Proving the non-existence of roundabout trade

 In order to apply a FTA preferential tariff rate, 5 conditions as follows shall be met:

1. Trading party

Trading party shall be registered in the country of relevant FTA contracting party. In the case of FTA requiring C/O to be issued by the Government designated authorities, the condition of trading parties rarely becomes an issue. However, it can be a critical issue when C/O is issued by an exporter. If it is issued by a person not registered in the country of relevant FTA contracting party, C/O can be deemed invalid unless such implementation is agreed by the FTA contracting parties in advance like KR-US FTA.

2. Tariff concession item

As FTA tariff concession item is listed in the form of HS code and relevant description, it is crucial to classify the exported product correctly. Incorrect tariff classification may lead to apply the application of a preferential FTA tariff rate to a non-concession item, or to apply incorrect preferential FTA tariff rate to an item of different base rate and staging category.

3. Originating product

Imported goods shall satisfy relevant origin criteria prescribed under each FTA to be originating products.

4. Direct transportation

Except for the case where port of loading and port of discharge indicated in B/L or AWB are located in the FTA contracting party and the Republic of Korea respectively, additional documents are required to prove direct consignment.

5. Procedural requirements

The Certificate of Origin (C/O) form shall conform to the relevant FTA and its contents shall match with the shipping documents. Only the valid C/O shall be used and the claim for preferential tariff treatment shall be made within one year from the acceptance date of the import declaration.

 

When an importer receives a notice of origin investigation from Korea Customs, the first thing to do is to contact the exporter and ask whether and what documentary evidence relating to the determination of originating products can be provided. If RVC criterion has been applied, the documentary evidence can reveal the confidential cost data and it may be hard to receive support from the exporter. However, if CTC criterion has been applied, the exporter may provide description of manufacturing process and BOM without cost data. Then, the chances that Korea Customs closes the origin investigation after receiving documentary evidence from the importer get higher.

 

However, it shall be noted that origin investigation is not limited to check on the 5 conditions. Once Customs suspects of roundabout trade, substantial documents may be required to prove the non-existence of roundabout trade. Inventory management ledger, production management ledger, production log, warehousing/release management ledger, sale ledger, relevant tax invoice etc. combined can be the documentary evidence that the exported goods have been truly manufactured in the FTA contracting party.

 

It may be hard for the importer to obtain such materials from the exporter. Even so, it is important to maintain an active posture as much as possible. Showing willingness to cooperate in origin investigation helps in clearing Customs officials’ doubts.