Current issues in including design and engineering costs in the value of imported equipment

When determining the customs value of production equipment imported into Russia, questions often arise in practice as to whether it is possible to include the design and engineering costs in the customs value. Such costs may have a significant impact on the total amount of customs duties payable, so it is important to understand when and under what conditions they should be included in the customs value of equipment.

Statutory regulation

The customs value of imported goods should include such additional charges as the costs of design, engineering, development, artwork and other similar work/services if such work/services are provided outside the Eurasian Economic Union (EAEU) and are not includedCustoms Code of the Eurasian Economic Union, article 40, clause 1(d)(2) in the price of goods.

The key conditions for including such costs in the price are as follows:

• the cost of such work or services is not included in the price of goods;
• the work or services have been performed/provided outside the EAEU customs territory;
• the work or services are related to the goods imported/being imported; and
• the work or services are neededResolution of the Arbitrazh Court of the Volga District No. Ф06-5230/2024 dated 26 July 2024 in case No. А55-25863/2023, Resolution of the Arbitrazh Court of the Urals District No. Ф09-2702/24 dated 10 June 2024 in case No. А60-46984/2023 for the manufacture of the goods imported/being imported.

In one such case, the court heldResolution of the Arbitrazh Court of the West-Siberian District No. Ф04-2395/2024 dated 16 July 2024 in case No. А70-17412/2023 that the costs of engineering or design of equipment are related to the goods and are necessary for their manufacture, and should therefore be included in their customs value. At the same time, it was not argued at the trial and cassation courts that some of the equipment (metal structures) was manufactured in Russia and was not imported at all. If this argument had been advanced, it would have been possible to exclude the portion of the cost of the project documentation attributable to them.

Where there is no connection between such costs and the imported goods, the customs value and the amount of customs duties paid may not be adjusted. For instance, in one of the cases, the court stated that the imported goods were mass-produced products offered to the general public on a regular basis, irrespective of the creation of the disputed documentation.

In the same case, the court pointed out that the customs value of parts (components) of equipment should not include the cost of designing the equipment itself, since in the case at hand, the documents for the finished equipment were only provided to the manufacturer as a specification and did not contain any drawings of the imported parts. As a result, the court heldResolution of the Arbitrazh Court of the West-Siberian District No. Ф04-124/2023 dated 25 September 2023 in case No. А27-11611/2022 that the existence of a link between the design contracts and supply contracts does not in itself indicate that the imported equipment components were manufactured based on the disputed design documentation, but merely indicated that there was a common purpose, ie, the installation of finished equipment in the Russian Federation.

Royalties

In practice, design and engineering costs could be reclassifiedCustoms Code of the Eurasian Economic Union, article 40, clause 1(7) as royalties. For example, if the importer obtains rights to use technical information, patents and/or copyrights, courts may ruleResolution of the Arbitrazh Court of the West-Siberian District No. Ф04-2887/2022 dated 21 July 2022 in case No. А70-6626/2021 that such payments should be included in the customs value.

Delineation of work related to equipment and that related to the facility as a whole (plant, workshop)

Russia’s Ministry of Finance distinguishes engineering and design work/services between:

• work related to the engineering and design of equipment to be supplied under a foreign trade contract (“Work 1”); and
• work related to the engineering and design of an industrial facility as a whole (factory, workshop, etc) (“Work 2”).

Work 1 is actually performed in relation to the goods purchased; such goods cannot be manufactured, delivered and used for their intended purpose without Work 1 and, therefore, the costs related to Work 1 are incurred on the basis of the requirements of the seller of the goods or, if no such requirements formally exist, due to the impossibility of manufacturing, delivering and using the goods for their intended purpose without Work 1. Therefore, the costs related to Work 1 are to be included in the customs value of goods.

In turn, Work 2 is actually performed in respect of the facility to be created as a whole (factory, workshop, etc), rather than in respect of goods. Therefore, the costs related to Work 2 are not to be includedLetter of the Ministry of Finance of Russia No. 27-01-21/47986 dated 25 May 2023 in the customs value of goods.

In practice, the issue of differentiating between Work 1 and Work 2 remains controversial, in particular when it comes to the design and engineering of various utility systems (electricity, gas, water supply, compressed air supply systems, etc) which ensure the operation of both the facility as a whole and the imported equipment. For example, in one of the cases, the parties concluded separate supply contracts and engineering services contracts. The deliverables under the engineering services contract was the technical documentation, which included, among other things, information on the utility systems (for gas, compressed air, water and electricity). The court foundResolution of the Arbitrazh Court of the Urals District No. Ф09-4094/23 dated 7 July 2023 in case No. А60-46401/2022 that the costs of such services are to be included in the customs value of the imported equipment.

Conclusion

Design and engineering costs are not always to be included in the value of imported equipment. However, despite the insignificant number of cases, recent developments in court practice demonstrate that the customs and judicial authorities are taking an increasingly hard stance in this respect. It is important to conduct a thorough analysis on a case by case basis whether the conditions are in place for including such costs in the value, which needs be taken into account as early as at the stage of drafting equipment supply contracts or design and engineering services contracts.