New KCS Instruction for Efficient Procurement of Taxation Materials

 

As explained in my previous post, Customs authority bears the burden of proof. (koreacertifiedcustomsattorneysj.blogspot.com), if importers fail to provide the necessary materials to verify the declared customs value, Customs authority cannot determine a new customs value for taxation purposes. This is because, as ruled by the Supreme Court, the Customs authority bears the burden of proof regarding the appropriateness of the newly determined customs value. However, without materials provided by importers, there's no means to substantiate the appropriateness of the newly determined customs value.

Obtaining necessary documents and information during a customs investigation is crucial. Table 1 of the INSTRUCTION ON THE OPERATION OF CUSTOMS INVESTIGATION (관세조사 운영에 관한 훈령) contains the List of Standard Preparation Materials for Customs Investigation. Concerning customs value, the following are the standard materials requested by customs investigators:

Main Category	Subcategory	Sub-subcategory	Sub-sub-sub-subcategory
4. Concerning Customs Value	Price Actually Paid or Payable	Trade Contract (English, Korean)	Import Goods Purchase Agreement
			Import Goods Purchase Agency Agreement
			Defects Warranty Agreement
			Research and Development Services Agreement
			Business Support Agreement for advertising and sales promotion, etc.
		Price Data	Annual Import Goods Price List
			Information on price determination for transactions (attached correspondence content)
		Expense Payment Details	Financial Expense Payment Statement
			International Marketing Expense Payment Statement
			Defects Warranty Expense Details and Calculation Basis
			Research and Development Service Expense Details and Calculation Basis
	Royalty	Contract (English, Korean)	Technology Transfer (Service) Agreement
			Intellectual Property Rights Usage Agreement including Trademark, Copyright, etc.
		Royalty Payment Details	Royalty Payment Details and Calculation Basis
			Technology Transfer Fee Payment Details and Calculation Basis
			Design Expenses, Research and Development Expenses, etc., Payment Details, and Calculation Basis
	Commissions	Contract (English, Korean)	Commission, Brokerage Fee, etc. Agreement
		Payment Details for Fees, etc.	Payment Details and Calculation Basis for Commission, Brokerage Fee
			Payment Details and Calculation Basis for Service Charges
	Assists	Contract (English, Korean)	Contract Manufacturing and OEM Agreement
		Assists Details	Supply details of products and services related to the production of imported items
	Freight, Insurance Premiums, Packaging Costs	Payment Details for Freight and Insurance Premiums	Charter Contract
			Blanket Insurance Contract
			Payment details for freight and transportation-related expenses
			Insurance Premium Payment Details
		Payment Details for Container and Packaging Costs	Overseas Packaging Service Contract
			Container Leasing Agreement
			Payment details for overseas packaging service and container leasing costs
	Other	Provisional Value Declaration Data	Provisional Value Declaration Item List
			Supporting materials for provisional and final value declaration
		Cases of authoritative interpretation	Application Form for Advance Ruling on Customs Valuation and Its Decision (Including ACVA)
			Written application and response for civil queries

 

If there are transactions between related parties where goods are traded at transfer prices, as it is natural that the special relationship has influenced the price, additional materials as follows are also requested as standard taxation materials:

Main Category	Subcategory	Sub-subcategory
5. Concerning Related- Party Transactions	Trading Relationships	Intercompany Capital Transactions between Related Parties
		Organizational Chart for Inter-company and Segregation of Duties Table
		Status of Non-Related Parties (vendors, customers, import/export items)
	Transaction Type	Details of import/export merchandise between related parties (goods)
		Details of import/export non-goods between related parties (services, intangible assets)
		Details of import goods categorized by type of import transactions (general import, contract manufacturing import, etc.)
		Details of import goods categorized by type of domestic sales (wholesale, retail, etc.)
		Details of import goods categorized by type of transactions in bonded areas (Duty-Free Shop transactions, bonded factory, etc.)
	Internal Guidelines and Policies for Price Determination	Internal Price Determination Data, including Import Goods Price Calculation Details, and International Trade Price Policy Documentation, including TP Policy (English, Korean)
		Annual Transfer Price List for Importing, Selling, etc. (categorized by customer, product, etc.)
		Explanatory materials for determining transfer price of import goods and intangible assets
	Transfer Price Reports	Transfer Price Analysis Report (TP Study, TP Report, etc.)
		Integrated Enterprise Report and Individual Enterprise Report under Article 21-2 of the ENFORCEMENT DECREE OF THE ADJUSTMENT OF INTERNATIONAL TAXES ACT
		Audit Report and Annual Report of Overseas Related Parties
	Declarations to Tax Office	APA Application, Adjustment, and Approval (Annual Report, etc.)
		Normal Price Calculation Declaration (including intangible assets and service transactions)
		International Trade Statement
		Cost Allocation Adjustment Statement
	Other Contracts	Management Support Agreement
		Cost Sharing Agreement
	Payment and Receipt Details	Summary of Intercompany Payment Expenses
		Post-Compensation Adjustment Calculation Details and Supporting Documents, Actual Payment and Receipt Data
		Management Support Cost Calculation Details and Supporting Documents, Actual Payment and Receipt Data (including Intercompany Allocation Criteria)
		Calculation Details of Headquarters or Intercompany Marketing Cost Sharing, Calculation Details, and Actual Payment and Receipt Data
		Other Headquarters or Intercompany Non-Trade Remittance and Receipt Details (e.g., Dividends)
		Accounting standards and methods related to the transaction

 

However, if an importer, such as a Korea branch office, and its headquarters are unwilling to cooperate, whether intentionally or unintentionally, it is not feasible to acquire sufficient materials to verify the appropriateness of the declared customs value of imported goods. Furthermore, even if customs investigators construct a rationale for rejecting the declared customs value, substantiating the legitimacy of the newly determined value from the viewpoint of customs valuation is challenging. Moreover, this rationale is vulnerable to attack when the importer appeals the decision of the customs investigators.

 

The CUSTOMS ACT (관세법) includes provisions to impose sanctions on importers who fail to provide requested materials without justifiable reasons. However, because there are no specific standards or criteria for applying these provisions, customs investigators rarely utilized them.

 

In order to increase the effectiveness of securing data by strengthening the response to non-cooperation in data submission, and to conduct fair and accurate customs investigations by supplementing the data request process, the Korea Customs Service (KCS) enacted a regulation titled ‘INSTRUCTION ON SECURING DATA FOR TAXATION DURING CUSTOMS INVESTIGATION(관세조사 시 과세자료 확보에 관한 훈령)’, which entered into force on April 5, 2024.

 

Customs investigators can take following measures according to the specific criteria stipulated in the Tables of the Instruction:

-          Extension of the on-site visit period by customs investigators (Article 9)

-          Suspension of the customs investigation (Article 10)

-          Imposition of administrative fines (Article 11)

-          Selection of declarations subject to Customs examination of documents (Article 12)

-          Increase of Customs inspection ratio (Article 13)

-          Revocation of the approval for monthly tax payment (Article 14)

-          Non-issuance of import tax invoices (Article 15)

-          Denial of transaction price (Article 16)

-          Criminal complaint filing and request for prosecution, or disposition notice (Article 17)

-          Selection as an entity subject to irregular customs investigations (Article 18)

 

If the KCS Instruction helps procuring taxation materials, the Customs authority’s success rate in appeal cases would increase. This is because, historically, Customs has lost many cases due to the burden of proof.