New Customs Rules Clarify Valuation of Franchise Royalties

The new WCO regulations clarify that franchise and brand royalties are not included in customs valuation if they are not directly related to the imported goods. Businesses need to understand the criteria for determining this direct relationship to minimize trade costs. This clarification provides greater certainty and potentially reduces the customs duties payable on imported goods where franchise or brand royalties are involved but are unrelated to the specific characteristics or production of those goods.

Imagine you're an ambitious entrepreneur looking to operate a franchise of a well-known international brand. After paying franchise fees to secure brand rights and operational systems, you need to import goods to support your business. A critical question arises: Should these franchise payments be included in the customs value of your imported goods? This isn't just a technicality—it directly impacts your bottom line.

The WCO's Landmark Guidance

In May 2017, the World Customs Organization (WCO) Technical Committee on Customs Valuation (TCCV) issued a crucial advisory opinion during its 44th session in Brussels. Originating from a case submitted by Mexico, this opinion clarifies how franchise fees should be treated in customs valuation—particularly when franchisees pay for brand usage and operational systems.

Key Findings from the Advisory Opinion

The opinion establishes that franchise fees shouldn't automatically be included in import duty calculations when:

The payments aren't directly tied to imported goods
Fees primarily cover domestic use of branding and operational systems
Payments relate to manufacturing and selling branded products locally

This interpretation aligns with the WTO's Customs Valuation Agreement, which specifies when intellectual property fees should factor into duty calculations. The guidance helps customs authorities and businesses navigate previously ambiguous scenarios.

Practical Implications for Franchise Operators

Consider a Mexican company franchising a U.S. fast-food brand. If they pay brand usage fees primarily for domestic operations rather than specifically for imported ingredients or equipment, customs authorities shouldn't include those payments in the goods' taxable value.

This distinction matters because:

It prevents unnecessary duty payments that could make franchises less competitive
Creates more predictable customs processes for international franchising
Reduces potential disputes between businesses and customs authorities

Four Factors That Determine Duty Inclusion

Businesses should examine these elements when assessing franchise fee treatment:

Contract terms: Explicit language separating import costs from brand usage fees strengthens the case for exclusion
Payment structure: Fees based on local sales rather than import quantities suggest no direct linkage
Fee purpose: Payments supporting domestic operations versus import activities carry different implications
Operational necessity: Whether imports could occur without franchise payments being made

Navigating Customs Complexity

While the opinion provides clarity, exceptions exist. Fees might still be dutiable if:

They represent the sole condition for importing goods
Amounts directly correlate with import quantities or values

The WCO will include this opinion in its Valuation Compendium, serving as a key reference for global customs administrations and traders.

Strategic Recommendations for Businesses

Franchise operators should:

Maintain detailed records of franchise agreements and fee structures
Consult customs valuation specialists when structuring international franchise operations
Monitor for updates as the opinion undergoes final WCO Council approval

This advisory represents a significant step toward standardized customs treatment of franchise fees worldwide. For entrepreneurs building global franchise networks, understanding these nuances can mean substantial duty savings and smoother cross-border operations.