By Jeanne du Buisson, Haidee Watkin & Sid Mahajan
After a long deliberation period, Justice Becroft has delivered his judgment in the High Court case Chief Executive of New Zealand Customs Service v Country Road Clothing (NZ) Limited [2024] NZHC 1696. This decision quashes an earlier 2022 Customs Appeal Authority decision, and rules in favour of New Zealand Customs (see below for a summary of the case).
The key issue in this case was whether the calculation of the price paid or payable by Country Road Clothing (NZ) Limited (CRNZ), for imported goods, should include certain licensing and royalty payments that relate to post importation activities. New Zealand Customs’ view was that the royalties and licencing fees paid for intellectual property (shop layout, design and marketing) were sufficiently linked to the imported goods, as the royalty payments would not have been made if the goods were not imported, regardless of the mechanism for their calculation. CRNZ argued that the payments were for ‘post-importation support’ and did not relate to the price paid or payable for the imported goods. The Court found that the royalties paid by CRNZ to its parent company, Country Road Clothing Pty Ltd (CRAU) should have been included in the customs value of the imported goods. At the time of writing this we are not aware of any appeal to the decision, but this may still be in process.
It follows that New Zealand importers that pay for post-importation support under royalty/licence arrangements similar to those in the case should consider the impact of this High Court decision on their individual circumstance as this is likely to now be a focus area for New Zealand Customs. Furthermore, this decision may also come to the attention of other Customs Authorities around the world.
Therefore, if your business makes any royalty/licence payments and these payments are not included in the calculation of the customs value of the imported goods, now is a good time to get in touch with Deloitte to discuss the impact of this High Court decision.
Case summary
The summary facts are set out below:
Customs Appeal Authority - 2022
The Customs Appeal Authority (the Authority) accepted that in order to determine which payments made by CRNZ reflected the true value of the goods (and therefore what the customs value of the goods should be), each category of payment under the commercial arrangement between CRNZ and CRAU needs to be considered separately. In assessing the nature of the payments, the Authority also considered how those payments were quantified.
The Authority ultimately found that the price paid by CRAU to CRNZ for the actual goods were set by a transfer pricing regime, and therefore satisfied the obligation to calculate and pay the value received at an arm’s-length. The Authority also found that there was ‘no quantifiable nexus’ between the value of the royalty payments and the cost or value of the imported goods. Accordingly, the Authority concluded that the royalty payments were a form of post-importation profit sharing, unconnected to the ‘true value’ of the goods, and therefore, they should be excluded from the customs value.
The decision was not accepted by New Zealand Customs and the matter was appealed to the High Court.
High Court - 2024
The High Court considered the key point in the case to be whether the three prior Court of Appeal decisions (Adidas New Zealand, Avon Cosmetics and Nike) adequately resemble the facts of the present case. Upon analysing these decisions, the High Court noted the decision was a ‘finely balanced one’, but ultimately ruled that the Authority adopted the incorrect test.
The High Court concluded that the royalty payments are within the scope of the ‘true value’ of the imported goods and therefore CRNZ’s customs value should be adjusted to include the royalty payments. Four reasons for the decision were given:
For more information, please reach out to your usual Deloitte advisor.