Huawei Loses Appeal on Trademark Royalties

The company claims payment of 334 million Br in royalties to the mother company for using trademark for two years

The Ethiopian Revenues & Customs Authority (ERCA) has rejected a claim made by Huawei Technologies Ethiopia Plc of paying trademark royalties to its mother company. Accordingly, the company is compelled to settle 100 million Br in tax on the expenses it claimed as trademark royalties.

A few months ago, the company was required to pay 491 million Br in corporate and value-added taxes (VAT) after the Large Taxpayers Office (LTO) of the Authority conducted a risk audit on the company’s book. The Authority, which is under pressure to cover over 68pc of the new fiscal year’s budget with tax revenues, conducts risk audits on companies when it feels pose risks. The risk audit on Huawei was conducted on financial years between 2015 and 2016.

Out of the total amount, 445 million Br was for corporate tax liability while the remaining are value-added taxes. Entertainment expenses, trademark royalties, expenses for customs clearances, and settlements made with hotels are among the expenses rejected by the Authority stating that the company did not present complete records and receipts.

The company, which has a strong presence in the country undertaking a 700 million dollars mobile phone infrastructure expansion, was requested to pay 111.4 million Br and 102.8 million Br principals of corporate tax for the year of 2015 and 2016, respectively. It was also required to pay 45 million Br VAT for the year 2016.

Displeased with the audit finding of the Large Taxpayers Office, Huawei, which introduced high-speed 4G broadband network in Addis Abeba and 3G service throughout the country, appealed to the head office of the Authority in March 2018. In its appeal that listed 26 points, Huawei Technologies Ethiopia, the wing of the private Chinese telecom giant and world’s third-largest smartphone maker next to Apple and Samsung, claimed that the LTO did not adequately consider its financial documents and receipts during the audit.

The Authority, which has been reviewing the case for four months, has admitted the 25 points of the company and ordered the LTO to reassess the audit. However, it ordered the company to settle a tax bill on the expenses it has reported as royalty payments made for the mother company in China for using the brand and trademark in the local office. During the audit, Huawei declared that it had paid 134 million Br royalty in 2015 and 200.2 million Br the next year to the mother company, which netted 8.6 billion dollars in profit last year. Founded in 1987, Huawei has a presence in over 170 countries.

Reviewing the appeal, the Authority has rejected the claim of the company in this issue stating that there is no way branch offices would pay royalties to the mother companies to use trademarks. Excluding the fine and interest rate, the company is expected to pay 100 million Br corporate tax on these expenses.

The decision of the Authority is admissible, according to a law practitioner with over two decades of experience, who states that parent companies and subsidiaries have the same owners.

“Subsidiaries get registered in the respective countries, just to be a taxable entity,” said the expert. “The registration wouldn’t limit them to sharing trademarks.”

Auditors of the Authority have started reassessing the audit report of the company starting from last week, according to a source close to the case.

During the last 11 months of the past fiscal year that ended just last week, the Authority managed to collect 162.38 billion Br revenue, only 70pc of its target. Out of the total amount, 95 billion Br was collected from domestic tax. For the current fiscal year, which has started this week, the Authority is expected to collect 235.7 billion Br in tax.

Steven Lu, Country Manager of Huawei Ethiopia Devise Business Development, and corporate communications department of the mother company in China did not respond to email inquiries from Fortuneuntil the paper went to print.


Published on Jul 07,2018 [ Vol 19 ,No 949]



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