Korea: Products provided free of charge under purchase agreement were not “free of charge imports”
Supreme Court decision
Supreme Court decision
The Supreme Court held (2018du47714) that raw pharmaceutical products provided free of charge under a purchase agreement were not “free of charge imports” as defined in Article 17(1) of the Enforcement Decree of the Customs Act, and therefore their customs value could be determined under Article 30 of the Customs Act.
The taxpayer, a manufacturer and seller of pharmaceuticals, signed an exclusive purchase agreement with a Japanese corporation for enzyme-based raw pharmaceutical products, under which a certain percentage of the purchase volume was provided free of charge as a "free sample" when the purchase volume exceeded an annual threshold.
In 2014, the taxpayer filed an import declaration for the products provided free of charge at an arbitrary price of 5000 yen/billion unit (BU)). After a customs audit in 2015, the customs authority denied the declared customs value of the products, finding that the products were “free of charge imports” as defined in Article 17(1) of the Enforcement Decree of the Customs Act, and did not fall under the definition of “goods sold for export to Korea” in Article 30(1) of the Customs Act, and assessed additional duties and other taxes against the taxpayer based on the transaction price of the products purchased for commercial use in accordance with Article 31 of the Customs Act.
The taxpayer argued that the purchase agreement effectively provided for a provisional base price each year, with the final price determined by supplying additional discounted quantities after the purchase of a certain quantity (i.e., the “free samples” were a “price adjustment term”).
The Supreme Court held in the taxpayer’s favor, finding that because the additional supplies were not less than 10% of the annual purchase quantity (i.e., the purchase agreement provided that if the annual purchase quantity was less than 1,688 BU, the additional supply would be 10% or 11% of the annual purchase quantity, and if the annual purchase quantity was more than 1,688 BU, the additional supply would be at a higher rate), it was difficult to conclude that the products were “free of charge imports” as defined in Article 17(1) of the Enforcement Decree of the Customs Act.
Read a September 2023 report [PDF 373 KB] prepared by the KPMG member firm in Korea
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