Meaning
Three-step analytical process used by customs officials determines if intellectual property payments must be added to the price of imported goods for taxation. The royalty addition test examines whether the payment is related to the goods and whether it constitutes a condition of sale. This test determines the ultimate tax liability for companies importing branded or patented products.
Relatedness Standard
Determination of whether a fee is related to the goods depends on whether the imported item incorporates the technology or trademark being paid for. If the royalty is paid for the right to use a patent that is essential for the manufacturing of the specific components imported, the first part of the royalty addition test is satisfied. Payments for intangible assets that are used separately from the imported physical goods do not meet this criterion.
Verification follows a technical review.
Condition Check
Analysts evaluate if the seller would permit the export of the goods if the buyer refused to pay the royalty. A condition of sale is often found when the seller and the licensor are the same person or when the licensor has the power to stop the shipment. This second pillar of the royalty addition test prevents the use of separate royalty agreements to artificially lower the declared price of the physical cargo.
Double Counting
Final verification confirms that the royalty amount is not already part of the price paid for the merchandise. If the importer can demonstrate that the invoice price already covers the intellectual property rights, no further addition is required. This check maintains the fairness of the valuation by avoiding the taxation of the same value twice.
