Korea is introducing a new Importer Self-Assessment (ISA) program allowing companies the opportunity to file an annual ISA report in lieu of undergoing a Customs Assessment. It also provides the extra benefit of allowing VAT recovery on additional duties payable, which is an obstacle under the current system.
The reality of the ISA program is that it is practically impossible for customs to verify the legality of all import declarations due to the limited manpower of the auditors. Given this circumstance, customs audits were primarily focused on the collection of additional duties. This increased the number of objections and appeals filed against Customs, proving to be a burden for both businesses and tax collection.
As a result, in April of 2017, the Korea Customs Service (KCS) introduced the ISA program into Korea so that both taxpayers and the KCS would be able to come to an agreement without unnecessary dispute. To facilitate participation in the new program, KCS plans to focus on expanding the number of Authorized Economic Operator (AEO) entities and reassign some auditors to the management of those AEO entities.
Main contents of the program
Companies that utilize ISA will need to submit an annual self-assessment report to KCS on a yearly basis. The process of the program is as below:
The ISA program is a voluntary approach to trade compliance that provides recognition and support to participating companies. However, only AEO companies are eligible to apply for the ISA program. If you are an AEO company that would like to utilize this program, you should submit ‘the application for designation as ISA report’ to an Account Manager (AM) from KCS.
- Provision of risk information by AM
The Account Manager is the customs officer who manages AEO entities. The AM provides risk information on issues throughout the companies import/export transactions, such as customs valuation, HS classification, foreign exchange transactions, etc.
Your company will have to conduct a self-assessment reflecting the risk information provided by the AM related to the import/export declaration records of the previous year. The scope of assessment should cover six main compliance issues such as HS classification, reduction, bonded warehousing, duty drawback, customs valuation, and foreign exchange transaction.
- External verification and submission of the ISA report
The ISA report must be verified by Korea customs attorneys (more than two customs attorneys) before being submitted to Customs to ensure credibility. Once the report is verified by the Customs attorneys, the company shall submit the report within six months from the end of the financial settlement year.
- Review of the report
The report submitted by your company will be reviewed by the AM within six months from the submission date of the report. A discussion between your company (or their representative customs attorneys) and an AM is necessary to conclude the review of the report. The final report will be settled and confirmed by the ‘audit review committee’ of Customs.
- Conclusion of the review
The review comes to a close when you receive the results and the customs audit (investigation) is exempted for the settlement year for which the notice of ISA result was issued.
However, it is not exempted in the cases where 1) falsified or illegal documents were submitted, 2) the entity did not cooperate fully with the customs authorities, such as not submitting required materials, or 3) the AM states that an additional review is required for additional evaluation, inquiry, and consultation, etc.
Thing to be considered for the application
Only AEO entities can enjoy the benefit of customs audit exemption by utilizing the ISA program. In the case where there are additional duties to pay as a result of a self-assessment, the amended import tax invoice issued allows for a VAT refund.
According to the recent KCS announcement, if your company would like to participate in the ISA program in 2018, you should submit your application between 20th Dec 2017 - 18th Feb 2018.
Given the current manpower of KCS, they can limit the number of the companies of ISA in 2018. Thus, in the case where the company intends to apply to the ISA program, it is recommended they apply for ISA as soon as possible.
For the AEO entities that do not utilize this scheme, there will be an annual submission of self-assessment letter of the authorization criteria, increased risk of assessment from the comprehensive audit every five years, and occasionally a planned audit, which could all be mitigated by submitting the annual settlement report if this scheme is utilized.
It is important to hire capable customs attorneys for ISA report verification for accurate confirmation of your business and for better negotiation with KCS on behalf of your company.
Tradewin has years of experience assisting in similar programs in a variety of industries and geographies around the world. Tradewin Korea, with licensed customs attorneys, has learned from this accumulated experience and know-how to best support you.