a customs value is key
for the ad valorem method as this value is multiplied by an ad valorem rate of duty resulting in
the amount of duty to be paid upon importation of the goods. Ad valorem terms are reflected
in form of a percentage for example 2 per cent of the value of the goods. In case ad valorem
terms are applied to calculate customs duties, it requires the determination of the following
elements:
 the origin of the goods;
 their tariff classification; and
 their customs value.

In some scenarios, customs duties can also be designated by a potential combination of

specific and ad valorem terms.

2.1.2 Historical background

Although I will not focus in detail on the historical evolution setting the general principles of the
customs value, it remains relevant to mention some of the main sources having led to the
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade
1994. Today this agreement, which is also known as the WTO Customs Valuation Agreement,
is used by most countries in the world to define local legislation.

As a first source, to be considered as a general standard, article VII of the General Agreement
on Tariffs and Trade laid down the principles for an international system of valuation. This
multilateral treaty was signed by 23 countries on 30 October 1947. Article VII provided the
concept of the customs value to be based on the “actual value” of imported goods. Next to this
first introduction of the “actual value”, the agreement still allowed the use of variant other
methods for valuation purposes.

As of the 1950s, many countries started to determine customs duties according to the Brussels
Definition of Value. This method determined a “normal price” for each product. In practice, this
meant a fixed price was assigned per product. For this reason, it was Customs’ responsibility
to maintain an exhaustive pricing list. This method was difficult to be managed by Customs

5
considering the constant changes in prices and the addition of new products on the market
whereby the method could not be applied globally. Specifically, this method was never adopted
by the USA, which did not form part of the BDV. It was clear that a more flexible and uniform
valuation method was needed which would require the harmonization of the systems of more
countries.

The Tokyo Round Valuation Code established an improved system of customs valuation by
introducing the term “price actually paid or payable” for the imported goods. This was also the
introduction of the “transaction value” term, which intended to provide a fair, uniform and
neutral system for the valuation of goods for customs purposes. The Tokyo Round Valuation
Code, concluded in 1979, was signed by more than 40 countries.

Finally and more recently, the Uruguay Round initiated the creation of the WTO. Consequently,
the Tokyo Round Valuation Code was in 1994, although essentially identical, replaced by the
WTO Customs Valuation Agreement. This agreement, which is still applicable today, focuses
primarily on the customs value of imported goods for the purpose of levying ad valorem duties.
The said agreement was signed by more than 100 countries. Within the ECC, this agreement
became applicable as of January 1st of 1995 by having implemented regulation 94/800/EC.4
This agreement was also used to codify the CCC which entered into force in 19925 but only
became applicable as of 1 January 1994.

Finally, the CCC was replaced by the UCC which entered into force on October 30th of 20136
and is now applicable since 1 May 2016 where we can nowadays find the customs valuation
rules for the EUCU.

2.2 Valuation methods

Within the framework of the WTO Customs Valuation Agreement7, it was agreed to describe
six methods to determine the customs value of goods.

The following methods are described and must be applied in sequential order:
1) the transaction value;
2) the transaction value of identical goods;
3) the transaction value of similar goods;
4) the deductive value;
5) the computed value;
6) the fall back method.

2.2.1 Transaction value

Transaction value is commonly known as the standard rule for customs valuation purposes. It
is considered as the primary basis to determine the customs value of goods and is thus applied
in approximately 95% of the imports. The purpose of this method is to determine at best what
the value of the goods is rather than what the value of the goods should be. This method is
described in detail in the next chapter.

4 OJ L 336 of 23/12/1994, p.119 - Council Decision of 22 December 1994 concerning the conclusion
on behalf of the European Community, as regards matters within its competence, of the agreements
reached in the Uruguay Round multilateral negotiations
5 Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs

Code
6 See note 1
7 Art 1 Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade

1994

6
2.2.2 Transaction value of identical goods

The second method following the sequential order is the transaction value of identical goods.
The method, is described in the UCC as “the transaction value of identical goods sold for export
to the customs territory of the Union and exported at or about the same time as the goods
being valued”.8

According to the WTO Customs Valuation Agreement9, this method can only be applied in
case the goods being valued and the identical goods are:
 identical in multiple sense of the term (physical appearance, quality, …);
 produced by the same manufacturer and within the same country.

2.2.3 Transaction value of similar goods

The UCC describes method three as “the transaction value of similar goods sold for export to
the customs territory of the Union and exported at or about the same time as the goods being
valued”.10

Article 3 of the WTO Customs Valuation Agreement mentions that this transaction value can
be calculated if the goods being valued and the similar goods are:
 closely resembling in terms of material components and from an appearance
perspective;
 capable of performing the same functions and can be considered interchangeable from
a commercial point of view;
 produced by the same manufacturer and within the same country.

2.2.4 Deductive value

The deductive value method for customs valuation purposes is described as “the value based
on the unit price at which the imported goods, or identical or similar imported goods, are sold
within the customs territory of the Union in the greatest aggregate quantity to persons not
related to the sellers” in the UCC11.

Paragraph 1 of the Interpretative Note of article 5 of the WTO Customs Valuation Agreement
defines “the unit price at which goods are sold in the greatest aggregate quantity” as the price
at which the greatest number of units is sold in a scenario of unrelated parties.

2.2.5 Computed value

The computed value as described in the UCC12 is the sum of the production costs of the goods
being valued increased by (i) an amount for profit and general expenses and (ii) the cost of
transport and insurance to the place where goods are brought into the customs territory of the
Union.

8 Art 74 (2)(a) UCC

9 Art 2 Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade
1994
10 Art 74 (2)(b) UCC
11 Art 74 (2)(c) UCC
12 Art 74 (2)(d) UCC

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2.2.6 Fall back method

Finally, in case the customs value of imported goods in the EU cannot be determined based
on the above-described methods the fall back method should be used as described in article
Art 74 (3) UCC. The determination shall then be based on available data, using reasonable
means consistent with the principles and general provisions of all the following:
 WTO Customs Valuation Agreement;
 article VII of the GATT;
 chapter 3 of title II of the UCC.

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3. Transaction value
3.1 General principles
The definition of the transaction value as per the WTO Customs Valuation Agreement is “the
customs value of imported goods shall be the transaction value, that is the price actually paid
or payable for the goods when sold for export to the country of importation adjusted in the
accordance with the provisions of Article 8”. 13

In order to apply the transaction value, a sale is to be negotiated freely. The price the buyer
pays the seller can be said to best represent the actual (market) value of the product. Thus,
this price should be used for customs purposes. The key element to recall from this is that
each of the parties shall act in their own interest meaning that they are attempting to profit out
of the sale.14

Article 1 of the WTO Customs Valuation Agreement was almost identically taken over in the
UCC which states that “the primary basis for the customs value of goods shall be the
transaction value, that is the price actually paid or payable for the goods when sold for export
to the customs territory of the Union, adjusted, where necessary”.15

Sale (for export)

It seems relevant to describe what should be understood with “sale for export”. In this respect,
the UCC IA defines the “sale for export” as “the sale occurring immediately before the goods
were brought into that customs territory”.16.

In order to consider goods as brought into the Union, they should physically cross the border.

Additionally, the EC DG Taxud provides more detail in one of its guidance document to state
that the “sale for export” is “the sale which allows the application of the transaction value in a
manner that takes into account the substance of the entire commercial import transaction. It
allows the proper application of other relevant provisions. Where this not possible, the
application of the transaction value is not possible”.17

So what constitutes a sale and what does not? According to the WCO TCCV advisory opinion 18
it is important that the term “sale” is taken in the broadest sense so that the customs value of
the imported goods can be determined under the transaction value method as often as
possible. Transactions that qualify economically and legally as sales should be used for
customs valuation purposes.

For an actual sale to occur the parties should be regarded as buyer and seller and the
transaction should constitute a sale in the legal and commercial sense19. The following sales

13 See note 7
14 Sheri Rosenow and Brian J. O’Shea, A handbook on the WTO Customs Valuation Agreement
(Cambridge University Press, 2010) page 22
15 Art 70 (1) UCC
16 Art 128 (1) UCC IA
17 EC DG Taxud, B4/ (2016) 808781 revision 2, Guidance document on the of Customs Valuation

Implementing Act articles 128, 136 and 347 of the UCC IA, para 4 of section 2.1
18 WCO TCCV Advisory Opinion 1.1, The concept of “sale” in the Agreement, Adopted, 2nd Session, 2

October 1981, 27.960

19 EC DG Taxud, B4/ (2016) 808781 revision 2, Guidance document on the of Customs Valuation

Implementing Act articles 128, 136 and 347 of the UCC IA, para 7 of section 2.1

9
transactions and related imports should therefore be excluded and cannot be considered as
“sale for export” within the scope of transaction value:
 import on consignment;
 import by branches of the same company (no separate legal entity);
 import under a hire or leasing contract (also if there is an option sale);
 domestic sale – being a sale occurring between two EU residents – after import.20

Furthermore article 128 (2) UCC IA adds that the transaction value method can also be applied
on sales taking place in/from a customs warehouse within the EU territory if the following
conditions are met:
 there is no sale for export in accordance with article 128 (1) UCC IA;
 the sale taking place within the customs warehouse is not a domestic sale;
 the sale in the customs warehouse meets the requirements of article 70 (3) UCC.21

In practice, this means that the sales under the below listed procedures are to be excluded as
in these cases the goods do not qualify as having been imported in the EU:
 bonded warehouse;
 temporary storage;
 goods placed under a special procedure other than internal transit, end-use, outward
processing.22

Price actually paid or payable

The UCC identifies “the price actually paid or payable” as “the total payment made or to be
made by the buyer to the seller or by the buyer to a third party for the benefit of the seller for
the imported goods and shall include all payments made or to be made as a condition of sale
of the imported goods”.23

In addition, the UCC IA defines “the price actually paid or payable” as “all payments made or
to be made as a condition of sale of the imported goods by the buyer to any of the following
persons:
 the seller;
 a third party for the benefit of the seller;
 a third party related to the seller;
 a third party where the payment to that party is made in order to satisfy an obligation
of the seller.”24

The same article of the UCC IA also mentions that payments can be made by way of letters of
credit or negotiable instruments, and payments may be made directly or indirectly.25

Based on the above, I can conclude that the price paid or payable should be agreed by both
parties in a contract. This contract should not necessarily be in writing but can equally be verbal
as long as this can be evidenced by letters, emails, notes, bank statements, etc.

20 EC DG Taxud, B4/ (2016) 808781 revision 2, Guidance document on the of Customs Valuation
Implementing Act articles 128, 136 and 347 of the UCC IA, para 9 of section 2.1
21 EC DG Taxud, B4/ (2016) 808781 revision 2, Guidance document on the of Customs Valuation

Implementing Act articles 128, 136 and 347 of the UCC IA, para 6 of section 2.3
22 Art 128 (2) UCC IA
23 Art 70 (2) UCC
24 Art 129 (1) UCC IA
25 See note 24

10
Irrespective of how much of the total price has been paid or is still to be paid at the time of
acceptance of the customs declaration, the entire price should be taken into consideration for
determining the customs value of imported goods. This also means that the invoice price may
not necessarily represent the total price paid for the goods.

A set price can be transferred in money, via payment in kind or even a combination of partly
money and partly payment in kind. However, in case of payments in kind it is necessary that
there is an agreed method by which the price can be determined.

Direct and indirect payments

Finally, it is also relevant to mention the difference between direct and indirect payments. The
first occurs either in case there is a payment (i) from the buyer to the seller or (ii) from the buyer
to a person related to the seller and last but not least (iii) from the buyer to a third party to fulfil
an obligation to the seller.

As for indirect payments, we should think about the scenario where the buyer settles a debt
owned by the seller or also where a customer of the buyer settles the payment to the initial
seller.

3.2 Elements to be included in the transaction value

Moving on from the general principles, I will now dive into the elements to be included and
excluded from the transaction value.

To start with, let me cover the elements to be added to the transaction value as per article 71
(1) UCC. The following five additions shall be made only on the basis of objective and
quantifiable data. No other additions shall be made26.

1. Commissions and containers

“To the extent that they are incurred by the buyer but are not included in the price actually paid
or payable for the goods:
(i) commissions and brokerage, except buying commissions;
(ii) the cost of containers which are treated as being one with the goods in question; and
(iii) the cost of packing, whether for labour or materials.”27

For commissions and brokerage fees, the rule is easy as it is stipulated that any commissions
or broker fees incurred by the buyer and not yet included in the price of the goods, should be
added with the exception of buying commissions. For example, when a buyer pays a
commission for arranging the transport but the agent is actually working for the seller, such a
commission should be included in the transaction value. As this payment can basically be
considered as a kind of indirect payment to the seller. Buying commissions, which are to be
excluded, occur where a buyer pays a fee to his agent for the service of representing him
abroad in the purchase of the goods being valued.28

In terms of packaging, normally the price of packing and its related materials are included
within the price of the goods. When this is not the case, such costs should be added to the
price. This is also the case for containers as long as they are treated “as one” with the goods
from a customs classification point of view. It is important to note that containers and packaging

26 Art 71 (3) UCC

27 Art 71 (1)(a) UCC
28 Interpretative Note to Art 8 of the Agreement on Implementation of Article VII of the General

Agreement on Tariffs and Trade 1994, para 1(a)(i)

11
which are of the reusable type and classified individually, should not be added to the price but
will assessed separately to the goods.

2. Assists
“The value of goods and services where supplied directly or indirectly by the buyer free of
charge or at reduced cost for use in connection with the production and sale for export of the
imported goods:
(i) materials, components, parts and similar items incorporated into the imported goods;
(ii) tools, dies, moulds and similar items used in the production of the imported goods;
(iii) materials consumed in the production of the imported goods; and
(iv) engineering, development, artwork, design work, and plans and sketches undertaken
elsewhere than in the Union and necessary for the production of the imported goods.”29

The above listed goods and services, which are used for the production of the imported goods,
are also commonly known as “assists”. I will elaborate on the “assists” in the next chapter.

3. Royalties and license fees

“Royalties and license fees related to the goods being valued that the buyer must pay, either
directly or indirectly, as a condition of sales of the goods being valued.”30

The import of goods usually incorporates elements like intellectual property rights that should
be compensated by payments such as royalties or license fees. Where the related payments
are already included in the price of the goods, they are automatically included in the customs
value. In case they are not included, they should be added by an adjustment of the price.

Royalties and license fees are defined in the OECD Model Tax Convention on Income and on
Capital as “payments of any kind received as a consideration for the use of, or the right to use,
any copyright of literary, artistic or scientific work including cinematograph films, any patent,
trademark, design or model, plan, secret formula or process, or for the use of, or the right to
use, industrial, commercial or scientific equipment, or for information concerning industrial,
commercial, or scientific experience (commonly referred to as “know-how”).”31 This definition
provides a useful list of elements which can be considered to be added to the transaction value.

The conditions to decide whether royalties or license fees should be added to the price paid or
payable, as stated in article 71 (1)(c) UCC, are:
 they are not included in the price paid or payable;
 they are related to the goods being valued; and
 the buyer must pay them, either directly or indirectly, as a condition of sale of the goods
being valued.

Although I will not go into more detail on this topic, I would still like to mention that WCO
Commentary No 25.132 provides a list of factors that can be considered to determine whether
the payment of royalty and license fees constitutes a condition of sale of the imported goods.

29 Art 71 (1)(b) UCC

30 Art 71 (1)(c) UCC
31 Art 12 (2) OECD Model Tax Convention on Income and on Capital (2014)
32 WCO TCCV Commentary 25.1, Third party royalties and licence fees - General commentary,

Adopted, 32nd Session, 15 April 2011, VT0800E1c

12
4. Proceeds
“The value of any parts of the proceeds of any subsequent resale, disposal or use of the
imported goods that accrues directly or indirectly to the seller.”33

Proceeds occur in the scenario where a seller receives a part of the buyer’s turnover and/or
realized benefit on the resale, distribution or use of the goods after importation. They are not
to be confused with dividends as these are linked to an overall profit realized by a company.
In this case, there should always be a direct link with the imported goods.

5. Transport and handling costs

“The following costs up to the place where goods are brought into the customs territory of the
Union:
(i) the cost of transport and insurance of the imported goods; and
(ii) loading and handling charges associated with the transport of the imported goods.”34

The last element to be added to the transaction value is the cost of shipping meaning the actual
transport, the related insurance and the related services such as loading. For the purpose of
determining the customs value of goods under the transaction value method we should only
take into account the costs in proportion to the actual place of importation in the EU.

3.3 Elements not to be included in the transaction value

Having just identified the elements which are to be included in the transaction value, it is also
relevant to state which elements should not be included. In this respect, the UCC states that
the following elements are in any case to be excluded from the customs value:
 “The cost of transport of the imported goods after their entry into the customs territory
of the Union;
 charges for construction, erection, assembly, maintenance or technical assistance,
undertaken after the entry into the Union of the imported goods such as industrials
plants, machinery or equipment;
 import duties or other charges payable in the Union by reason of import;
 charges for interest under a financing arrangement;
 charges for the right to reproduce the imported goods in the Union;
 buying commissions; and
 payments made by the buyer for the right to distribute or resell the imported goods, if
such payments are not a condition of the sale for export to the Union.”35

Although I do not want to elaborate on all of the above items, I would still like to comment on
one obvious factor which determines why some of these elements are to be excluded from the
customs value. In this respect, most of the elements are related to potential costs that would
be incurred after the goods have been imported in the EU. This is consistent with what was
established in chapter 3.2 which said that only costs prior to the actual import are to be included
in the customs value.

33 Art 71 (1)(d) UCC

34 Art 71 (1)(e) UCC
35 Art 72 UCC

13
4. Assists
4.1 General principles
Aforementioned, I listed the “assists” which are to be included in the customs value. It is
important to mention that article 71 UCC is also practically identical to article 8 (1)(b) of the
WTO Customs Valuation Agreement.

Before going into the details of the different elements and conditions of these articles, it is
relevant to mention the actual underlying principle.

Thus, in case a seller obtains for free or at a reduced price production inputs that are required
for the production of goods meant for export, it is expected that the seller will be in a position
to charge a lower price for the finished goods than if he incurred the costs to purchase or
produce the inputs himself. The use of the words “production inputs” directly links with the
“assists” and covers items such as materials, tools but also “know-how”. This means not only
tangible items are to be considered within the “assists” category but also intangibles.

“Assists” may be considered as a type of indirect payment made by the buyer to the seller and
it is therefore relevant to take the value of these assists into consideration when determining
the customs value of finished goods.

4.2 Conditions
Article 71(1)(b) UCC states that “the value of goods and services where supplied directly or
indirectly by the buyer free of charge or at reduced cost for use in connection with the
production and sale for export of the imported goods” should be added to the customs value
of the imported goods.

Consequently, in order to fall within the scope of the “assists” category, the following conditions
should be met:
 It is not mentioned per se in the article but the first condition is the fact that the goods
or services must not yet be part of the price paid or payable.
 The second relates to the fact that the buyer should supply the goods or services
directly or indirectly. This means that the goods or services can perfectly be supplied
by an intermediary as long as the buyer takes the cost at his own account.
 Furthermore, the goods or services are to be supplied for free or at a reduced cost.
 The goods or services are to be used in connection with the production process and
the related sale for export. This means that general office costs which are not
necessary for production purposes should not be added to the customs value of the
goods.
 Finally, the type of goods or services which fall within the “assists” category are limited
to the list mentioned in article 71 (1)(b) UCC. Point (3) of that same article stipulates
that no other additions can be made except for those listed.

4.3 Categories

As presented in the article, there are four categories of “assists”. How are these differentiated?
Let me follow the order of article 71 (1)(b) UCC and provide some detail on each of the
categories. Although the first three categories are straightforward, category four generates a
great deal of discussion and interpretation.

14
4.3.1 Items incorporated into the imported goods

The first category covers the so-called raw materials and/or semi-finished goods which are
supplied by the buyer and which the seller will use to bring together with other goods to form
a finished good. Thus, it mentions specific materials, components, parts and similar items that
are essential to the creation and which physically exist within the finished good. It is therefore
logical that the value of such items is to be added to the customs value of imported goods.

4.3.2 Items used in the production of the imported goods

On the contrary, the second category covers items which will not be part of the finished goods
but which are however specifically used in the production process of these goods. This
category should not cover the actual machinery owned by the seller but instead touches upon
the hand and power tools which are specifically supplied by the buyer and which will be needed
to produce the goods. Classic examples of such items are tools, dies and moulds which are to
be added to the machinery for the purpose of producing the particular goods for the buyer.

4.3.3 Materials consumed in the production of the imported goods

Similar to the first two categories, this category also covers physical materials. More
specifically the materials or products supplied by the buyer and used in the process of
production by the seller. They are usually not identifiable at first sight but are also required for
production, such as fuels, lubricants, abrasives and similar materials. A relevant question
which you could ask yourself within the framework of this category, is how to treat a potential
waste resulting out consumed materials. In this respect, depending on what is done with the
waste, it should or should not be part of the value of the assist. Thus, in the scenario where
the seller can sell the waste as scrap, the profit – if retained by the seller for his own account
– should be included in the assist’s value. In the other scenario, where the profit out of the sale
of the waste is credited back to the buyer, the value of the assist can be reduced.

4.3.4 Design and development necessary for the production of the imported
goods

As previously indicated, category four holds a wide scope of items which should technically be
added to the customs value. As “this the most complex and difficult of the assist categories”36,
I have covered the different complexities of this topic in the next chapter.

4.4 Valuation and apportionment

Article 135 (1) UCC IA describes the valuation method for goods and services used for the
production of the imported goods, as mentioned previously the so-called “assists”. Thus, the
amount to be included in the customs value of imported goods is affected by two elements:
1) the value of the assist; and
2) the way in which that value is to be apportioned to the imported goods.
The apportionment of these elements should be made in a reasonable manner appropriate to
the circumstances and in accordance with generally accepted accounting principles. 37

36 Saul L. Sherman and Hinrich Glashoff, Customs Valuation: Commentary on the GATT Customs
Valuation Code (ICC Publishing S.A./Kluwer Law and Taxation Publishers, 1988) para 248
37 Interpretative Note to Art 8 of the Agreement on Implementation of Article VII of the General

Agreement on Tariffs and Trade 1994, para 1(b)(ii)

15
4.4.1 Valuation

In order to determine the value of the “assist”, I first need to distinguish the scenarios where a
buyer and a seller are related from the one where they are not related parties.

Article 135 (1) UCC IA describes both scenarios. In the first case, where the buyer and seller
are not related, the general rule of the valuation of the “assist”, supplied by the buyer, is
deemed to be equal to the related cost of acquisition. In this scenario, the “assist” is to be
valued at its purchase price.

On the other hand, where the supplied “assist” is produced by the buyer or by a related party
to the buyer, the general rule of the valuation of the “assist” is deemed to be equal to the related
cost of production. Obviously, if a buyer purchases the “assist” from a related party which
produces it, the value shall be their sales price as long as the arm-length rule is respected.

In both scenarios, either to the cost of acquisition or production, the transport cost to the
manufacturing place should be added as well as any potential non-refundable duties and taxes
related to this transport.38

Additionally, if the buyer leases the assist, the value of the “assist” is to be calculated based
on the total amount payable under this leasing contract.

Finally, the value of the “assist” should also take into account any potential previous usage,
before the actual supply, by the buyer. Consequently, the value of the “assist” should be
adjusted to take into account any depreciation.

When looking at the four categories of “assists”, you realize that the valuation should in practice
be easier in case of tangible items than intangibles.

4.4.2 Apportionment

Once the value of an “assist” is determined, you still need to allocate its value in a reasonable
way over the manufacturer’s production39. In this respect, there are various methods to
apportion the value of an “assist”. Although I do not wish to list all of them, a buyer could for
example consider to allocate the cost of the “assist”:
 to the first shipment which will be imported;
 over a quantity of units produced up to the time of the first shipment; or
 over an anticipated production.

When mentioning the manufacturer’s production, you should only take into account the
production destined for export instead of the entire production as it could well be that some
goods are to be sold locally in the country of the manufacturer.

Finally, for a method of apportionment to be acceptable for the Customs authorities, it should
be in accordance with GAAP40 and sufficient documentary evidence should be kept to justify
the method.

38 Sheri Rosenow and Brian J. O’Shea, A handbook on the WTO Customs Valuation Agreement
(Cambridge University Press, 2010) page 52
39 Sheri Rosenow and Brian J. O’Shea, A handbook on the WTO Customs Valuation Agreement

(Cambridge University Press, 2010) page 53

40 See note 39

16
5. The intangible assist
5.1 General principles
Before going into the different challenges with respect to the last category of the “assists”, I
need to mention that this category differentiates itself from the previous three on two aspects.
The first being the fact that this category covers intangible rather than tangible items. Secondly
and more importantly, it distinguishes itself from the other categories by setting an additional
condition with respect to the geographic origin which I will elaborate a bit further.

So what are some of the main issues which can be faced in practice when actually dealing
with the allocation of this “intangible assist” to the customs value?

By the way, the term “assist” was first mentioned in the EC Customs Valuation Compendium41
used primarily for guidance. It is to be noted that the Customs Valuation Compendium is now
in the process of revision, to take account of the UCC legal package.

5.2 Challenges
Let us review article 71 (1)(b) UCC and dismantle it in order to dig into some persistent issues
on how to best interpret its different elements. This article states that “in determining the
customs value, the price actually paid or payable for the imported goods shall be supplemented
by the value of the following goods and services where supplied directly or indirectly by the
buyer free of charge or at reduced cost for use in connection with the production and sale for
export of the imported goods, to the extent that such value has not been included in the price
actually paid or payable”. The following being “engineering, development, artwork, design
work, and plans and sketches undertaken elsewhere than in the Union and necessary for the
production of the imported goods”.

Apart from the general conditions set for “assists” which were outlined in chapter 4.2, let me
touch upon the additional conditions outlined in the article42 being:
1) undertaken elsewhere than in the Union; and
2) necessary for the production of the imported goods.

Condition 1: Undertaken elsewhere than in the Union

In this respect, the first condition requires a geographic origin meaning it is relevant to know
where the actual work is performed. Looking at it from an EU point of view, in case transaction
value is applied for imports of goods within the EU, the relevant intangible work supplied for
free or at a reduced price should be performed outside the EU in order to be considered as an
“assist” in the scope of article 71 (1)(b) UCC. Although this condition seems rather
straightforward, in practice it may be difficult to define the actual place of work when dealing
for example with global R&D activities.

For the sake of completeness, it is also relevant to note that it was agreed by the WTO
Valuation Committee that the word “undertaken” should be understood as meaning “carried
out” in the context of WTO Customs Valuation Agreement. 43

41 See note 3
42 See note 29
43 Decision 2.1 taken by the Committee on Customs Valuation, Meaning of the word "undertaken"

used in Article 8.1 (b)(iv) of the Agreement, Adopted, 6th meeting, 3 March 1983

17
Condition 2: Necessary for the production of the imported goods
Slightly more complex compared to the first condition, is to answer the central question
constituting the second condition. For this I need to ask myself what qualifies as “necessary”
for the production?

The “intangible assist” covers certain types of “know-how” a buyer may provide a seller in order
to produce the imported goods. The following types of “know-how” work are considered to be
necessary:
 specifications for manufacture;
 product design and testing;
 construction of product prototypes and models;
 artwork;
 blueprints;
 schematics and other drawings.44

Deliberately, the term “research” is not mentioned in the above list. In this respect, I refer to
paragraph 5 of article 135 (1) UCC IA which specifically mentions that the costs of research as
well as preliminary design sketches shall not be included in the customs value.

So where should we actually draw the line between “research” and “development”? And should
all types of “research” be excluded or are there still exceptions to the rule?

5.2.1 Research vs Development

First of all, the GATT negotiators specifically intended to distinguish “research” and
“development” activities to define what should and what should not be included within the
customs value.

The following considerations45, argued by the GATT negotiators, resulted in the exclusion of
“research”:
a) it is virtually impossible to apportion research costs to specific imported goods; and
b) research costs are generally charged to the accounting period in which incurred as a
general overhead, this is, a general expense, and not the time in which the actual
manufacturing of the good may be taking place.

The link with accounting

Based on the above-mentioned argumentation of the GATT negotiators, I see a direct link with
accounting rules.

Under the International Accounting Standard number 38 “research costs” are defined as “costs
related to original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge or understanding”.46

On the other hand, under the same accounting standard “development costs” are defined as
“costs incurred in the application of research findings or other knowledge to plan or design for

44 Sheri Rosenow and Brian J. O’Shea, A handbook on the WTO Customs Valuation Agreement
(Cambridge University Press, 2010) page 50
45 Note VAL/W/24/Rev.1 by the Committee on Customs Valuation, The term “development” in Article

8.1 (b)(iv) of the Agreement on implementation of article VII, 10 January 1985

46 IAS 38

18
the production of new or substantially improved materials, devices, products, processes,
systems or services prior to the commencement of commercial production or use”.47

It is to be noted that a major difference between both definitions is the link with any actual
production or process of production. In this respect, “research” is commonly defined as not
linked to production while “development” is.

Going further into the accounting rules, research costs as described above are generally to be
recognised as an expense and should in principle not be capitalised.

On the other hand, development costs are generally capitalised only after technical and
commercial feasibility of the asset, for sale or use, has been established. This means that the
company must intend and be able to complete the intangible asset and either use it or sell it
and be able to demonstrate how the asset will generate future economic benefits.

If a company cannot distinguish the research phase of a project to create an intangible asset
from the development phase, the company should treat the expenditure for that project as if it
were incurred in the research phase only.

Consequently, the most relevant factor to decide when to capitalize development costs from
an accounting point of view, relates to the technical feasibility of completing the intangible asset
so it can be brought into the commercial market. In other words, this means that once you have
identified the product you want to develop, the “basic research” phase can be considered as
finalised.

So what should in practice be considered as “basic research”? The Canadian administration,

following the Canadian Institute of Chartered Accountants, has offered the following examples
of basic research activities48:
 laboratory research aimed at discovery of new knowledge;
 searching for application of new research findings of other knowledge;
 conceptual formulation and design of possible product or process alternatives.

Looking at the above examples, I can again see a clear trend of dealing with very general costs
of “basic research” which are not (yet) related to an actual production process. It is however
possible that some research is considered as being more than basic and could therefore be
qualified as “applied research” or “advanced research”. Should this be the case, it would mean
that the research will have crossed the line to an identifiable commercial project and would
therefore usually fall under “development” phase instead of “research” phase.

Once the research activities have been completed, the “development” phase can usually start.
During this period typical activities of “development”, as offered once more by the Canadian
administration, are49:
 testing in search for, or evolution of, product or process alternatives;
 design, construction and testing of pre-production prototypes and models;
 design of tools, jigs, moulds, and dies involving new technology.

Finally, once both the research and the development phase have been completed we normally
move to the production phase. In this respect, the Canadian administration has stated that the

47 See note 45
48 Saul L. Sherman and Hinrich Glashoff, Customs Valuation: Commentary on the GATT Customs
Valuation Code (ICC Publishing S.A./Kluwer Law and Taxation Publishers, 1988) para 247
49 See note 47

19
following activities are neither research nor development activities and should be considered
as productions costs50:
 engineering follow-through in an early phase of commercial production;
 quality control during commercial production, including routine testing of products;
 trouble-shooting in connection with breakdowns during commercial production;
 routine or periodic alterations to existing products, production lines, manufacturing
processes and other ongoing operations, even though such alterations may represent
improvements;
 adaptation of an existing capability to a particular requirement or customer’s need as
part of a continuing commercial activity;
 routing design of tools, jigs, moulds and dies;
 activity, including design and construction engineering, related to the construction,
relocation, rearrangement or start-up of facilities or equipment other than those whose
sole use is for a particular research and development project.

Consequently, if such production costs are charged separately, they should be treated as
indirect payments relating to the imported goods.

5.2.2 Activities undertaken both in the country of importation and in another

country

As previously indicated in chapter 5.2, it is a requirement for the “intangible assists” that the
work as such is carried out elsewhere than in the Union.

In this respect, I still need to mention that it is not relevant from which country the “assists” are
supplied as long as the actual work has not been carried out in the EU.51
So how should we in practice deal with the apportionment of activities such as “development”
which are undertaken both in the country of importation and other countries?

Some general guidelines in making such calculations tare provided:

 The “assist” should be valued at cost to the buyer who furnished it;
 Any necessary allocation as between countries is to be made according to GAAP;
 Any information, such as design, which is considered as general knowledge and is
available in the public domain is to receive only nominal value meaning no value or
perhaps just the cost of copying.
 Where a set of plans have been already been used for their original purpose by the
buyer, they should also receive a nominal value if made available or drawn upon by the
buyer for adaption for another use.
 Finally, the “intangible assist” must be necessary for the production of the imported
goods. This complex test excludes a number of assists from the customs value. A
typical example is the scenario where multiple sketches are provided to the
manufacturer who chooses and uses one. The cost of the sketches which are not
chosen should be excluded from the transaction value.

In addition, paragraph 4 of article 135 (1) UCC IA touches upon the fact that the value of the
“assist” shall include the costs of unsuccessful development activities insofar as those were
incurred in respect of projects or orders related to the imported goods.

50 See note 47
51 Commentary No 1 of the Customs Code Committee (Customs Valuation Section) on the application
of Article 32 (1)(b if the Customs Code on the valuation of goods for customs purposes, para 4

20
5.2.3 The Skechers Canada Case

The case of Skechers USA Canada Inc. v The President of the Canada Border Services
Agency52 was described, upon the release moment of its decision in December 2013, by many
customs specialist as one of the most important customs cases in years.

In short, the case dealt with the appeal submitted by a Canadian business having been
assessed by the Canadian Customs authorities (commonly known as CBSA) for not including
the R&D payments, following a cost-sharing agreement, in the customs value of the goods
which were imported into Canada.

CBSA argued that there existed sufficient links existing between the payment and the goods
in issue and that these links were substantiated by the following conclusions taken by the
Tribunal:
1. The R&D costs are not related to the Intangibles as such;
2. The entire R&D process is “in respect of” the goods in issue;
3. The R&D payments are not general payments;
4. The assists clause is not relevant;
5. The R&D costs cannot be further apportioned.

It is relevant to bring up the most important argumentation with respect to the above five
conclusions, therefore the below overview constitutes a summary of both the appellant and
Tribunal’s arguments.

Appellant arguments Tribunal’s arguments

R&D costs are - R&D was done in respect of The goods in issue could not have
not related to Intangibles, namely the brand. been produced without this process.
Intangibles - R&D was not needed for the
production of the goods.
Entire R&D Only part of the R&D The different steps of the R&D
process is “in payments are “in respect of” process are all interrelated into a
respect of” the the goods in issue. common effort towards producing a
goods in issue good that customers wish to buy.
R&D payments R&D payments were general The link between the R&D payments
are not general payment unaffected by the and the goods in issue was
payments imported goods. apparent.
Assists clause is No relevant counterargument R&D costs are not true “assists”
not relevant since the appellant is not providing
assistance, in the form of providing
goods or services for free or at a
reduced cost, for the production of
the goods
R&D costs No relevant counterargument It was determined, based on the cost
cannot be further sharing agreement, that the R&D
apportioned payments were attributable, in their
entirety, to the goods in issue
because the entire research process
was necessary to create a
successful style of goods.

52Skechers USA Canada Inc. v The President of the Canada Border Services Agency (2013) AP-
2012-073 (CITT)

21
The outcome of this case is certainly interesting because the Tribunal takes up quite strict
position that the total R&D payments are to be taken into account for the consideration of the
customs value of the imported goods. Although it was concluded that the R&D payments could
not be considered as “assists” based on the fact the buyer was not providing the intangible
work to the seller for free or at a reduced cost, it was still interesting to see that research costs
were also considered as dutiable.

In this respect, I believe the appellant was not able to sufficiently document and argue the
differences in production phases and therefore the Tribunal concluded that “the research,
design and development process is a seamless, interrelated process, the whole of which is
required to produce the goods in issue”. As mentioned by the Tribunal if there is a clear link
between, for example based on the contract, the R&D costs and the actual production of a
good, the full costs should be taken into consideration for addition to the customs value of
imported goods.

This is without a doubt a very important factor to take into consideration when dealing with
contractual agreements such as cost sharing agreements covering R&D costs.

22
6. Conclusion
The purpose of this thesis was to describe the challenges with respect to the “intangible assist”
in the context of adding its value to the customs value of imported goods under the transaction
value method.

6.1 Research costs should in principle be excluded

Perhaps not all research costs should be excluded but when you can determine that “basic
research” has been performed to gain knowledge or understanding without actually having it
linked to a production process of a good, its related costs should not be considered as “assists”
and should therefore not be added to the customs value of imported goods.

In case research costs have already been included in the general costs of production and are
part of the price actually paid or payable, these costs will of course be considered within the
customs value of the goods to be imported. Thus, research costs should not and cannot be
excluded once they are part of the general production costs.

6.2 Necessary for the production

This condition is key to define if certain costs can fall under the “assists” category. It goes
without saying that it is also closely linked with the reason why research costs should in
principle be excluded. Necessary for the production means that you can only accept intangible
work which is needed for the production process and which cannot be considered as easily
replaceable. In other words, the final product will not be the same in case the specially needed
goods or services are not included in the production process.

However, the above can only be taken into consideration if it is necessary to create the
imported goods. Hence, you would not accept the cost of the intangible work if this is needed
exclusively for the production of goods which are to be sold locally within the same market of
the manufacturer or seller.

6.3 Final conclusion

To conclude this work I feel this subject has, from a theoretical point of view, enough material
to define the expectations from a Customs authority’s standpoint. However, I strongly believe
that the practical implications of determining and adding the value of the “intangible assist” to
the customs value of imported goods may prove to be challenging.

It seems key for companies to have on the one hand their customs experts work closely with
the business and product developers to understand how each R&D/design process is planned.
On the other hand, you should have your customs experts develop procedures that allow it to
make the distinction between research and development based on the actual nature of the
different processes in order to assess, for each of them, the customs impact and potential
customs duties. Finally, in both cases it seems advisable to keep sufficient documentation to
substantiate the differences of each phase and the related costs that go along with them just
in case the Customs authorities would ever decide to challenge the customs value of the
imported goods.

23
Literature list
CCC: Council Regulation (EEC) No 2913/92 of 12 October 1992 establishing the Community
Customs Code (OJ L 302, 19.10.1992, p. 1)

UCC: Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9
October 2013 laying down the Union Customs Code (OJ L 269, 10.10.2013, p. 1 – 101)

UCC IA: Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015 laying
down detailed rules for implementing certain provisions of Regulation (EU) No 952/2013 of the
European Parliament and of the Council laying down the Union Customs Code (OJ L 343,
29.12.2015, p. 558 – 893)

WTO Customs Valuation Agreement: Agreement on Implementation of Article VII of the

General Agreement on Tariffs and Trade 1994 signed on 15 April 1994 by ministers from most
of the 123 participating governments at a meeting in Marrakesh, Morocco

EC DG Taxud, B4/ (2016) 808781 revision 2, Guidance document on the of Customs Valuation
Implementing Act articles 128, 136 and 347 of the UCC IA published on 28 April 2016

EC DG Taxud, 800/2002 update, Compendium of Customs Valuation texts of the Customs

Code Committee, Customs Valuation Section published in September 2008

Saul L. Sherman and Hinrich Glashoff, Customs Valuation: Commentary on the GATT
Customs Valuation Code (ICC Publishing S.A./Kluwer Law and Taxation Publishers, 1988)

Sheri Rosenow and Brian J. O’Shea, A handbook on the WTO Customs Valuation Agreement
(Cambridge University Press, 2010)

European Court of Justice case law: Case C-173/15 GE Healthcare GmbH v Hauptzollamt
Düsseldorf [2017] EU:C:2017:195

Canada Federal Court of Appeal case law: Skechers USA Canada Inc. v The President of the
Canada Border Services Agency (2013) AP-2012-073 (CITT)

24