The automotive and machinery industries are transitioning from traditional mechanical manufacturing towards software-defined platforms. A significant share of their value now derives from intangible software components such as over-the-air (OTA) updates, advanced driver-assistance systems, and subscription-based software-as-a-service (SaaS) features.
For Asean original equipment manufacturers and importers, this digital shift triggers complex challenges as regional customs authorities expand audits to target digital revenue streams, forcing companies to defend their import valuations against overlapping transfer pricing (TP) adjustments and double-taxation risks. The main dispute centres on how WTO-based customs valuation rules view the relationship between a physical import and a digital service. Under transaction value (TV) principles, customs value relies on the price “actually paid or payable” for the physical goods.
However, when an importer pays separate licensing or SaaS fees to, for instance, a foreign affiliate, customs authorities question whether the payment belongs to the hardware, or represents a post-importation service. If a machine cannot run without the software, customs authorities will apply the “condition of sale” test and try to add those digital fees to the hardware’s import value as a dutiable royalty or subsequent proceeds. Conversely, if the software is an optional standalone application, it should be treated purely as a service.
Bundling these service fees into the customs value incorrectly inflates tariffs. It also results in double taxation, as these same digital payments are already subject to domestic value-added tax and corporate withholding taxes.
An important US Customs and Border Protection (CBP) ruling – HQ H357218 issued on 27 April 2026 – provides a useful framework for analysing this issue. In this case, an automotive manufacturer imported connected vehicles, while consumers paid separate, post-importation subscription fees for cloud-based services and diagnostics hosted on overseas servers.
Based on the facts, the CBP ruled that these separate connectivity and SaaS fees were non-dutiable because they were not a condition of sale for the physical vehicle. The ruling established that if software functions as an ongoing service to enhance user experience rather than an operational prerequisite for importation, the fees fall outside the TV rules.
This precedent provides a strong argument for Asean importers to unbundle hardware costs from post-importation digital service fees.
While the WTO framework sets a global foundation, actual enforcement varies across Asean based on local tax goals. In the Philippines, royalties and licence fees must be added to the import value if paid as a condition of sale. The Bureau of Customs frequently checks for bundled software during post-clearance audits. Software embedded in hardware at time of import is taxed if it is technically necessary for the machine to function.
However, post-importation charges such as assembly, maintenance or technical assistance are explicitly excluded from the customs value, provided they are split from the price of goods. Importers therefore face the hurdle of proving that modern SaaS fees and OTA updates are independent service arrangements rather than a hidden condition of sale for the hardware.
Several other Asean countries focus heavily on protecting their tax bases and maximising border collection. Certain regional customs authorities review intercompany agreements and use TP adjustments to argue that software fees paid to an overseas parent company are directly tied to local component sales.
Other jurisdictions focus on whether software is delivered via physical media or the cloud, moving towards taxing all digital transactions. What ultimately matters most across Asean is not the technology itself but rather how the business transaction is structured, split and documented.
To minimise exposure to aggressive customs audits, multinational companies may need to evaluate their transactional structures and unbundle agreements that combine physical goods with digital services. This separation must extend to invoicing and accounting.
Under this approach, invoices presented at the border must strictly reflect the value of physical cargo. All subsequent charges – such as SaaS fees, cloud renewals and OTA licences – should be billed on distinct invoices tied directly to post-importation use.
Crucially, companies must establish and document technical independence (to disprove it as a conditional sale) with clear records proving that the imported vehicle or machinery remains fully operational on a basic level without activating the premium software features.
As the line between goods and services continues to blur across Asean, managing these valuation rules is a practical necessity.
This article is for general information only and is not a substitute for professional advice. Direct any questions or comments on this article to the author at info@mtfcounsel.com.
Mark Anthony P Tamayo is a CPA-Lawyer and a partner of Mata-Perez, Tamayo & Francisco Law Offices (MTF Counsel) in Metro Manila
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