SEOUL: In the case where Korea Customs Service (“KCS”) imposed customs duty by regarding the price discount between related parties as abnormal, Yulchon successfully represented a Japanese company to elicit the court’s decision rendered in favor of the company.
1. Issue of the Case
Under the Korean Customs Act, in principle, the dutiable value of imported goods is the price actually paid in return for such goods. For instance, if KRW 100 is paid for imported goods, the dutiable value of such goods is KRW 100. However, where transaction parties agree between themselves that “even though the original price for imported goods is KRW 100, the price shall be discounted by 40 percent so that only KRW 60 shall be charged for such goods” and actually KRW 60 is paid in return for such goods, it is questionable whether the dutiable value of such goods is the original price (KRW 100) or the discounted price (KRW 60). Such instances frequently occur for foreign companies in Korea, because a foreign parent company, in practice, applies a specific discount rate to goods supplied to its Korean subsidiary for the purpose of strengthening competitiveness of the Korean subsidiary.
2. KCS’s Assessment
In the above instance, KCS has expressed its view that the dutiable value of imported goods is the original price (KRW 100). That is, KCS recognizes such arbitrary setting of the price of imported goods between related parties as abnormal. In this case, KCS, as the basis for its assessment, presented the logic that arbitrary setting of the price of imported goods between related parties falls under “conditions or circumstances by which determination of the price of imported goods is affected”. Under the Korean Customs Act, where determination of the price of imported goods is affected by conditions or circumstances, the dutiable value of imported goods shall not be the transaction price. According to KCS, as “conditions or circumstances” have affected the price discount in this case, the discounted price cannot be the dutiable value of imported goods, and thus, the original price that has not been affected by “conditions or circumstances” shall be the dutiable value of such goods.
3. Yulchon’s Response to KCS’s Assessment and Court Decision
However, “conditions or circumstances” under the Korean Customs Act do not mean various factors in a general sense. “Conditions or circumstances” refer to cases where “compensational relation or liability” existing between transaction parties is linked to price determination, as in the case of compensation sale or tie-in sale illustrated inthe Korean Customs Act. The purport of the Korean Customs Act is that as the transaction price does not represent the actual consideration for imported goods in the above cases, such transaction price cannot be regarded as the dutiable value of the goods, and this purport is shown in detail in the Commentary to WTO Customs Valuation Agreement based on which the Korean Customs Act was legislated. If various factors fall under “conditions or circumstances” according to KCS’s logic, the foundation of the Korean Customs Act under which the price agreed between transaction parties is considered the dutiable value cannot but collapse. By presenting the above theory, Yulchon actively argued that the price discount made for the purpose of strengthening competitiveness of the Korean subsidiary in this case is irrelevant with “compensational relation or liability”. As a result of Yulchon’s efforts, the court accepted the logic presented by Yulchon and determined that the price discount in this case is irrelevant with “compensational relation or liability” and thus does not fall under “conditions or circumstances” prescribed in the Korean Customs Act.
4. Implications of Court Decision
As KCS has tried to unlimitedly expand the scope of “conditions or circumstances” prescribed in the Korean Customs Act, importers, particularly foreign companies in Korea, have experienced considerable confusion in reporting the dutiable value of imported goods. In addition, KCS has recently warned that they will impose customs duty on foreign companies in Korea in cases like the present case.
However, as the court has limited the meaning of “conditions or circumstances” under the Korean Customs Act in accordance with the purport of WTO Customs Valuation Agreement through this decision, KCS’s attempt to impose customs duty on foreign companies in Korea by broadly interpreting WTO Customs Valuation Agreement is currently blocked.
Furthermore, this case is very meaningful in that it has served as a momentum to show other foreign companies in Korea the exact method of reporting the dutiable value of imported goods relating to the price discount. On a separate note, please be informed that companies that reflected the price discount in the dutiable value of imported goods and declared such value to KCS in the past can be retroactively relieved through requesting for refund (five years for imports made after August 2010).
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