South Korea: Korea's Customs Valuation Method For Transaction Value Between Related Parties

Last Updated: 25 January 2017
Article by Jeong Cheol Cho

Similar to the World Trade Organization (WTO) Customs Valuation Agreement, the Korean Customs Act provides that if the seller and buyer are related parties, the transaction value is examined in order to verify whether the special relationship affected the transaction value, and in the case the special relationship did have an effect on the transaction value, subordinate methods have to be applied while rejecting the transaction value in the customs valuation. The method of verification, such as the 'analysis of circumstances of transaction' and 'test price method', is used in order to verify whether the special relationship affected the transaction value. The 'analysis of circumstances' refers to an examination of the circumstances of sale, and the special relationship is viewed as not having effect on the price under some circumstances such as where the price of the relevant goods is determined using the pricing method ordinarily adopted by the buyer and the seller having no special relationship. The 'test price method' refers to a method where the special relationship is viewed as not having effect on the price if the transaction value closely approximates to the test price (such as uncontrolled transaction value for identical or similar goods).

With the number of foreign-invested enterprises on the rise as of late and the liberalization of foreign exchange transactions, much attention is paid to the transaction value between related parties, i.e. the customs valuation of a transfer price. This issue emerges as a material one to each Member State of the World Trade Organization (WTO), Korean customs office, and the relevant industry.

If the seller and buyer are related parties, the truthfulness of transaction value in customs valuation is brought into question. As such, whether the special relationship affected the transaction value is examined, and in case the special relationship did have an effect on the transaction value, subordinate methods have to be applied while denying the transaction value in the customs valuation.

The special relationship is specifically defined in Article 15(4) and (5) of the WTO Customs Valuation Agreement and Article 23(1) of the Presidential Decree of the Customs Act, and if the relationship is included in the above provisions, such relationship is viewed as specially related regardless of how it is termed.

At the time of Brussels Definition of Value, if a party has an affiliation with the other party as a sole agent, sole distributor or sole concessionaires, it is considered without exception that they are specially related. However, under the current WTO Customs Valuation Agreement, they are not viewed as related parties.

While the transaction between related parties is viewed as having a lot of room for distortion, it does not mean the transaction value is definitely distorted. The need for inspection of the test value or the relevant circumstances of transaction is simply emphasized in order to verify whether the special relationship had any effect on the transaction value. The ways to determine whether the special relationship affected the transaction value include (1) the 'analysis method of circumstances of transaction', where the circumstances of transaction are examined, and (2) the 'test value method' where the proximity of a test value to the transaction value is examined.

1 ANALYSIS OF TRANSACTION CIRCUMSTANCES

To determine whether a special relationship affected the transaction value, the circumstances of transaction must be closely examined, which may include (1) the details on how the commercial relationship was established between the buyer and seller, and (2) the pricing method of imported goods. Also, importers have a duty to submit to the customs authority information on how the commercial relationship was established between the buyer and seller and the circumstances of transaction including a pricing method of imported goods.

In principle, a customs office applies the transaction value as the dutiable value upon the conclusion that the price was not affected by the special relationship after inspecting the circumstances of transaction between the related parties. The customs office does not necessarily examine all transactions where related parties are involved, but it inspects the transactions where questions are raised on acceptability of the transaction value. Under the WTO provision or Customs Act, the following circumstances are viewed as not having effect on the price: (1) Where the price of the relevant goods is determined using the pricing method ordinarily adopted by the buyer and the seller having no special relationship, (2) Where the price of the relevant goods is determined in a manner in conformity with the general practice of determining the arm's length prices in the industrial sector concerned.

The Korea Customs Service (KCS) provided the following examples in its notification on the customs valuation of the imported goods as those where 'the price of the relevant goods is determined using the pricing method ordinarily adopted by the buyer and the seller, and thus, the transaction value is not affected by the special relationship':

  • Where the seller sells the relevant goods to an unrelated buyer at the same price level (Provided, that if there is any difference in the quantity or level(s) of transaction, an adjustment should be made.);
  • Where the seller sells the relevant goods to an unrelated buyer in the exporting country or a third country at the same price level (Provided, that if there is any difference in the quantity or level(s) of transaction, level of market development of the relevant countries and the seller's global marketing strategy, an adjustment should be made.);
  • Where the buyer purchases the identical or similar goods in terms of kind and quality from another unrelated seller at the same price level (Provided, that if there is any difference in the quantity or level(s) of transaction, an adjustment should be made.);
  • Where the goods have been sold at the price publicly notified in the newspapers or magazines which proves that an unrelated buyer also may purchase them at the same price level;
  • The price of the relevant goods sufficiently reflects all costs and expenses incurred in the production and sale of the goods and the company's overall profits that were realized through the sale of the same type of goods during the representative period;
  • Where the seller sells goods purchased from an unrelated manufacturer, etc. to the buyer, where the price of such goods sufficiently reflects the purchase price of the goods and the ordinary profits and general expenses related to the seller's sales;
  • Where the profit margin ratios realized by the seller's sale to the buyer and by the seller's sale to another unrelated buyer are at the same level (Provided, that if there is any difference in the quantity or level(s) of transaction, level of market development of the relevant countries and the seller's global marketing strategy, an adjustment should be made.);
  • Where the profit margin ratios realized by the buyer's sale of the identical or similar goods in terms of kind and quality that are purchased from a related party and an unrelated party are at the same level (this case requires that the profit margin ratios are realized under the same business and market conditions, and the buyer's profit margin ratio is at the same level as that of the relevant industry.); or
  • Where the buyer is free to purchase the relevant imported goods or the substitute goods from an unrelated person and it is confirmed by the submitted data and the statement of the actual transaction that price is the main reason the buyer chooses the seller.

2 TEST VALUE METHOD

If an importer demonstrates that the transaction value closely approximates to one of the following test values, such transaction value may be adopted as a customs value:

  • The transaction value in the sales to unrelated buyers of the identical or similar goods in terms of kind and quality that are exported to the country having no special relationship; or
  • The customs value of the identical or similar goods in terms of kind and quality that is determined on the basis of the domestic sales price or estimated price.

Test values that are compared with the transaction value between the related parties should be used only for comparison purposes and must not be considered as the custom value itself. Also, when comparing the test value and transaction value, an adjustment should be made if there is any difference in the quantity or level(s) of transaction.

While the WTO Customs Valuation Agreement does not provide any specific figure in relation to the meaning of 'closely approximate to', the Korean customs law sets forth so called '10% Rule'. That is, 'closely approximate to' means that the imported price differs from the test value by less than 10%. Accordingly, in many cases, the customs offices in Korea, in practice, determined whether the special relationship affected the price based on whether the import price fluctuated by more than 10% or whether the difference between the test value and the price of goods is more than 10%.

However, it is not reasonable to deem that more than 10% difference between the test price and the transaction value always means that the special relationship affected the transaction price regardless of the nature of the imported goods and the type of the transaction, which are very diverse. In this regard, the Korean customs law sets forth that if the head of customs office deems that the imported price is reasonable in light of the nature of the imported goods, transaction type, and the customary practice for the transactions, even though the difference between the test value and the transaction value exceeds 10%, the transaction price may be considered as 'closely approximate to'; on the other hand, if the head of customs office deems that the imported price is not reasonable, even if the difference is less than 10%, the transaction price may not be considered as 'closely approximate to'. However, there exists no sophisticated criteria to determine the reasonableness and thus, it is up to the Customs' discretion. There are views suggesting that it is desirable to set a higher range of the difference (e.g. 25%, quartile) rather than to allow the Customs indefinite discretion based on the narrow range of 10%.

As shown above, instead of defining the circumstances where the transaction between the related parties affected the transaction value, the Korean customs authorities provide examples in order to help determine the possibility of impact on the price. The WTO Customs Valuation Agreement also follows suit.

Originally published by Global Trade and Customs Journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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