IRS advice on treatment of minimum royalties may also raise customs compliance considerations

Customs & International Trade Newsalert

In a recently released field attorney advice (FAA 20124401F), the U.S. Internal Revenue Service (IRS) concluded that minimum royalties paid for the use of licensed patents must be capitalized to inventory under Section 263A of the Internal Revenue Code (IRC). Other types of royalties may be treated differently. From a tax perspective, companies should review their royalty agreements to determine the types of royalties involved, and analyze their treatment of royalties for purposes of Section 263A.

Similarly, for taxpayers engaged in import activity, this analysis presents an opportunity to simultaneously analyze the customs compliance implications of how royalties are being characterized under their royalty agreements and treated from a customs perspective.

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