CONTENTS
- 1. Tariff Classification | Concept and Importance in Trade Transactions
- - Connection with Determination of Origin
- - HS Advance Ruling System
- 2. Tariff Classification | Major Types of Violations and Issues
- - Requirements for Establishing a Charge of Violating the Customs Act
- - Relevant Laws and Levels of Punishment
- - Sentencing Standards
- 3. Tariff Classification | How to Respond as a Suspect
- - Separation of Administrative and Criminal Procedures and the Demonstration Strategy
- 4. Tariff Classification | Situation Review Checklist
- - Corporate Internal Clearance Compliance
- - Daeryun's Assistance
1. Tariff Classification | Concept and Importance in Trade Transactions
Tariff classification refers to the legal and administrative procedure by which all import and export goods traded in international commerce are identified and systematically classified under designated numbers (HS codes) in the tariff schedule, in accordance with the Harmonized Commodity Description and Coding System (the HS Convention) established by the World Customs Organization (WCO).
This serves as the most important and fundamental reference point that determines the tariff rate to be finally imposed on the imported goods, the basis for imposing internal taxes, whether preferential tariffs apply under a free trade agreement (FTA), and various customs clearance requirements such as import prohibitions or restrictions.
Connection with Determination of Origin
Determination of origin and tariff classification are closely interrelated.
When raw materials from several countries are used in the manufacturing process of goods, the origin is often determined by how much the code of the final finished product has changed from that of the raw materials (the change-in-tariff-heading criterion).
Therefore, if the classification criterion is wrong, there is a risk that the proof of origin itself will be invalidated.
HS Advance Ruling System
If the tariff classification of goods scheduled for import is unclear, you may apply to the Korea Customs Service for an HS advance ruling.
A tariff classification confirmed through an advance ruling may be applied as the clearance standard for the same goods for a certain period, which has the effect of reducing clearance risk in advance.
In particular, for new-technology products, multifunction products, and chemical products with a complex composition, confirming the tariff classification standard through an advance ruling is important.
2. Tariff Classification | Major Types of Violations and Issues
Errors in classification may arise from simple negligence, but when intentional manipulation is carried out for the purpose of obtaining improper economic gain, they are treated as a serious type of crime.
Tariff Evasion and Excessive Refund
The most representative issue is intentional manipulation to reduce the amount of tax.
This is the act of falsely declaring the components, materials, and degree of processing of imported goods so as to disguise them under a different code to which no tariff or a low rate applies, instead of the lawful standard under which a higher tariff rate applies.
Conversely, in the case of exports, codes may be manipulated in order to improperly receive an excessive export refund.
Illegal Imports and Evasion of Customs Clearance Requirements
In order to protect public health, sanitation, and the environment, certain goods may be brought in only after undergoing strict quarantine, certification, and permit procedures.
Because these customs clearance requirements are difficult to satisfy, or in order to save costs, illegal import conduct, in which goods are falsely entered under a different tariff classification system that is exempt from import requirements so that import clearance can proceed, occurs frequently.
Violation of FTA Rules of Origin and Forgery of Certificates
This is a type in which a code is arbitrarily changed in order to artificially satisfy the change-in-tariff-heading criterion, and through this a false FTA certificate of origin is obtained.
This triggers customs investigations not only by the home country's customs but also by the customs of the counterpart importing country, and once detected, exclusion from preferential tariffs and criminal punishment are difficult to avoid.
Requirements for Establishing a Charge of Violating the Customs Act
For a charge of violating the Customs Act to be established, specific legal requirements must be met.
False Declaration and Unlawful Customs Clearance Conduct
For there to be a problem under the Customs Act, there must be an objective and specific act in which the import or export was declared with a tariff classification clearly different from the actual physical characteristics, components, and use of the goods, and through this the goods passed the customs review and were released, or a difference in the amount of tax was created.
The Existence of Intent and an Improper Purpose
What the investigative agency most focuses on proving is 'intent'.
If it is a declaration error caused by a practitioner's mistake, the matter may be concluded with administrative dispositions such as additional collection of the tax and imposition of penalty taxes; however, if an improper purpose of evading tariffs or avoiding unlawful import requirements is recognized, a charge of violating the Customs Act applies.
In particular, dolus eventualis, in which a person recognizes the possibility that the result will occur yet accepts it, may also be recognized as subject to punishment.
Relevant Laws and Levels of Punishment
Issues related to tariff classification may begin with a customs inquiry and extend to a post-clearance audit by customs, an on-site corporate investigation, a tax assessment, and a criminal complaint.
For this reason, accurately organizing the facts at an early stage and preparing a response strategy is important.
The customs investigation procedure is as follows.
- Analysis of clearance records
- Request for submission of corporate records
- Customs investigation (on-site corporate investigation)
- Tax assessment or referral to prosecution
- Administrative appeal or litigation
If a violation of the Customs Act and related laws through a tariff classification declaration filed by improper means is recognized, heavy criminal penalties may apply depending on the seriousness of the matter.
Both the individual party and corporate officials involved may be subject to punishment.
Relevant Law and Type of Violation | Level of Punishment |
| Customs Act Article 269 (smuggling of exports and imports) | Imprisonment for up to 7 years or a fine of up to 70 million won |
| Customs Act Article 270 (evasion of customs duties, etc.) | Imprisonment for up to 3 years or a fine of up to the higher of five times the evaded customs duty and the value of the goods |
| Customs Act Article 276 (false declaration, etc.) | A fine of up to the higher of the value of the goods or 20 million won |
Sentencing Standards
The Sentencing Commission applies the following standards when determining sentences for the relevant offenses.
Mitigating Factors
ㆍ Where, after detection, the offender voluntarily pays the full amount of the evaded tax or carries out substantive measures to remedy the harm
ㆍ Where the offender participated passively in the crime due to a lack of practical experience in trade and customs clearance work, or the degree of participation was minor
ㆍ Where the offender sincerely reflects on their conduct and has no prior record of criminal punishment for the same type of offense
ㆍ Where the offender actively cooperated in clarifying the facts during the investigation by customs and the investigative authorities
Aggravating Factors
ㆍ Where the crime continued over a long period and improper export and import clearance was attempted repeatedly
ㆍ Where the methods of concealing the crime were very serious, such as destroying import ledgers, fabricating evidence, or transacting through borrowed-name accounts
ㆍ Where the amount of evaded tax, the refund improperly received, or the quantity of illegally imported goods is significant
3. Tariff Classification | How to Respond as a Suspect
If you become subject to a customs investigation on suspicion of a tariff classification error during export and import work, you should recognize the seriousness of the situation and respond carefully.
Investigative authorities may use digital forensics techniques to obtain a wide range of materials, including internal emails, messenger conversations, and records of communications with business partners.
In addition, statements that arbitrarily distort the facts or appeal to emotion at the early stage of the investigation can instead work as unfavorable evidence.
If you are identified as a suspect, you should thoroughly gather materials supporting that the code applied at the time was based on advance ruling cases of the Korea Customs Valuation and Classification Institute or on overseas clearance practice.
Separation of Administrative and Criminal Procedures and the Demonstration Strategy
Depending on the results of the investigation, it is necessary to determine whether the matter will end with the imposition of a simple collection amount and additional tax, or whether it is a matter that will be referred to the prosecution on charges of intentional evasion.
At the investigation stage, a twofold response is required: establishing a statement strategy that consistently demonstrates the absence of intent and any intention to manipulate, while rebutting the taxation reasoning on the administrative sanctions based on legal grounds.
A hasty admission or denial of the charges can lead to irreversible consequences, so every stage should be reviewed together with a legal professional.
4. Tariff Classification | Situation Review Checklist
Legal disputes related to tariff classification may lead to administrative sanctions and heavy criminal penalties that threaten a company's financial condition and very survival.
In addition, if a company judges the situation complacently and misses the timing for an early response, or demonstrates its position on the wrong grounds, procedural disadvantages may follow.
Please review the items below to assess whether your current situation may progress into a serious legal stage.
Situation Review Checklist
ㆍ Have you ever entered a code arbitrarily according to practice at the time of clearance, without an accurate analysis of the components of the goods or an advance ruling
ㆍ Do the certificate of origin materials or the goods specifications exchanged with export and import business partners contain any parts that differ from the facts or are incomplete
ㆍ Despite being imported goods of the same nature, is there a history of clearance under a different tariff line at a different customs office in the past
ㆍ Does the matter carry the possibility that criminal investigation or administrative litigation procedures may become an issue in combination
Corporate Internal Clearance Compliance
As a company's export and import volume grows, managing the risk arising from tariff classification errors becomes more important.
Recently, a growing number of companies are establishing internal clearance management systems and operating HS code management systems.
In particular, because different classifications may be applied to the same goods at several customs offices, the maintenance of internal standards and an advance review procedure are necessary.
At Daeryun, corporate attorneys and customs specialists who hold the qualification of a licensed customs broker work together to support export and import companies in establishing clearance compliance.
We comprehensively review the components, use, and manufacturing process of the goods to determine the appropriate HS code, and analyze past clearance history and customs examination cases to refine the classification standards.
We also check in advance the legal risks that may arise in the clearance process, such as applications for an HS advance ruling, responses to tariff classification disputes, and reviews of FTA rules of origin.
Together with this, so that consistent tariff classification can be applied to the same goods within the company, we support the establishment of a company-tailored compliance system, through measures such as refining internal standards, reviewing clearance procedures, and training staff in charge, to help create a stable export and import transaction environment.
Daeryun's Assistance
Given the nature of customs and trade transaction cases, the direction of the early response and the confirmation of the facts have a profound effect on the entire subsequent legal process.
In particular, where there is a high possibility that a criminal investigation, a tax assessment by the administrative authority, and a civil claim for damages may become intertwined at the same time due to an error, the final outcome can change greatly depending on which procedure is prioritized and how the reasoning is developed.
In a situation where specialized legal principles and trade practice are intermixed, responding solely on a frontline party's own judgment only increases unnecessary risk.
Even simply assessing objectively whether the current situation has reached a stage requiring legal defense can help reduce unforeseeable harm.
If such an organizing of the situation must come first, consulting with experts in each field who have experience handling the full procedures of related cases to set a clear direction is one wise approach.
Daeryun Law Firm (LLC) operates a one-firm system in which numerous attorneys and experts in each field analyze and respond to the essence of a matter together, in order to respond to complex multi-procedure disputes.
In particular, in matters related to tariff classification, customs specialists who hold the qualification of a licensed customs broker work organically with experts suited to each case area, such as criminal, administrative, tax, and corporate law, to derive a strategy tailored to the individual situation.
We also apply our own data analysis framework and an IT-based work infrastructure to review cases promptly and predict risk factors in advance.
In this way, the firm provides systematic and thorough assistance across the entire process, from the early stage of the case investigation through administrative appeal, trial advocacy, and follow-up management.
If you need assistance, please go ahead and 🔗book a legal consultation with a customs attorney.
