Efforts to obtain an exemption from additional duties when the application of the FTA tariff rate is denied

 

Under Article 36 (1) of the ACT ON SPECIAL CASES OF THE CUSTOMS ACT FOR THE IMPLEMENTATION OF FREE TRADE AGREEMENTS (hereinafter referred to as ‘FTA Customs Act’), when the application of the FTA tariff rate is denied, and deficient duties (calculated as customs value x (MFN tariff rate - FTA tariff rate)) are collected, the following amounts are also collected as additional duties:

1. 10% of the deficient duties (40% if the relevant shortfall results from an importer’s request for the application of conventional tariffs through unjust means, such as forgery and alteration of a certificate of origin)

2. The amount computed by multiplying the underpaid duties or deficient duties by the number of days specified in item (a) and the interest rate prescribed in item (b):

(a) The number of days from the day following the statutory time limit for payment (in the case of the ex post facto application of conventional tariffs, referring to the day when the customs duties are refunded) to the payment date

(b) The interest rate prescribed by Presidential Decree, considering the interest rates applied to loans in arrears by finance companies, etc.

 

Meanwhile, under Article 36 (2) of the FTA Customs Act and Article 47 (3) of its Enforcement Decree, importers may argue for the exemption of additional duties in the following cases:

-      Where an importer notified of an error in a document evidencing origin pursuant to Article 14 (2) of the Act makes a revised declaration before receiving notice on an investigation of origin referred to in Article 17 (1) of the Act. However, this exemption applies only when the importer is not responsible for the error.

-      With respect to a request for verifying origin made by the Commissioner of the Korea Customs Service or the head of a customs office to the customs authority of a Contracting State under Article 19 (1) of the Act, where the customs authority of the Contracting State fails to notify the outcome of such verification within the period prescribed by Ordinance of the Ministry of Economy and Finance.

-      Where an exporter or producer of a Contracting State has failed to submit materials requested by the Commissioner of the Korea Customs Service or the head of a customs office under Article 16 (1) of the Act within the period prescribed in paragraph (2) of the aforesaid Article or submitted materials by misrepresentation, or in other cases where an importer has justifiable reasons in relation to the collection of shortage of customs duties.

 

However, convincing Customs that the importer is not responsible for the incorrect application of FTA tariff rates is not easy. Since the detailed circumstances and situations that importers face can vary significantly, it is common for importers to file an appeal with the Tax Tribunal against the decision by Customs to levy additional duties.

 

Tax Tribunal Ruling No. 조심 2022관0139 provides a sample case in which the importer could be exempt from additional duties.

The imported item in question was a product made from Yucca Shidigera Extract. The importer used HS Code 1302.19-9099 to import the product and applied KR-US FTA tariff rate. During the origin verification process, it was confirmed by the Customs Valuation and Classification Institute (CVCI) that the correct tariff classification for the product is HS Code 2008.99-9000. Since the product-specific rule for HS Code 2008.19 – 2008.99 is ‘a change to subheading 2008.19 through 2008.99 from any other chapter, except as provided for in the Note to Chapter 20’, the HS Code for the Yucca Shidigera Extract is a crucial factor in determining whether the imported product qualifies as an originating product or not.

The importer argued that Yucca Shidigera Extract should be classified under heading 1302. As documentary evidence, they submitted manufacturing process charts, the US Entry Summary indicating HS Code 1302.19 for Yucca Shidigera Extract, and CVCI’s ruling on similar goods classified under 1302.19.

However, Customs refuted the importer’s argument, stating that, according to the manufacturing process charts, ‘the fresh stems are crushed into pulp by mechanical press and obtain the raw extract,’ and ‘the fresh roots are shredded, sprayed with water, pressed by the mechanical press to obtain the crude extract’. Since Yucca Shidigera Extract was juice obtained from crushed Yucca Shidigera, not a vegetable product extracted from the original vegetable material by solvents, it should be classified under heading 2008.

Although the tax judges ruled that Yucca Shidigera Extract should be classified under heading 2008 and that the FTA tariff rate was not applicable, they recognized that the importer had justifiable reasons to believe that Yucca Shidigera Extract would be classified under heading 1302 and therefore exempted the importer from additional duties.

 

While an official advance ruling system exists to confirm tariff classification, in most cases, importers are still obligated to verify the correct HS Code for imported goods. However, when dealing with raw materials, it is often impractical to apply for advance ruling with CVCI. Additionally, searching for CVCI’s advance ruling on goods similar to the raw material in question may be limited. Therefore, official import documents for the raw materials issued in the exporting country can serve as evidence that the importer had justifiable reasons to believe the correct HS Code for the raw material was used in determining an originating product.