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Korean Supreme Court Provides Guidance on Imposition of Penalties and Issuance of Amended VAT Invoice Where Customs Authority Reverses Determination Regarding Dutiability of Royalties


Kim & Chang’s customs practice group successfully defended a client who was assessed penalties and whose requests for issuances of amended import VAT invoices were denied by the customs authorities for not adding the royalties paid to an overseas affiliate to the customs value when reporting the duties and other amounts due when the Supreme Court of Korea ruled that such measures taken by the customs authorities were illegal (2019Du54023, 2019Du48608, 2019Du44378).

Previously, the client, the domestic importer in the case, had sought the customs authorities’ clarification regarding whether royalties paid to the overseas affiliate are dutiable.  Finding that such royalties are not dutiable, the customs authorities reassessed and reduced the applicable duties and other amounts due by excluding the royalty amounts from the dutiable base.  Based on this, the domestic importer had thereafter been reporting and paying customs duties and VAT without adding the royalties to the dutiable base.  However, the customs authorities subsequently overturned their earlier reassessment on the basis that the company had earlier made some factually inaccurate representations.  The customs authorities assessed additional customs duties and VAT based on again including the royalty in the dutiable base, and, in addition, assessed penalties on the company and refused to issue amended import VAT invoices.  The company then appealed the authorities’ decisions, seeking to cancel the penalty assessments as well as the refusal to issue the amended import VAT invoice.

In multiple cases involving these disputed issues, the Administrative Court accepted the customs authorities’ arguments and dismissed the company’s claims.  On appeal, the High Court rendered split decisions with respect to these cases, where some accepted the importer’s claims but others did not.  Eventually, the Supreme Court recently held that (i) it cannot be deemed that there was fault attributable to the importer pursuant to Article 35 (2) (c) of the former Value-Added Tax Act; and (ii) there was a legitimate reason not to blame the importer for neglecting its obligations when it reported customs duties and other amounts without including royalties in the dutiable value.  As a result, in each of the relevant cases, the Supreme Court either found in favor of the company’s claims or remanded the case back to the High Court.

These decisions provide some meaningful guidance regarding the types and amount of documentation required to be submitted by taxpayers and the burden of proof on the customs authorities in determining whether the requirements regarding condition of sale and relatedness have been met in determining whether royalties paid should be included in the customs value of a good as provided by Article 20 (1) (4) of the Customs Act.  The decisions also provide a detailed description of the conditions that need to be met in order to issue an amended import VAT invoice and to legitimately assess penalties pursuant to the Customs Act with respect to imports of goods.  As such, we anticipate that these decisions will become important precedents in the context of future legal interpretation as well as practice relating to assessment of penalties, issuance of amended import VAT invoices and inclusion of royalties in the dutiable value of goods.