Kim & Chang’s International Trade & Customs Practice was recently instrumental in persuading the Tax Tribunal to render the decision that it was erroneous to impose value-added tax (“VAT”) and penalties by adding the development milestone payments made by the applicant under a contract with an overseas exporter, which was a partner of a new drug joint development contract, to the dutiable value on the grounds that the relevance and conditionality of the development milestones were not related to the imported goods (Tax Tribunal Decision Joshim 2024Gwan160, rendered on September 17, 2025).
The applicant entered into a business cooperation agreement with the overseas exporter for the introduction and joint development of oral immuno-cancer drugs (the “Agreement”) and imported clinical trial preparations made of the new drug candidate substance (the “New Drug Candidate Substance”) in tablet form (the “Products”) in order to conduct clinical trials of the New Drug Candidate Substance developed by the exporter pursuant to the Agreement.
The purpose of the Agreement was for the applicant to make the exporter the development milestone payments (the “Milestone Payments”) in consideration for an exclusive license (right) to manufacture and sell a new drug after the development and commercialization of the new drug.
The Customs Office conducted a customs audit on the applicant and deemed that the Milestone Payments were a royalty paid in relation to the Products and as a transaction condition, and added the Milestone Payments to the dutiable value of the Products to correct and notify the VAT and penalty tax. The applicant filed an appeal for adjudication.
The Tax Tribunal ruled as follows:
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1. |
The Customs Office has failed to clarify the right to be acquired by the applicant from importing the Products, and has failed to specify the form of rights set forth in Article 19 (2) of the Enforcement Decree of the Customs Act. |
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2. |
The rights to be acquired by the applicant under the Agreement appear to be the right to exclusively commercialize drugs, including the New Drug Candidate Substance, upon obtaining marketing approval in the future, and clinical trials appear to be an obligation to be performed by the applicant in the development process, and it is difficult to deem that the clinical trials themselves are rights. |
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3. |
The Agreement only provides that the exporter will supply the Products to the applicant only for the purpose of clinical trials in accordance with the schedule set forth in the attachment, and the applicant will pay for such supply, but it has not been confirmed that the Products must be purchased from the exporter under the Agreement. |
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4. |
The Agreement stipulates that the Milestone Payments will be made upon occurrence of a certain event, regardless of the importation or use of the Products, and the Milestone Payments by the applicant were made because a third party initially administered the New Drug Candidate Substance to the clinical trial participant, irrespective of the importation of the Products. |
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5. |
The price for the Products appears to be the amount set forth in the appendix to the Agreement, and even if the Products are not imported under the Agreement, the applicant has no choice but to make the Milestone Payments if the payment conditions for the development milestones are satisfied. Therefore, it is difficult to deem that the Milestone Payments are relevant to the Products or were paid as a transaction condition. |
Based on the foregoing, the Tax Tribunal determined that the Customs Office was erroneous in imposing VAT and penalties on the applicant by deeming the Milestone Payments as royalties and adding them to the customs value of the Products.
The Customs Office has recently consistently attempted to assess customs duties by adding royalties/license fees, management consulting fees, joint purchase fees, etc., paid by the importer to the exporter in addition to the purchase price, to the customs value of the relevant imported goods. The Tax Tribunal’s decision is meaningful in that it confirms that, in order to determine the additional payment made by the importer to the exporter as royalties and include it in the customs value, the relevance of the payment to the imported goods must be strictly determined, and it must be included as a transaction condition.
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