Korea: Customs and VAT valuation of “free samples” provided under supply contract (Supreme Court decision)
The Supreme Court held that goods provided as “free samples” were not actually supplied without cost.
“Free samples” provided under supply contract (Supreme Court decision)
The Supreme Court held (2018DU47714 (17 November 2022)) that goods provided as “free samples” were not actually supplied without cost, and the value of such goods for customs and value added tax (VAT) purposes must be computed based on the total price paid under the supply contract by the total amount provided under the contract (including the free samples).
Summary
The taxpayer imported pharmaceutical raw materials under a contract which provided that a certain percentage of the goods (based on the quantity purchased annually) constituted free samples. The taxpayer filed import declarations for the goods using a contract price determining based on dividing the total amount paid under the contract by the number of goods provided (including the free samples).
The customs authority denied the customs value reported by the taxpayer on the grounds that certain of the goods were imported free of charge and did not fall under “goods sold for export to Korea.” The authority determined the customs value of those goods based on the purchase price per unit stipulated in the contract and corrected the customs duties and VAT (including penalties).
The taxpayer appealed the determination to the Supreme Court, which held that the supply contract set a provisional base price but determined the final transaction price based on the annual total payment and the annual total purchase quantity when the amount of free sample quantities were determined. The court found that even though the goods were called free samples, and the taxpayer technically did not pay for them, they were not supplied without cost.
Read a February 2023 report [PDF 285 KB] prepared by the KPMG member firm in South Korea
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