The Ministry of Economy and Finance (the “MOEF”) amended the Enforcement Decree and Enforcement Regulation of the Customs Act in October 2020, so that customs valuation is substantively governed by the Enforcement Decree and Enforcement Regulation of the Customs Act.  On February 23, 2021, the MOEF also amended the Notification on Customs Valuation of Imported Goods (the “Former Notification”) and changed its name to the “Notification on Operation of Customs Valuation” (the “Notification”).

The Former Notification used to set forth the contents of the provisions in the controlling laws concerning customs valuation, including details required to determine the customs value of imported goods such as the base exchange rate for duty imposition purposes.  The recent amendments made to the Notification and other laws relating to customs valuation aim to resolve the often-raised issue over violation of the principle of statutory taxation and the doctrine of non-delegation of legislative powers, because the basis of duty imposition used to be regulated under a notification issued by the Korea Customs Service, rather than laws enacted by the National Assembly.  
 
The key amendments to the Notification are as follows.
 

1.   The Notification expressly specifies that the goods have to be “sold for export” in order for the transaction value to be recognized as the customs value

Article 14 of the Notification provides that the transaction price of “goods that did not arrive in Korea as a result of export sale” cannot be recognized as the customs value.

Essentially, this provision defines the concept of “export sales” in a clearer manner by adopting the guidelines provided by the WTO’s Technical Committee on Customs Valuation and foreign customs offices.  Going forward, we expect that increased references to precedents and interpretations from other countries as standards by which to determine what constitutes export.

Conventional import and export transactions will not be affected by the amendments as they fall within the scope of “export sales” provided by the Notification.  However, special attention will be required when transactions are carried out within bonded areas or involve a series of repeated transactions.
 

2.   The Notification includes revised provisions on grounds for denying the use of transaction value

According to Article 30 (3) 4 of the Customs Act and Article 23 (2) of the Enforcement Decree of the Customs Act, even when there is a special relationship between a buyer and a seller, if the import price is “determined in a manner consistent with the normal pricing practice of the relevant industry,” the transaction value may be recognized as the customs value.

Article 28 of the Notification expressly sets forth that the following cases frequently brought up in interactions with the Korea Customs Service may be deemed as being “consistent with the normal pricing practice of the relevant industry:”

• Where the price of goods sufficiently reflects the entire cost of production/sales and a company’s overall profit realized from sale of goods of the same type during a representative period;

• Where the gross profit margin gained by an exporter from sales to an importer is equivalent or similar to that from sales to a buyer that has no special relationship with the exporter; and

• Where an exporter uses a specific formula to determine the price and applies the same formula to sell its goods to all buyers, irrespective of whether the exporter has a special relationship with the buyer.

In addition, whether a special relationship between transacting parties affects the price of imported goods when a discount is applied in relation to marketing of the imported goods has been a topic of frequent discussion.  Regarding this issue, Article 27 of the Notification expressly prescribes that “conditions or considerations related to the production or marketing of imported goods are not deemed as conditions or consideration to not recognize the transaction price as the customs value.”
 

3.   The Notification sets out the scope of dutiable additions such as royalties and freight charges with greater specificity 

Under Korean customs law, royalties can be added to the customs value only when such royalties are (i) “related” to the imported goods and are a (ii) “condition of sale” of the imported goods.  While a visual or technical determination on whether royalties are “related” to the imported goods is relatively easy, determination on the existence of “condition of sale” involves judgment of complex facts, and has been the source of frequent disputes between the customs office and taxpayers.

To clarify this issue, Article 21 of the Notification explicitly provides examples of circumstances in which the “condition of sale” requirement is satisfied.  These circumstances include: where a seller and a recipient of royalties (or the right holder) are of special relationship; where an importer effectively does not have the choice to purchase; and where a buyer obtains an exclusive license over intellectual properties and in turn grants a non-exclusive license over such intellectual properties to a seller.

Regarding freight charges, which is another dutiable factor, Article 24 of the Notification provides that the freight charge is the actual paid cost required to transport the imported goods to the port of importation, and that the amount finally paid to a carrier or a forwarding agent shall be added to the customs value.

Where the freight charge stated in the freight statement prepared by a carrier is declared for the purpose of import clearance and the actual incurred freight cost is paid to the carrier subsequently, taxpayers are advised to note that it may not be possible to determine the actual freight cost to be incurred at the time of filing import clearance.

In addition to the above, the Notification also sets forth provisions relating to: (i) strengthened reporting requirements for provisional value and revised regulations relating to reporting of final import price; (ii) revised regulations relating to the cost of containers and packaging; (iii) revised standards of price discrepancy adjustment under the price determination method based on the dutiable value of goods of same kind and quality; (iv) improvements in the method of determining dutiable price based on the selling price of goods of the same or similar kind; and (v) revised regulations regarding pre-examination of customs value.  Given the wide scope of the amendments, companies are advised to pay close attention to the Notification as these provisions may have a significant impact on customs valuation going forward.