CONTENTS
- 1. Overview of the Case Concerning Whether the Customs Investigation Was Improper
- - What Is a Customs Investigation?
- 2. The Customs Investigation Impropriety Case, the Supreme Court's Determination
- - Was the Additional Investigation After the Customs Investigation Period Had Elapsed Unlawful?
- - Whether the Principle Prohibiting Reinvestigation Applies
- - The Legality of Electronic Service
- - Whether the Unpaid Amount Is Included in the Dutiable Value
- - Whether the Additional Tax Should Be Exempted
- 3. Customs Investigation, Daeryun's Strategy?
1. Overview of the Case Concerning Whether the Customs Investigation Was Improper
The case concerning whether the customs investigation was improper is as follows.
The plaintiff in this case was the Korean subsidiary of a global apparel brand.
It was a company established with 100% of its capital invested by the Swedish parent company, and it exclusively sold the brand's products in Korea.
From 2013 to 2015, the plaintiff imported clothing and made its declarations based on the invoice prices of third-country contract manufacturers.
The customs office, however, found that there were unpaid amounts stated on the invoices issued by the parent company that had been omitted from the declarations, and it determined that these amounts should be included in the dutiable value.
It ultimately issued an additional assessment of approximately 10 billion won in customs duties and value-added tax (including additional tax), and the plaintiff filed a lawsuit seeking to revoke it.
What Is a Customs Investigation?
A customs investigation is an administrative investigation conducted by a customs office to verify the legality of import and export transactions and the appropriateness of the dutiable value.
In practice, a customs investigation covers various issues, including the calculation of the dutiable value, transactions with related parties, verification of origin, and review of refunded tax amounts.
For companies that are in a related-party relationship with an overseas parent company in particular, the dutiable value may be suspected of having been understated or distorted, so the risk of a customs investigation is considerably high.
2. The Customs Investigation Impropriety Case, the Supreme Court's Determination
On the question of whether the customs investigation was improper, the Supreme Court upheld the lower judgment as it stood and dismissed the plaintiff's final appeal.
In other words, finding that the determinations made at both the first and second instances were entirely proper, it ultimately rejected the company's (the plaintiff's) arguments.
The Supreme Court's determination will be examined in detail below.
Was the Additional Investigation After the Customs Investigation Period Had Elapsed Unlawful?
The plaintiff argued that the customs office had abused its investigative authority by continuing the investigation even after the investigation period it had notified (August 10 to August 28, 2015) had passed.
The Supreme Court, however, held that the customs office's subsequent measures were lawful for the following reasons.
-The plaintiff submitted important materials (the invoices) just before or after the closing date of the investigation
-The customs office did not conduct an on-site visit or take any coercive measures, but requested supplementation of the materials and explanations
-The plaintiff also cooperated voluntarily
Whether the Principle Prohibiting Reinvestigation Applies
The Customs Act, in principle, prohibits reinvestigation of the same matter.
This is an important safeguard for the protection of taxpayers.
The Supreme Court held that the measures the customs office carried out after the closing date were not a new investigation but merely a continuous supplementary act in relation to the existing investigation, and it did not accept the argument that the principle prohibiting reinvestigation had been violated.
This reaffirmed the established precedent that, in determining whether there has been a reinvestigation, the purpose, period, method, and nature of the materials of the investigation, among other factors, must be comprehensively considered.
The Legality of Electronic Service
Under the Customs Act, a notice of correction may, in principle, be served electronically only upon an application.
The plaintiff argued that the notice was unlawful because it had never submitted a formal application.
The Supreme Court, however, held that there was no illegality even in the absence of a formal application procedure, for the following reasons.
-The plaintiff had consented in advance to electronic delivery
-An employee prepared a confirmation of receipt without objection
-There was no resulting disadvantage
Whether the Unpaid Amount Is Included in the Dutiable Value
The Customs Act defines the dutiable value as the “price the buyer is actually required to pay.”
The Supreme Court held that the unpaid amount was included in the dutiable value, for the following reasons.
-The unpaid amount stated on the invoices issued by the parent company was a sum the plaintiff was required to pay without fail
-This was a cost directly related to the transaction in goods
Whether the Additional Tax Should Be Exempted
The plaintiff did not submit the invoices to the customs office in a timely manner.
The Supreme Court held that, because this deprived the customs office of the opportunity to accurately examine the dutiable value, there was no justifiable ground, and the imposition of the additional tax was therefore proper.
3. Customs Investigation, Daeryun's Strategy?
This customs investigation case is significant in that it is an instance where a company raised an objection on the ground of procedural defects in the course of a customs investigation but was not vindicated.
In particular, the Supreme Court made the following key points clear.
▶A mere formal defect in the electronic service procedure is unlikely to be found to render the service unlawful. Where actual consent and receipt exist, the notice is regarded as a lawful one.
▶An unpaid amount arising from a transaction with a related party is included in the dutiable value. This is because it falls within the “price the buyer is actually required to pay” under the Customs Act.
▶The additional tax is not exempted. Where materials were not submitted in good faith during the customs examination process, there is deemed to be no justifiable ground.
In the end, with all of the taxpayer's defensive arguments dismissed, this case may be said to be a precedent that, from a company's standpoint, reaffirmed the importance of responding to a customs investigation as well as the need to secure transparency in transactions with related parties.
Accordingly, multinational companies and importers that transact with overseas parent companies should thoroughly manage their transaction contracts, invoices, royalty payment records, and the like, and it is advisable to obtain expert advice in preparation for a customs investigation.
At Daeryun Law Firm LLP, attorneys experienced in customs matters, customs experts who hold licensed customs broker qualifications, and certified tax accountants and certified public accountants affiliated with the firm collaborate to provide professional advisory services to companies on related-party transactions, the calculation of the dutiable value, procedural-defect issues, and similar matters.
If you are concerned about responding to a customs investigation or about a dispute, we recommend that you consult an expert at the early stage of the customs investigation notice.
