Mar 2010 According to Circular 40 / TT-BTC dated 22 May 2008, royalties and license fees for the use of intellectual property rights related to imports, which are paid as a condition of sale are considered to be dutiable. Accordingly, in the past, Vietnam Customs has taken the view that where royalties are paid for intellectual property rights in addition to the price of the imported goods these should be included in the customs value of the imported goods and as such were dutiable.
In order to avoid discouraging the transfer of technologies and know-how into Vietnam, the Ministry of Finance issued Notice 22 / TB-BTC on 13 January 2010. In this Notice, the Ministry takes the view that royalties which are paid on a periodic basis to foreign parties under a license contract for the use of brands, patents or know-how, and of which the value cannot be determined upon importation, should no longer be added to the dutiable value of imported goods. According to the Ministry of Finance the foreign contractor withholding tax (FCWT) should be applied in these circumstances and the applicable FCWT rate would be 10% of the royalty payment.
Following the Notice, the Ministry of Finance has requested the General Department of Customs to identify problems that have occurred during the course of the implementation of Circular 40 and to submit a draft Circular to the Ministry of Finance which would amend and supplement Circular 40 in relation to the dutiability of royalties paid for the abovementioned intellectual property rights (i.e. brands, patents and know-how).
The Post-Clearance Inspection Department of the General Department of Customs has also issued an official letter to the Customs Departments of Hai Phong, Hanoi, Binh Duong, Dong Nai and Ho Chi Minh City on 25 January 2010 ordering the various Customs Departments to no longer add royalties to the dutiable value of imported goods which are paid for the use of brands, patents or know-how.
Given Vietnam Customs' position on royalties in the past, it is expected that many companies in Vietnam, which have been paying duties on the royalties for the mentioned intellectual property rights, can now benefit from this Notice from the Ministry of Finance. As the General Department of Customs is currently drafting the changes to Circular 40, at this stage, it is not clear whether companies which have been paying duties in this respect would be eligible for import duties refund for certain past shipments. Furthermore, depending on the implementation details, certain royalties may still be considered dutiable (e.g. how will Customs treat royalties paid on patents which are embedded in the imported goods or royalties paid on trademarks on imported goods which are traditionally considered to be dutiable). Further guidelines and details on how Customs will implement the Notice will hopefully provide more clarity in this respect.
Companies that are currently paying duties on royalties should however start discussing with Customs on how they can exclude the royalties for brands, patents and know-how from the dutiable value for imminent and future shipments.
