Our firm’s International Trade & Customs Practice has recently won a decision from the Tax Tribunal that ruled that when parts imported by the claimant from its overseas headquarters are used for free warranty repairs, the difference between the sales proceeds of the parts prepaid by the claimant to the domestic dealer and the import price of the parts reimbursed by the overseas headquarters does not constitute an indirect payment amount. Therefore, it cannot be added to the customs dutiable value of the related vehicle (Tax Tribunal Decision 2023gwan0098, April 22, 2024).
The claimant in this case imports automobiles and parts from its overseas headquarters and sells them to domestic dealers, who subsequently sell them to domestic consumers or use them for automobile repair services.
After selling automobiles to consumers, if defects occur within the warranty period and a free repair is provided, (i) domestic dealers first use parts purchased at a cost from the claimant to perform free repairs for consumers and subsequently bill the claimant for the “purchase price of the parts” (which, under the claimant’s standard practice, refers to the selling price to the domestic dealers) and “labor costs” (the sum of the purchase price and labor costs, the “disputed repair amount”), from which they received compensation from the claimant; and (ii) following the payment of the disputed repair amount to the domestic dealers, the claimant files a claim with the overseas headquarters for the “import price of the relevant parts,” as well as “various costs,” including domestic transportation costs incurred when selling parts to dealers and “labor costs” (the sum of the import price, various costs and labor costs will be referred to as “disputed compensation amount”), and receives reimbursement from the overseas headquarters for the disputed compensation amount.
As a result, concerning the free warranty repairs of the automobiles, a difference arose (the “disputed payment amount”) between the disputed repair amount advanced by the claimant to the domestic dealers and the disputed compensation amount reimbursed by the overseas headquarters. In this context, the customs authorities determined that the disputed payment amount qualifies as an indirect payment amount as defined in Article 30 (2) of the Customs Act and Article 20-2 (1) 2 of its Enforcement Decree. Consequently, they added this amount to the customs dutiable value of the automobiles and made corrections and assessments for customs duties. The claimant, dissatisfied with this decision, filed for an administrative trial.
Regarding the customs authorities’ decision outlined above, the Tax Tribunal determined the following:
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(1) |
For an indirect payment amount to be added to the customs dutiable value under customs law, it must, in principle, be fixed at the time of importation. Additionally, the “discounted amount” or “separately paid warranty cost” referenced in Article 20-2 (1) 2 of the Enforcement Decree of the Customs Act also signifies an amount that is fixed at the time of importation based on the trading conditions of the imported goods. Therefore, the customs dutiable value cannot be interpreted as including the amounts of free warranty repair costs that are incurred individually and sporadically over a considerable period following importation. |
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(2) |
This dispute pertains to a profit generated from the sale of parts by the claimant to the domestic dealers. However, if the domestic dealers use those parts for free warranty repairs, the claimant effectively negates the profit from the sale of those parts retroactively. This situation corresponds to the claimant providing the parts to the domestic dealers free of charge, which does not result in any additional losses or profits for the overseas headquarters, the claimant, or the domestic dealers related to the free warranty repairs. Hence, the Tax Tribunal concluded that the customs authorities’ decision to consider the disputed payment amount as an indirect payment made to the overseas headquarters for importing automobiles and to add it to the customs dutiable value for the imposition of customs duties was erroneous. We represented the claimant in this case and achieved a favorable outcome. |
Recently, in industries where free warranty repairs are prevalent (such as in automobiles, machinery and semiconductors), customs authorities have consistently sought to classify costs associated with free warranty repairs as indirect payments. This classification allows them to include these costs in the customs dutiable value of the related imported goods, thereby subjecting them to duties. The recent Tax Tribunal decision discussed above is significant in that it confirms that for costs associated with free warranty repairs to be included as indirect payments in the customs dutiable value under customs law, those costs must be determinable at the time of importation. Furthermore, it emphasizes the need for a strict assessment, particularly in cases where the importer incurs separate additional costs.
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