Korean Tax Tribunal on the Adjustment of Value of Imported Goods and Transfer Pricing

Late last year the Korean Tax Tribunal ruled that the “Customs Value” shall not be effected by a “Transfer Price Adjustment.” The holding will make it more difficult for those importing products into Korea where the product may be paid for by the importer only after the sale of the item.

The case involved the import of motorcycles and auto parts by a foreign parent of a local company. The transfer prices were set in 2009 based on exchange rates in 2009. The transfer price was in Euros. Because of currency fluctuations, the company intended to change the transfer price to more adequately reflect market realities and allow for profit by the local company. The agreement between the companies allowed for a retrospective decrease in price based on changed circumstances, since imported items are not immediately sold. Time is needed to sell the goods and the time needed to sell can lead to currency fluctuation risks (“changed circumstances”)

The local company and the parent agreed to a 5 percent decrease in the export price, thus, also seemingly decreasing the amount of custom duties owned. The catch was that over 15 million Euro worth of product was, already, reported as imported and duties were already paid by the local company.

Thus, the local company requested a refund of custom duties already paid on the 15 million Euro worth of goods (based on decrease in import price).

The Korean Customs Agency denied the request claiming, inter alia, that a price adjustment may not occur after the reporting of the importation of the item.

The company appealed to the Tax Tribunal of Korea.

The tribunal ruled that the calculation method for determining an arm’s length price (transfer price issue) under the Law for Coordination of International Tax Affairs is an issue separate from the rules to determine a value for customs purposes. Thus, the transfer price is not a determining factor (or even a factor) in the determining the customs value of an imported item. Odd?

The case does contain some good news for importers.

The Korean Tax Tribunal noted that Commentary 4-1 of the World Customs Organization (WCO) states, in part, that where “price review clauses” has been effective or not is critical in determining whether an adjustment of the customs value should occur. When the price is already paid, then, the issue is moot and the price is set, but when an importer only pays after the item is imported and sold and then the exporter is paid – then a price adjustment is possible and thus the customs value shall be adjusted.

The Tax Tribunal, however, noted that the clause that allows the price adjustment must have a detailed method to calculate the decrease in price and the present clause was not detailed enough. The Tax Tribunal noted that the price review clause between the is vague and contains no method to determine how to adjust the price.

Seems like bootstrapping, but, still, include in all your agreements with your importer detailed clauses and adjustment calculation methods to reflect numerous contingencies, however, I fear that even if you had a precise formula, the Tax Tribunal would find some other argument to deny the refund.

The case may be appealed.

What do you think?