Korea: Preferential tariff rates under free trade agreements with United States and China (tax tribunal decisions)
Obligations to benefit from preferential tariff rates
Free trade agreements with United States and China (tax tribunal decisions)
The tax tribunal issued rulings concerning obligations to benefit from preferential tariff rates under free trade agreements with the United States and China.
Korea-United States free trade agreement
The tax tribunal concluded that denial of the application of the Korea-United States free trade agreement was valid because documents submitted by the importer and exporter were not sufficient to prove the origin of raw materials.
Summary
An importer applied a 0% preferential tariff on imported goods under the Korea-United States free trade agreement. Korea Customs Service (KCS) conducted an origin verification and requested the importer to submit the data that proves the origin of raw materials. The importer submitted the affidavit, datasheet, manufacturing process, and certificate of origin by receiving them from the exporter, but it only described the specification of the finished goods, factory address, and production process of the finished product, and details related to the supply of raw materials or the origin of raw materials were not shown.
Even though KCS directly requested from the exporter the data related to the origin of raw materials, the exporter failed to submit the relevant data before the deadline. Accordingly, KCS denied the application of a 0% preferential tariff and imposed customs duties, value added tax (VAT), and penalties.
At issue was:
- Whether it was valid to deny the application of the preferential tariff under the Korea-United States free trade agreement
- Whether it was valid to reject the request for a penalty exemption
- Whether it was valid to reject the request for the issuance of the corrected tax invoice
Tax tribunal decision
Denial of the application of the Korea-United States free trade agreement was valid because documents submitted by the importer and exporter were not sufficient to prove the origin of raw materials.
In addition, the importer’s request to exempt the penalty and to issue a corrected import tax invoice was rejected because the importer appeared to have neglected its duty to verify the country of origin. The importer did not try to confirm the country of origin before importing the goods at issue, and it was not enough to trust documents, such as a certificate of origin prepared by the exporter.
Korea-China free trade agreement
The tax tribunal concluded that it was valid to collect customs duties, VAT, and penalties because an importer failed to present the legitimate certificate of origin at the time of importation, regardless of the Customs’ acceptance at the time of importation.
Summary
An importer applied the preferential tariff rate under the Korea-China free trade agreement by submitting a non-preferential certificate of origin, and not a certificate of origin according to the form prescribed by the Korea-China free trade agreement. At the time of import declaration, Customs accepted the application of the preferential tariff. However, Customs conducted the origin verification a few years later and collected the customs duties, VAT, and penalty by denying the preferential tariff since the importer did not submit the certificate of origin in the form prescribed by the Korea-China free trade agreement.
At issue was whether it was valid to exclude the application of the preferential tariff under the Korea-China free trade agreement because that they did not have a valid certificate of origin.
Tax tribunal decision
The importer argued that it was unfair to point out these errors at a time when the importer was no longer able to apply the preferential tariff retrospectively (one year after import declaration) even though Customs accepted the preferential tariff application at the time of import declaration. However, Korea Customs processed the customs clearance without detailed review for the efficiency of customs clearance, and the appropriateness of customs clearance was reviewed later through origin verification or customs audit.
Accordingly, the tax tribunal concluded that it was valid to collect the customs duties, VAT, and penalty since the importer failed to present the legitimate certificate of origin at the time of importation, regardless of the Customs’ acceptance at the time of importation.
Read a January 2023 report [PDF 284 KB] prepared by the KPMG member firm in South Korea
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