Risk of profit adjustment without ACVA

 

In transactions between related parties, post-adjustment is commonly made based on the difference between the target margin and the actual margin calculated after the sale of imported goods.

Since ‘the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues directly or indirectly to the seller’ is an additional element of customs valuation under the transaction value method, it is natural for Customs authorities to focus on the periodic payments made between the related parties.

It used to be a common practice for importers to correct the customs value of imported goods when paying the difference, considering it as part of the proceeds from the imported goods, and not to correct the customs value of imported goods when receiving the difference, treating it as an adjustment of profit.

It was absurd to apply a double standard when the reason for the post-adjustment remained the same. Importers appealed Customs’ decision, filed lawsuits, and received rulings that, since the payment/receipt was an adjustment of profit, it must not be subject to taxation under the CUSTOMS ACT.

 

Now that the payment cannot be subject to taxation as an additional element of customs valuation, Customs authorities attempt to deny the application of the transaction value method on the grounds that the special relationship has influenced the transaction price of imported goods. In this scenario, following the hierarchy of customs valuation methods, the customs value is more likely to be determined using the deductive value method, which typically results in a higher customs value compared to that determined using the transaction value method.

 

The determination of whether a special relationship has influenced the transaction price of imported goods varies from case to case. In the case of 조심 2017관0150, it was concluded that the special relationship had not influenced the transaction price of imported goods. This conclusion was based on the appellant’s evidence, which demonstrated that the transaction price of goods imported from unrelated sellers was lower than that of goods imported from related parties. Additionally, the domestic sale price remained the same, resulting in a lower gross margin ratio for transactions between related parties. Given the circumstances surrounding the sale research, the price could be considered as determined in accordance with normal pricing practices in the relevant industry.

 

On the other hand, in the case of 조심 2021관0077, the tax judge ruled that the special relationship had influenced the transaction price of imported goods based on the following factors:

-      When calculating the wholesale factor, expected costs, such as sales discount rates, were excessively higher than the actual costs, or costs to be borne by the seller, such as defect warranty costs, were included, resulting in a lower transaction price for the goods in question.

-      Certain cost items were either included or excluded from the import price determination factors without any reasonable explanation, depending on the year of import.

-      While it’s common practice for a profit-seeking company to adjust the import price in the following year if expected costs are lower than the actual cost, the same cost item consistently exceeded the actual cost without such adjustment.

-      Unlike the supply contract, the import price determination factors integrated wholesale factors from different vehicles and parts. It seems that this integration was not applied as intended when determining the import price of the goods in question, resulting in excessive profits for the appellant each year and subsequent payments.

 

As such, appeal cases demonstrate that when profit is adjusted between related parties, importers should be aware of the risk of being challenged by Customs authorities regarding the customs value. Even if the payment is not challenged from the perspective of the proceeds of any subsequent resale, disposal, or use of the imported goods, there is a high chance that Customs authorities may reject the transaction value method itself. The only way to mitigate this risk is to obtain and maintain an Advance Customs Valuation Arrangement (ACVA) ruling.