Dramatic increase in Korean customs audits expectedJune 27, 2013
Due to shortfalls in customs revenue collections in the past year, Korea Customs has announced its intention to increase the number of customs audits in 2013. It is expected that company-level audits will increase by over 50%, possibly affecting up to 130 companies.
Along with company-level audits, Korea Customs will continue to conduct planned audits, free-trade agreement (FTA) origin audits, foreign exchange investigations and other aspects of its compliance review programs. Overall, it is expected that the total number of companies audited this year could be more than double the amount audited last year.
Korea Customs has also announced that it will be focusing on multinational corporations that have large volumes of related-party sales with their local Korean entities. Companies that have not been audited in the past four years and/or have import levels of greater than US$50m may also face a greater risk of being audited this year.
Companies with high duty rates or high-value luxury goods are also likely to be selected for audit.
In general, Korea Customs may audit the following aspects of a company’s import/export business:
- Customs valuation
- Non-trade-related payments (royalties and commissions, etc.)
- Duty refunds
- Foreign exchange transactions
- Overall compliance with import/export regulations
- Other areas based on the company’s business
Customs authorities utilize their highly developed IT system to assist in these audits. This system allows them to track inflows and outflows of goods and capital on a transaction-level basis down to the line items on the invoice. This allows them to very quickly spot “outliers” and anomalies that may indicate an area where the importer is not compliant with local regulations.
This also helps the officials find fluctuations in import prices as well as transfer pricing adjustments. These are two areas that officials commonly focus on and use as reasons to challenge the related-party pricing.
What should multinational companies do?
As companies look to mitigate potential risk from these audits, it will be important to have a detailed understanding of the business’s import/export compliance status in Korea. It will also be important to understand how the company’s import prices compare with the prices applied in that industry in general, to help to identify potential areas of risk where customs could claim that the related-party status of the buyer and seller have had an impact on the import price.
Companies with royalty payments, buying commissions, cost-sharing agreements or other similar payments should also carefully review how they have treated these payments from a customs valuation perspective and analyze potential risk and how this may be mitigated.
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