Basic principle of tax administration – ACTUAL TAXATION

 

There is a crucial rule in tax administration that applies consistently, known as the actual taxation rule. From the perspective of customs duties, this means that the person who actually owns the imported goods at the time of filing their import declaration shall be the person liable to pay customs duties and be so declared.

This rule is stipulated in Article 14 of the FRAMEWORK ACT ON NATIONAL TAXES (국세기본법), a statute prescribing fundamental and common matters concerning national taxes.

FRAMEWORK ACT ON NATIONAL TAXES  Article 14 (Actual Taxation) (1)     If any ownership of an income, profit, property, act or transaction which is subject to taxation, is just nominal, and there is other person to whom such income, etc., belongs, the other person shall be liable to pay taxes and tax-related statutes shall apply, accordingly. (2)     The provisions pertaining to the computation of tax base in the tax-related statutes shall be applied to a real income, profit, property, act or transaction, regardless of its title or form. <Amended on Jun. 9, 2020> (3)     Where it is recognized as a method of receiving unjust benefit pursuant to this Act or tax-related statutes, such as an indirect method through a third party or a method of involving two or more activities or transactions, this Act or tax-related statutes shall apply as if the relevant parties have made a direct transaction or have conducted an activity or transaction in succession, according to the economic substance of such activity or transaction. [This Article Wholly Amended on Jan. 1, 2010]

 

In terms of tax administration, it is essential to consider not only the amount of tax paid but also the identity of the taxpayer. That's why both the Importer of Record (IOR) and the Person Liable to Pay Taxes (Taxpayer) are declared in an import declaration, and documentary evidence is required when the IOR differs from the Taxpayer.

 

For some cases, such as transactions under DDP terms, there can be grey areas. A company needs a unique ID code assigned by a Main Customs Office to file an import declaration, and the ID code is assigned only to a company whose business is registered with a tax office. So, only a company registered in Korea can be the IOR and Taxpayer.

 

When an item is sent to a consignee in Korea under DDP terms by a foreign company, the owner of the item is the foreign company at the time of filing an import declaration. However, the foreign company cannot be the IOR or Taxpayer. Therefore, it is common practice for the consignee to be declared as the IOR and Taxpayer, even though the tax amount is paid by the foreign company on behalf of the consignee through the forwarder.

 

The principle of actual taxation can affect the amount of taxes as well.

In Korea, the tariff rate of certain agricultural and livestock products is determined according to Article 94 of the ENFORCEMENT DECREE OF THE CUSTOMS ACT (관세법시행령).

ENFORCEMENT DECREE OF THE CUSTOMS ACT Article 94 (Request for Applying Concession Tariff Rate to Agricultural, Forest and Livestock Products)             With respect of agricultural, forest and livestock products to which a tariff concession was made at a rate equivalent to the difference between domestic and foreign prices and at a rate higher than the basic tariff rate in the process of opening up the domestic market and increasing market access in tariff negotiations with an international organization under Article 73 of the Act, any person who imports such products upon a recommendation from a relevant administrative agency within the limit of the market access volume shall submit a letter of such recommendation to the head of the relevant customs office before the import declaration is accepted. Provided, That where the relevant agricultural, forest and livestock products are not carried out of the bonded zone, a letter of such recommendation may be submitted by the date when 15 days pass from the date of acceptance of import declaration. <Amended on Feb. 17, 2021>

 

In short, to import the goods listed in Table 1 annexed to the GUIDELINE FOR RECOMMENDATION OF CONCESSION TARIFF RATE FOR MARKET ACCESS VOLUME OF AGRICULTURAL AND LIVESTOCK PRODUCTS AND IMPORT MANAGEMENT (농축산물 시장접근물량 양허관세 추천 및 수입관리 요령) at a much lower tariff rate (the difference can be over 500%), the importer shall receive a recommendation from a relevant administrative agency.

 

There were companies that had received recommendations and imported beans, red beans, and sesame seeds by applying W1 tariff rate (WTO tariff rate for the goods recommended). Customs discovered that another company, A, had actually imported and paid for the products, exerting control over the importers. All the documents had been issued to and issued by the importers, and payments had been made through the importers’ accounts. Customs even investigated the internet banking IP and gathered enough evidence proving that it was Company A that actually controlled the transactions.

Under the principle of actual taxation, Company A had to be declared as IOR and Taxpayer. However, it was not Company A that received recommendations. As a result, Customs applied the W2 tariff rate (WTO tariff rate for the goods not recommended) and imposed customs duties for the difference and additional taxes. Although Company A filed an appeal, the tax judge ruled that Customs' disposition was legitimate (조심 2022관0108).

 

Just matching formalities (matching IOR, Taxpayer, and Payer) is not enough to ensure actual taxation.

Any mismatching will easily draw Customs’ attention.