The Supreme Court recently ruled that the license fees paid by a TV channel operator that imported animations and other videos in exchange for the right to broadcast such videos on domestic TV channels for a set period of time are not part of the dutiable value of imported goods under the Customs Act.1
The customs authority took the view that (i) only the right to produce a new material using a specific design or idea contained in an imported good constitutes a “right of reproduction” which is not dutiable, and (ii) accordingly, the license fees paid in exchange for being granted the right to broadcast on domestic TV channels are not the cost of a right of reproduction, but rather a type of “royalty” that is dutiable under the Customs Act. Accordingly, the customs authorities imposed duties on the TV channel operator, and the lower courts ruled that the imposition was appropriate.
The Supreme Court, however, decided that the license fees paid by the TV channel operator could not be included in the dutiable value of the imported goods as the license fee was paid in exchange for the right to reproduce the videos by broadcasting the videos in Korea after importing them (i.e., a right of reproduction). The decision was based on the grounds that, in principle, customs duties are imposed according to the nature and quantity of the goods at the time an import declaration is made, but (i) as the right of reproduction is used after the time of the import declaration, it has no relation to the imported goods at the time of the import declaration, and the costs of using such right must be treated separately from the value of the imported goods, and (ii) accordingly, the parenthetical in Article 19 (2) of the Enforcement Decree of the Customs Act stipulates that the cost of using the right to reproduce a specific design or idea on other products by using imported goods in which a specific design or idea is embodied is excluded from royalties which are added to the transaction price.
In recent customs cases, the question of whether certain types of payments like license fees, royalties and franchise fees paid by domestic business operators to overseas business operators would be deemed dutiable royalties has often been argued. This Supreme Court decision is meaningful in that it has provided an important standard for judging whether or not certain fees would be deemed dutiable royalties.
In this case, Kim & Chang’s International Trade & Customs Practice successfully represented the TV channel operator by reversing the lower court’s decision and winning the case at the Supreme Court.