Pre-assessment Review | The Korea Customs Service's Determination on the Impropriety of the Customs Value Assessment

Company A argued that the transaction price was not affected by related parties.

Company A argued that the requesting corporation's gross profit margin was realized at a level similar to that of competing companies and that its import price also reflected the exporter's reasonable costs and profit, so the price had not been set unreasonably low.

Company A argued that the notifying authority did not properly understand the ordinary characteristics of the industry.

The notifying authority, however, pointed out that Company A had selected its import price by relying on the results of a prior customs investigation without reviewing the appropriateness of the transaction price through a transfer pricing study or a third-party benchmark, and that the transaction price of the goods at issue was markedly lower than that of competing goods or than the import price of competing goods selected at the time of the prior customs investigation.

Considering as well that Company A's gross profit margin was markedly higher than that of the domestic industry of the same kind, so that reasonable costs and profit could not be regarded as reflected, the notifying authority determined that the price had been affected by the related-party relationship and set unreasonably low.

Company A argued that the adjustment coefficient presented in the pre-assessment notice was applied uniformly, so that the customs value was improperly assessed, and that this violated the WTO Customs Valuation Agreement and the Customs Act.

Company A further argued that, even if the requesting corporation's transaction price were rejected, the price determination standards under Articles 31 through 35 of the Customs Act should be reexamined as a priority, and that in this case there was no legitimate reason to reject the examination of the customs value under Article 33.

The notifying authority, however, countered that the customs value assessment had been conducted by a reasonable method reflecting the adjustment coefficient recognized in the prior customs investigation, and that it had determined the customs value based on the materials submitted by Company A and the prior investigation.

The notifying authority also supported its position that Company A had failed to respond to its requests for materials, had not participated in consultations between the tax authority and the taxpayer, and that there were errors in Company A's arguments regarding the selection of comparable companies and the calculation of the same-kind and same-class ratios.

Company A argued that, because its transaction price had been recognized in a prior customs investigation, the customs authority's change of the customs value was an improper disposition that infringed its trust.

Company A argued that its method of determining import prices had not changed for more than ten years and that it had submitted all the materials requested by the notifying authority for the customs investigation, so the corporation argued that there was no fault attributable to it.

Company A argued that, nevertheless, the notifying authority's issuance of the pre-assessment notice infringed the taxpayer's monetary interests, so the pre-assessment notice amounted to an improper retroactive taxation contrary to the principle of good faith.

The Korea Customs Service, however, pointed out that Company A had arbitrarily interpreted the ‘ratio of the import price to the domestic wholesale selling price of O times’ from the time of the prior customs investigation as an absolute and unchanging ratio and had determined the price of the imported goods accordingly, that it had not adjusted the actual import price thereafter, and that the problem was its failure to make adjustments despite domestic and international changes in which import prices rose substantially.

Accordingly, the Korea Customs Service determined that the requesting party's contention that the disposition was unlawful as contrary to the principle of good faith was difficult to accept.

Company A emphasized that the reduction of its import price was a reasonable decision reflecting external variables and that there had been no intent to underreport or to evade its tax obligation, and it argued that the imposition of penalty tax was improper.

The notifying authority, however, pointed out that Company A had arbitrarily interpreted the Customs Act and its Enforcement Decree, which amounted to nothing more than mere ignorance and misunderstanding of the statutes.

It supported its position that Company A had erroneously concluded that the results of the prior customs investigation had presented a method for determining the transaction price of the imported goods.

Moreover, even if there had been a disposition in the prior customs investigation, that was a past disposition and could not be regarded as the notifying authority's disposition concerning the customs value of the goods at issue imported thereafter.

Accordingly, because this did not amount to a change of interpretation by the Korea Customs Service, it determined that the requesting party's contention that the penalty tax should be exempted was difficult to accept.