Ask a Lawyer is a regular column written by attorneys at Yoon & Yang LLC on various legal aspects of the Korean life or business. The content provided here is general legal information, not legal advice on a specific situation. -- Ed.

Q: How can a multinational company eliminate its risks on customs value calculations when its Korean subsidiary imports goods from its affiliates abroad?

A: Let us assume that a Korean subsidiary (company A) of a multinational company imports goods from its affiliate abroad (company B) and declares, at the time of importation, the customs value of the imported goods using the transaction price calculated based on the Transfer Pricing Study or Advance Pricing Agreement with the National Tax Service. Even in such cases, the Korean Customs Service sometimes suspects that the transaction price between affiliated companies A and B, declared as customs value, is too low because of their special relationship. Furthermore, it is very difficult to determine the customs value of goods that were imported without considering the exporter. As such, multinational companies are exposed to risks in connection with the customs value determination of imported goods, and addressing such risks ex post facto involves substantial time and cost.

To reduce such risks, companies may consider applying for the Advance Customs Valuation Arrangement, which was introduced in 2008.

The ACVA is a system through which the KCS reviews and confirms the price that an applicant suggests as the customs value of a specific good. Since the customs value confirmed in this process is effective for three years, a company may remove risks arising from customs value calculations during this period. Even after the expiration of the three-year period, it can provide useful data, which the importer may use to determine the customs value of the goods. 

Q. A Korean subsidiary of a multinational company often adjusts its operating income, which is its tax base, at the end of certain fiscal years so as to have its operating income conform to the arm’s length price, and the adjusted amount is usually remitted to the exporter (seller) as payment for imported goods. In such instances, the customs office additionally collects customs duties. Reversely, is it possible to receive a customs duties refund if the exporter remits the amount to the Korean subsidiary?

A: The Korean government recently introduced the “provisional customs value declaration with respect to post-adjustment of transfer price,” which came into effect on July 1, 2017. Under this system, a multinational company, which expects adjustments or changes of the transaction prices of the imported goods for the sake of having it accord with the arm’s length price, may declare a provisional customs value at the time of the importation, and then declare a final customs value after the adjustments or changes have been made.

If a multinational company uses this system, not only can it remove uncertainties from customs value evaluations and reclaim its overpaid customs duties due to the excessive customs value evaluation, but it can also be exempted from the 10 percent overdue penalty and obtain a revised import duty statement in relation to the value added tax.

We recommend multinational companies to proactively use this new measure if they expect their transaction price to be adjusted after import declarations have been filed.

By Lee Sung-bum
Attorney and partner of law firm Yoon & Yang LLC