Methods of Determining Customs Value of Goods Produced in a Bonded Factory

 

To utilize foreign goods as raw materials without completing customs clearance, the manufacturing factory must be licensed as a bonded factory by Customs. To import goods produced in a bonded factory, it is necessary to file an import declaration. The customs value of the goods must be determined and declared in accordance with the procedures stipulated in the CUSTOMS ACT (관세법). The relevant provisions regarding customs valuation of goods produced in a bonded factory can be found in Article 188 and 189 of the CUSTOMS ACT.

CUSTOMS ACT   Article 188 (Assessment of Customs Duties on Manufactured Goods) Where the work is done using foreign goods or using foreign goods and domestic goods as raw materials or materials, any goods therefrom shall be deemed goods which arrive in Korea from a foreign country: Provided, That if both foreign goods and domestic goods are used as raw materials or materials to manufacture new goods upon approval of the head of a customs office, as prescribed by Presidential Decree, any goods corresponding to the quantity and price of the foreign goods from among the goods therefrom shall be deemed goods which arrive in Korea from a foreign country. [This Article Wholly Amended on Dec. 30, 2010]   Article 189 (Assessment of Customs Duties on Raw Materials) (1) When any goods manufactured in a bonded factory are imported and an application for taxation on the foreign goods, which are raw materials of the relevant goods, has been filed with the head of a customs office in advance before a use report pursuant to Article 186 is filed, customs duties shall be assessed in accordance with the nature and quantity of the raw materials at the time the use report is filed pursuant to Article 186, notwithstanding Article 16. (2) The head of a customs office may permit the bonded factory satisfying the standards prescribed by Presidential Decree to file an application by raw material or goods, or for the entire bonded factory pursuant to paragraph (1) within the extent of one year. [This Article Wholly Amended on Dec. 30, 2010]

 

Customs duties on goods produced in a bonded factory are determined by multiplying the tariff rate, which is based on the tariff classification of dutiable goods, by the customs value. Therefore, two factors influence the customs duties imposed on such goods.

Let’s suppose there are hypothetical Product A and Product B manufactured in a bonded factory. Product A is made wholly of foreign materials, but Product B is made of 50% foreign materials and 50% domestic materials. The unit price of both Product A and Product B is 300.

In principle, the tariff rate is determined based on the tariff classification of Product A and Product B, and the customs value of both products is 300. This scenario is commonly referred to as ‘Assessment based on product’.

However, if the proviso of Article 188 applies, the customs value of Product B can be reduced to 150 (300 X 50/(50+50)). This scenario is commonly referred to as ‘Partial assessment based on product’.

Additionally, if Article 189 applies, the tariff rate is determined based on the tariff classification of foreign materials, and the customs value is 100, which is the price of the foreign materials. This scenario is commonly referred to as ‘Assessment based on material’.

 

We should note that there are certain requirements to be fulfilled in order to apply the alternative methods. For ‘Partial assessment based on product’, approval from the head of a customs office is required, while for ‘Assessment based on material’, an application must be submitted in advance before filing a use report.

 

In the case of ‘Assessment based on material’, the timing of the application is explicitly specified in the provision – it must be submitted in advance. However, in the case of ‘Partial assessment based on product’, it is a bit vague - upon approval.

 

A company determined the customs value of a product manufactured in a bonded factory by applying the ‘Partial assessment based on product’ using both foreign materials and domestic materials, before obtaining approval from the head of a customs office. Although the approval was obtained afterwards, Customs discovered this, rejected the alternative method, and collected the deficient customs duties for customs value of the domestic material portion.

 

The company appealed to the tax tribunal, but the tax judge ruled that, considering approval procedures prescribed by the Presidential Decree, the proviso of Article 188 shall be construed as prescribing the condition of prior approval. This case went all the way up to the Supreme Court, and the Supreme Court determined that the proviso of Article 188 applies only when both foreign materials and domestic materials are used after obtaining approval (Case No. 2019두55781).

 

Since ‘upon approval’ is not an explicit expression of ‘after approval’, the company should have requested an authoritative interpretation before applying it in their favor. This principle applies to every case where there is room for a favorable interpretation, as unforeseen consequences may arise unexpectedly.