Kim & Chang’s International Trade & Customs Practice successfully obtained a decision from the Korea Customs Service (the “KCS”) confirming that a transaction—wherein the Korean affiliate (the “Taxpayer”) of a multinational company imported goods from its overseas affiliate and then re-exported the unsold goods back to the overseas affiliate—constitutes a re-export of goods in the same condition under a consideration-based transaction, and therefore qualifies for the customs duty refund it received under the Act on Special Cases Concerning Refund of Customs Duties, Etc., Levied on Raw Materials for Export (the “Special Act on Refund”).
In particular, this was a significant achievement in that the Taxpayer’s arguments were accepted at the pre-assessment review stage—before any formal assessment and notice—resulting in the complete withdrawal of the contemplated assessment of customs duties and other significant charges. By resolving the matter at an early stage, the Taxpayer was able to avoid the time, cost and uncertainties associated with full-scale objection procedures, such as administrative appeals and litigation.
The Taxpayer imported high-value precious metals and similar items from its overseas affiliate in order to hold exhibitions and sales events targeting Korean customers. The Taxpayer then re-exported the items that were not sold in Korea (the “Disputed Goods”) to its overseas affiliate and received a customs duty refund for re-export in the same condition under Article 3(1)2 of the Special Act on Refund.
The Korean customs authorities (the “Customs Office”), however, asserted that to qualify as a re-export in the same condition eligible for a duty refund, the export must also constitute a consideration-based transaction. The Customs Office issued a pre-assessment notice seeking to recapture the customs duties and other charges refunded over the past five years totaling tens of billions of KRW, arguing that the export of the Disputed Goods did not constitute a consideration-based transaction for the following reasons:
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The Disputed Goods were expected to be returned to the exporter from the time of importation, and no profit arose at the time of export. Therefore, the Taxpayer’s export of the Disputed Goods was merely a return transaction and not a consideration-based transaction.
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The Taxpayer did not actually receive export proceeds, because it set off the export proceeds against the import price payable to the overseas affiliate for the Disputed Goods.
The Taxpayer challenged the Customs Office’s pre-assessment notice to the KCS by requesting a Review of Adequacy of Duty Imposition. During its pre-assessment review, the KCS determined that the export of the Disputed Goods constituted a consideration-based transaction and therefore qualified as a re-export in the same condition eligible for a duty refund under the Special Act on Refund, and concluded that the Customs Office’s pre-assessment notice and the rationale therefor were erroneous for the following reasons:
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The Disputed Goods followed the same transaction structure and settlement method as ordinary imported goods, and separate purchase orders and invoices were issued, suggesting that the transaction constituted a sale and purchase under a separate sales contract.
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Although the Taxpayer did not directly receive the export proceeds from the re-export of the Disputed Goods, it set off the proceeds against amounts payable to the overseas affiliate for imported goods. Such set-off is a payment/settlement method recognized under the Commercial Code, and the Taxpayer should be deemed to have substantively received consideration for the export of the Disputed Goods. Therefore, the export can be regarded as a consideration-based transaction.
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The Customs Office treated cases where import and export payments were settled on the same date as “gratuitous” and cases settled on different dates as “consideration-based.” However, despite the repetitive import/export transactions being of the same nature, the Customs Office failed to provide sufficient grounds for applying different legal characterizations solely based on differences in the timing of settlement.
This was a large-scale matter, involving a complex set of facts and legal issues, approximately 20 months of customs investigation and multiple rounds of written submissions. It is known to be the largest case to be accepted since the KCS introduced the pre-assessment review system. Notably, we adopted an affirmative strategy for this case: challenging head-on the very premises underlying the proposed assessment under a consistent legal theory, rather than responding defensively to each individual issue raised by the Customs Office. In particular, we effectively highlighted that, even within the Customs Office, there were conflicting views on the legal characterization of the same transactions, thereby exposing fundamental weaknesses in the logic of the proposed assessment.
Furthermore, we reconstructed, in a legally coherent manner, the structure and practical accounting/settlement mechanics of both the product sales events conducted by the Taxpayer and the global inventory movements. We also carefully refuted the Customs Office’s factual misunderstandings with objective evidence, such as the operations manual with the responsible person’s seal and inter-affiliate emails. In addition to the Special Act on Refund and its subordinate regulations, we comprehensively relied on the Commercial Code (mutual accounting), the Foreign Exchange Transactions Act, and the Civil Code (performance), establishing the proposition that “substantive receipt of consideration through mutual account settlement equals export for consideration,” which was accepted as a key ground for the decision.
In practice, it is not uncommon for companies to import goods from overseas affiliates, use them for exhibitions and events, and then re-export the unsold items in their original condition to obtain a refund of customs duties. In such transactions, disputes often arise as to whether the export qualifies as a “re export in the same condition” and “consideration-based export”—requirements for duty refunds. Ultimately, the conclusion for each company will vary depending on the facts, including the contract structure, payment and settlement method, and accounting treatment. As in this case, therefore, there is always a risk that the Customs Office may challenge whether the refund requirements are satisfied. Similar issues may also arise when companies, instead of seeking a refund for re-export in the same condition, utilize the temporary import clearance certificate (ATA Carnet) or the re-export duty exemption system under Article 97 of the Customs Act, given that whether the applicable requirements of each system are met is fact-intensive.
In sum, regardless of which system is used and before any dispute materializes, companies that re-export unsold inventory after domestic sales activities and seek a refund of previously paid customs duties and other charges should review the transaction structure, documentation and accounting treatment, as well as overall compliance with clearance, refund and exemption requirements, and develop a coherent response strategy.
