Korea: Transfer pricing adjustments added to customs value of imported goods when directly related
Decision concerning whether a transfer pricing adjustment was to be added to the customs value of imported goods
Supreme Court decision
The Supreme Court of Korea issued a decision concerning whether a transfer pricing adjustment was to be added to the customs value of imported goods.
The taxpayer, a local corporation in Korea wholly owned by a Swedish corporation sold automobiles and related parts to domestic dealers. The taxpayer declared to the Korea customs authority the transfer price of imported goods as their customs value in FY 2009 and FY 2010, then amended the customs value by adding the transfer pricing adjustment amounts in March 2010 and July 2011, and paid the corresponding customs duties.
The taxpayer then sought a refund of the transfer pricing adjustment amounts on the grounds that they were an adjustment of income, which should be not included in the customs value as the price actually paid or payable. The customs authority refunded the full amount of duties in relation to the transfer pricing adjustments for the FY 2009 and FY 2010 from December 2011 to June 2012, as an overpayment. However, from FY 2011 to FY 2014, the taxpayer declared the transfer price as the customs value of imported goods and did not report the transfer pricing adjustment amounts as the adjustment to the customs value.
At issue was whether the transfer adjustment was to be added to the customs value.
Supreme Court decision
The court reasoned that when the level of profit realized during the taxable period deviates from the level of the arm’s length price, the transfer adjustment is made for the purpose of convergence to the arm’s length price level. Whether this transfer pricing adjustment is included in the customs value as proceeds of a subsequent resale of imported goods should be judged according to the actual cause and nature of the transfer pricing adjustment.
Proceeds of a subsequent resale of imported goods are the amount that accrues directly or indirectly to the seller. Accordingly, even if the amount remitted by the importer to the exporter falls under the above definition, the amount received from the exporter cannot correspond to this. As a result, even though transfer pricing adjustments caused by the same pricing policy have the same substance, whether or not they are included in the customs value according to the customs law is treated differently depending on whether they are paid or received, which may lead to a risk of violating the principle of equity in taxation.
The customs authority argued that the transfer pricing adjustment was in the nature of consideration for imported goods because the transfer pricing adjustment amount was specified as an “additional purchase price” in the supply contract and “pre-remittance for imported goods” codes were used when remitting the transfer pricing adjustment amount through the bank. However, under the Framework Act on National Taxes, the provisions regarding the computation of tax base are to be applied according to the substance of a transaction regardless of the name or form.
Further, only the amount that can be directly related to individual imported goods and calculated on the basis of objective and quantifiable data was added to the customs value. However, the transfer pricing adjustment at issue was the result of a combination of various factors other than the increase or decrease in sales volume. Nevertheless, the customs authority determined that the transfer pricing adjustment at issue should be added to the customs value by allocating the total amount to each imported case, on the premise that the transfer pricing adjustment at issue was solely due to an increase in sales volume.
Therefore, the court ruled that the customs authority’s decision against the transfer pricing adjustment was not valid because it could not be considered that only the part directly related to imported goods among the transfer pricing adjustments was added to the customs value.
Transfer pricing adjustments need to be added to the customs value of imported goods only when they are directly related to the imported goods and can be calculated on the basis of objective and quantifiable data.
Read an October 2022 report [PDF 217 KB] prepared by the KPMG member firm in Korea
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