Contrasting Views on Royalty Payment

 

For the same royalty payment, if the tax authority views it as ‘irrelevant to imported goods’ while the customs authority sees it as ‘related to imported goods’, importers may feel embarrassed. However, importers should keep it in mind that customs duties and internal taxes are levied under separate laws with different tax purposes, taxable objects, tax bases, and tax calculation methods. Viewing the imposition of internal taxes according to internal tax laws as affecting the imposition of customs duties or as double taxation is not accurate.

 

Below is the summary of a tax tribunal appeal case (Case No. 조심 2022관0142).

Exporter A sold Product A, which carried a trademark, to a Korean importer, Company A. Company A paid only the price of Product A to Exporter A. Subsequently, Exporter A and Company A jointly invested and established Company B in Korea. Exporter A then sold the same Product A to Company B, requiring Company B to pay both the Product A price and a royalty for the use of the trademark in Korea and the sales of Product A with the trademark.

Company B considered the royalty to be related to imported goods and paid as a condition of sale. As a result, Company B included the royalty payment in the customs value of imported goods, treating it as an additional element under the transaction value method of customs valuation.

 

The tax authority found that the Product A price paid by Company A was identical to the Product A price paid by Company B and, based on this finding, did not recognize the royalty payment as a business-related cost, imposing corporate tax for the amount.

 

Company B interpreted the tax authority’s decision as recognizing that the royalty payment was irrelevant to imported goods, leading to the conclusion that the royalty payment should not have been treated as an additional element. However, the customs authority viewed that the royalty payment as related to imported goods, Product A, and paid as a condition of sale. This interpretation was based on the fact that the royalty was paid for the trademark, Product A carried the trademark, and Company B might not have purchased Product A without paying the royalty.

 

Company B appealed the customs authority’s decision, but the tax tribunal ruled that the decision was right. Despite Company B's appeal, the tribunal upheld the customs authority's judgment.

 

Likewise, for the same payment, the tax authority’s interpretation can differ significantly from that of the customs authority, and vice versa. When an issue arises concerning the corporate tax, it shall be reviewed from the perspective and rationale of the CORPORATE TAX ACT (법인세법). Similarly, when an issue arises regarding customs value, it shall be assessed from the perspective and rationale of the CUSTOMS ACT (관세법) and the WTO Valuation Agreement.