Risk of dual pricing

When an exporter sells a product to an unrelated customer in Korea at sales price and a related affiliate in Korea at transfer price, serious customs valuation issue can arise to the related affiliate if the sales price is much higher than the transfer price.

It’s because customs authority will try to collect tax shortfalls plus penalty calculated based on the customs value determined based on the sales price.

 

Pursuant to WTO Customs Valuation Agreement, the transfer price can be regarded as the appropriate customs value if it is proved that the special relationship doesn’t influence the transaction price of the product. However, under the situation where customs authority found out that a product was sold to an unrelated customer at much higher price, it is not easy to prove. Besides, the fact that the same product was sold to an unrelated customer at much higher price can be easily found out by customs authority through analysis of Korea Customs Service (KCS) database.

 

Non-influence of special relationship shall be proved through “Circumstances surrounding the sale” or “Test value”. In Article 28 (Determination of Special Relationship Influence based on Circumstances Surrounding the Sale Research) of the NOTIFICATION ON THE OPERATION OF THE CUSTOMS VALUATION (관세평가 운영에 관한 고시) which is a sub-statute of the CUSTOMS ACT notified by KCS, 10 cases are prescribed as examples where it is deemed that the special relationship doesn’t influence the transaction price under “Circumstances Surrounding the Sale”.

1.   Where the seller sells goods at a price of the same level for unrelated buyer in Korea. Provided that, adjustments shall be made if quantity, commercial level, etc. are different; 2.   Where the seller sells goods at a price of the same level for unrelated buyer in the exporting country or other third country. Provided that, adjustments shall be made if quantity, commercial level, level of market development per country, seller’s global marketing strategy, etc. are different; 3.   Where the buyer buys identical or similar goods at a price of the same level from other unrelated seller. Provided that, adjustments shall be made if quantity, commercial level, etc. are different; 4.   Where it is proved that the price of sold goods is publicly announced in newspaper, magazine, etc. and unrelated buyer can buy the goods at a price of the same level; 5.   Where the price of relevant goods is adequate to ensure recovery of all costs related to manufacture and sales of the relevant goods plus profit which is representative of the firm's overall profit realized over a representative period of time in sales of goods of the same class or kind; 6.   Where the seller sells goods bought from unrelated manufacturer, etc. to the buyer and the price of the goods is adequate to ensure recovery of purchase price paid for unrelated manufacturer, etc. plus general profit and expenses of the seller; 7.   Where the gross margin ratio which the seller realizes through sale to the buyer and the gross margin ratio which the seller realizes through sale to unrelated buyer are at the same level. Provided that, adjustments shall be made if quantity, commercial level, level of market development per country, seller’s global marketing strategy, etc. are different; 8.   Where the gross margin ratio which the buyer realizes through domestic sale of goods bought from related seller and the gross margin ratio which the buyer realizes through sale of identical or similar goods bought from unrelated seller are at the same level: Provided, That commercial and market conditions of the same level are presupposed and the gross margin ratio of the buyer shall be at the same level as relevant industry; 9.   Where it is confirmed, through submitted materials and actual transaction data, that the buyer can freely buy the imported goods or substitute goods from unrelated seller and the main reason why the buyer selects the seller is price; 10.Where the seller uses a specific formula to determine a price and applies the same formula when selling goods to either a related buyer or an unrelated buyer.

 

As the sales price is much higher than the transfer price, the situation is exactly opposite to the example, “the seller sells goods at a price of the same level for unrelated buyer in Korea”.

 

According to Article 23 (2) of the ENFORCEMENT DECREE OF THE CUSTOMS ACT (관세법시행령), following value can be the test value:

-      Transaction price of identical or similar goods exported to a buyer of Korea who has no special relationship

-      Customs value (deductive value or computed value) of identical or similar goods

 

According to Article 5 of the ENFORCEMENT RULE OF THE CUSTOMS ACT (관세법시행규칙), in general cases, it is deemed that the special relationship doesn’t influence the transaction price if the difference between the transfer price and the test value (in this case, sales price) doesn’t exceed 10%.

 

Besides, there is a limit in adjusting the test value from the perspective of commercial level and trading quantity.

 

As it is explicitly seen that the transfer price fails “Circumstances surrounding the sale” and “Test value”, customs authority will try alternative valuation methods in a sequential order.

Regardless of the shipment date of imported goods, customs authority may calculate the customs value based on the sales price by applying valuation method no. 6-6.

 

In order to reduce the amount of collection and penalty, the related affiliate shall establish valuation rationale which can beat valuation method no. 2, 6-2, and 6-6.

 

 

In the case where TP Study says the transfer price is within the arm’s length range, the exporter and related affiliate may think that it is also appropriate from the perspective of customs valuation.

 

Although TP Study can be a good reference for customs valuation, just as WCO CASE STUDY 14.2 puts, the use of a transfer pricing report as a possible basis for examining the circumstances surrounding the sale should be considered on a case by case basis.

 

The exporter and related affiliate shall never forget that, when there is something to compare on the product level, Korea customs authority will never miss it and customs valuation is to determine the customs value of a specific product, not the general price level of an industry.