Reasons for Proposal
The WTO General Agreement on Tariffs and Trade defines a requirement where transaction value can be used as declaration (customs) value (requirement to meet transaction value) and requires taxpayers to voluntarily review the value signed under a purchase and sale agreement (transaction value) and declare it. Tax authorities give taxpayers an opportunity to explain if there is some doubt about their declared value, and taxpayers claim their declared value is fair and are incentivized to actively cooperate with tax authorities.
In contrary to the WTO Agreement, the Customs Act in Korea specifies a reason to exclude transaction value from customs value (requirement to exclude transaction value), which disincentivizes any taxpayer who finds it more useful to transport as transaction value from self-verifying and submitting documentation. Furthermore, tax authorities focus on “excluding” transaction value, a basis to determine customs value, perpetuating a conflicting structure with taxpayers.
In particular, due to the special nature of international trade such as a complex and diverse trade environment, tax authorities entirely rely on documentation submitted from taxpayers in determining whether customs value is appropriate. In trade between persons in special relationships (foreign headquarters and Korean subsidiaries), which is a growing share of international trade, documentation to determine whether the value is appropriate is concentrated on foreign headquarters, which makes taxpayers’ voluntary and active cooperation very important.
During tariff investigation, however, multinational companies use non-cooperation to submit documentation as their advantageous tax strategy*, and tax authorities focus on excluding transaction value under the current Customs Act** instead of encouraging cooperation from such taxpayers.
In this regard, like the WTO Agreement and legislative examples in other countries, this Act aims to revise applicable laws so that taxpayers and tax authorities can cooperate to recognize transaction value, provide an incentive to allow taxpayers and tax authorities to cooperate proactively, and require tax authorities to support declaration in good faith by conducting a preliminary review or providing required information (Article 30 paragraphs 1, 2, and 3).
Notes
* Things to correct and address as requested from 2017 and 2020 inspections of state administration by the Strategy and Finance Committee: Review legislative amendment, which strengthens companies’ obligations to submit documentation, and reinforce professionals to prevent tax evasion by multinational companies.
** A court ruling required “tax authorities to demonstrate that transaction value has been affected by a special relationship, in addition to the fact that the purchaser and the seller are in a special relationship, to exclude transaction value between persons in such a special relationship” (Supreme Court 2007Du9303, May 28, 2009).
