Korea: Advance customs valuation arrangement, coordination with transfer pricing

The prices of goods in cross-border transactions are of great interest to both customs and transfer pricing authorities. While the importance of setting transfer pricing based on the OECD Guidelines is well recognized, the importance of reviewing the transfer prices for customs purposes is often neglected. This can cause friction between multinational enterprises (MNEs) and customs authorities in Korea.

As compliance from both a customs and transfer pricing perspective is challenging, the Korea Customs Service (KCS) introduced the advance customs valuation arrangement (ACVA) program in 2008 to reduce conflict between MNEs and customs authorities due to complex and diverse types of transactions.

ACVA refers to an advance arrangement between a taxpayer and the customs authority, at the request of the taxpayer, on customs valuation of imports traded between related parties (i.e., an overseas parent company and its domestic subsidiary). The program is intended for taxpayers to determine customs value prior to import declaration (even after import declaration) in cooperation with the customs authorities so that they can avoid potential risks and make informed decisions for their business.

The number of companies using this program is increasing due to the combination of the customs authorities’ active promotion of the program and the taxpayer’s effort to hedge the risk of being imposed duties by customs authorities.

• Secure legal stability in the customs valuation area: The taxpayer can secure legal stability in the customs valuation area for up to 11 years, including ACVA review and effective period. The uncertainties arising from the customs audit can be resolved and stable management on customs valuation, which is the main issue when it comes to the customs audit, can be secured.
• Waiver of penalty: If taxpayers correct previous import records based on the ACVA result, they will be exempted from penalties for misdeclaration (equivalent to 10% of tax deficiency) if they do so within two months after the ACVA ruling is issued.
  
• Provisional-definite price declaration: ACVA applicants are eligible for provisional value declaration from the time of filing the ACVA application. They are exempted, in full, from penalties for tax deficiency that may arise at the time of final value declaration at a later stage as per ACVA rulings. If there is a year-end adjustment of transfer prices, the taxpayer can consider utilizing a provisional-definite price declaration since the final value might not be settled yet at the time of importation. ACVA makes the taxpayer fulfill the basic requirements for provisional value declaration.
  
• Pre-arrangement scheme between ACVA and advance pricing agreement (APA): A pre-arrangement scheme between ACVA and APA enables taxpayers to apply for ACVA with the customs authorities (KCS) and APA with the tax authorities (NTS) at the same time for the sake of the taxpayer’s convenience. Upon the application from taxpayers, customs and tax authorities work together to coordinate on customs value for the purpose of duties and on arm’s length price for the purpose of internal taxes.

Step 1: Pre-consultation

• It is not a mandatory procedure, but through the pre-consultation process, taxpayers can consult the main customs office about the availability of ACVA applications, application methods, and procedures.

Step 2: Application

• Applicants must submit the application form along with the statutorily required documents.

Step 3: Examination and consultation

• The main customs office examines decision methods of customs value as well as reasons the transaction value may be unacceptable, such as whether the relationship between parties has influenced the price, and factors of addition/deduction from the price actually paid or payable.

Step 4: ACVA Committee

• Once the main customs office examines the ACVA application, the ACVA Committee will be held. The Committee deliberates whether the ACVA application has been properly examined in accordance with relevant regulations.

Step 5: ACVA Approval

• Once the final decision on the ACVA application is made through the deliberation of the ACVA Committee, the taxpayer will receive the letter of ACVA Decision.

Step 6: Annual report for five years

• Taxpayers must submit the annual report within six months from the last day of the business year, including if there are any changes to statements in the ACVA application.
   

Read a March 2023 report [PDF 481 KB] prepared by the KPMG member firm in Korea