Korea: “Transfer pricing adjustment” under supply contract not “subsequent proceeds” for customs purposes

A Supreme Court decision concerning a “transfer pricing adjustment” under a health food products supply contract

“Transfer pricing adjustment” under supply contract not “subsequent proceeds”

The Supreme Court held (2022du35275) that amounts paid pursuant to a “transfer pricing adjustment” under a health food products supply contract were not “subsequent proceeds” as defined in Article 30 (1) (5) of the Customs Act.

Background

Under the Customs Act, “subsequent proceeds” is one of the additions for customs purposes, similar to the additions to taxable income in corporate tax, which is defined as “the amount of proceed derived from the sale, disposal, or use of the imported goods after the importation of such goods, which is directly or indirectly attributable to the seller.” 

Summary

According to the supply contract between the taxpayer and the exporter, the import price was based on the exporter’s standard cost multiplied by a premium rate. However, by comparing the actual operating profit achieved by the taxpayer with the target operating profit corresponding to the arm’s length price, if the actual operating profit exceeded the target operating profit, the excess amount was remitted to the exporter, and if the actual operating profit fell short of the target operating profit, the deficiency amount was received from the exporter (referred to as the “transfer pricing adjustment”).

The tax authority argued that the transfer pricing adjustment constituted “subsequent proceeds” as defined in Article 30 (1) (5) of the Customs Act that must be added to the customs value of the imported goods and assessed additional customs duties based on the increased customs value.

The court rejected the tax authority’s argument because in order for a payment to be included in the customs value as subsequent proceeds, it must be an amount directly related to the imported goods out of the sales proceeds obtained from the sale of the imported goods, and the transfer pricing adjustment was not. The transfer pricing adjustment was not the sum of the individual profit amounts calculated for each of the imported goods but was based on operating profit which was affected not only by the selling price but also by various factors such as sales volume, premium rate, fluctuations in exchange rates, and SG&A expenses.

Read an October 2023 report [PDF 1 MB] prepared by the KPMG member firm in Korea

 

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