First-Ever Advance Customs Valuation Arrangement Reached in Korea
October 2, 2009
World Trade\Interactive
[WT\I Editor’s note: The following article appeared in the August 2009 Customs and International Trade Letter published by Yulchon Attorneys at Law of South Korea and is reprinted here with permission.]
In July 2009, Yulchon Tax Group successfully represented a major multinational consumer product company (the “Company”) in its bid to reach an Advance Customs Valuation Arrangement (“ACVA”) with the Korea Customs Service for the first time since the introduction of the ACVA system at the end of 2007.
Under an ACVA, the customs administration and the taxpayer agree in advance on the method to determine the customs value of products imported from a related foreign exporter. If an ACVA is reached and the importer reports the customs value in accordance with the method prescribed under the ACVA, the Korea Customs Service (“KCS”) will accept, without challenge, the reported customs value for a period specified under the ACVA. According to the KCS’s Notice on Determination of Customs Value of Imported Products, once an application for an ACVA is filed, the KCS must notify the applicant of the result of their review as to whether the related party relationship affected the transaction price, the method to be used to determine the customs value and certain other matters. The applicant then responds in writing as to whether the applicant agrees with the KCS’s determination.
Prior to the introduction of the ACVA system, when a Korean subsidiary of a foreign company import[ed] products from the foreign parent or its affiliate, the customs value reported was often rejected by the KCS on the ground that it was affected by the related party relationship and the taxpayer was consequently assessed additional customs duty and penalties based on the customs value recalculated by the KCS. Thus, the taxpayers had difficulties in estimating their ultimate customs duty liabilities and also had to pay penalties whenever the reported customs value was rejected. Considering that the KCS’s stance became fairly aggressive in customs audits since the beginning of this year and the taxpayer can be subject to a criminal liability when the customs value is underreported, the uncertainty surrounding the customs value has become increasingly burdensome to the taxpayers. Thanks to the introduction of the ACVA system, however, taxpayers may now enjoy some stability in their business management and have the ability to accurately estimate their ultimate customs duty liabilities, and the customs administration may secure a stable flow of tax revenue and also avoid frictions with taxpayers. For these reasons, the adoption of similar systems in other jurisdictions can be anticipated.
Under the ACVA system, one of the most critical factors affecting the customs value is the selection of comparable products. In reviewing appropriateness of the customs value reported, the comparable price used by the KCS is the domestic resale price of the identical or similar product (i.e., comparable product) subtracted by the profits and general expenses of the importer of the comparable product. If the customs value reported deviates from this comparable price to a certain degree, the KCS rejects the customs value reported. The most critical aspect of the ACVA application handled by Yulchon Tax Group this year was therefore reaching an agreement with the KCS on the selection of comparable products. Whenever a disagreement emerged, we developed arguments from various angles and produced solid back-up data. Through these efforts, we successfully persuaded the KCS into recognizing the customs value of certain products previously reported by the Company as not having been affected by the related party relationship between the Company and its foreign affiliate. As for the remaining products, the KCS agreed to accept the customs value to be reported by the Company if the ratio of profits and general expenses agreed under this ACVA is used in calculating the customs value reported.
We also note that the KCS and the National Tax Service (“NTS”) signed earlier this year a Memorandum of Understanding (“MOU”) regarding joint audits by the KCS and the NTS on transfer prices, and exchange of information and cross-training of audit techniques between the two agencies. Given this MOU, and considering that the KCS and the NTS tend in practice to respect transfer prices accepted by the other agency, even though not required by law, an ACVA with the KCS is expected to substantially increase the stability and the predictability in the transfer pricing area for corporate tax purposes as well.
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