Being audited is pretty unpleasant. Having people go through your things in minute detail looking for mistakes you have made. Most companies’ normal reactions to a customs audit in Korea is probably ‘Why us?’ or ‘We are doing just fine’.
Well, unfortunately it looks like customs auditors have different views on how well companies are doing on customs compliance. In 2013, the Korea Customs Service imposed $200 million USD in additional duties collected through customs audits and investigations; more than 4.4 times the 2012 figure. And this number has been steadily growing ever since.
There are three main types of customs audits in Korea:
- Corporate audit : Regularly conducted (typically every 4 years)
- Planned audit : Irregularly conducted (normally targeting an industry)
- Comprehensive audit : Regularly conducted for AEO licensed companies (typically every 5 years)
The scope of the audit covers all import/export/drawback activities including HS classification and customs valuation for the past 5 years. KCS aims to screen each and every transaction over that 5 year period rather than only sampling some transactions so that additional duties can be maximized.
The current post clearance audit system has been implemented since 1996. However, it wasn’t until recently that Customs audits have made MNCs with operations in Korea fearful and shocked. In 2013, KCS announced that they would conduct extensive audits against MNCs who purchase from overseas related parties. To conduct these audits, KCS reorganized and increased its audit staff. Approximately 150 companies have been audited each year since then. It’s an open secret that the dramatic increase in the number of audits is due to shortfalls in customs budgeted revenue due to the various FTAs in effect; ultimately, resulting in fewer duties to collect. It is likely this situation is only going to get worse as more FTAs with Korea are on their way.
More seriously, an additional VAT collected as a result of a Customs audit is nonrefundable with the revision of the VAT Act in July 2013. These large potential VAT revenues encourage KCS to increase its audits and scrutiny even more.
I know, it’s silly. I’ve been faced with the difficulty of making taxpayers understand this. This is not something that I can explain logically but the law regulates it. You’d better blame Socrates for saying, “a law is a law, however undesirable it may be”. Please stop blaming me!
Going back to the audit, the major issues often raised by KCS during an MNC customs audit are Transfer Pricing, Royalties and Foreign Exchange Transactions. I have assisted clients in many customs audits and, in my experience, not even one company had intent to evade customs duty. However, sadly enough in each case significant additional duties and penalties occurred due to their lack of customs knowledge and preparation thereof.
Fortunately, I can mention one thing that will make you feel relieved. The Customs act of Korea allows taxpayers to get support from a licensed Korea customs broker or Korean attorney who may participate in the audit and present opinions on behalf of taxpayers.
Tradewin Korea provides this service, and is here with the expertise available to help you minimize additional duty through leveraging its extensive customs audit experience! We will be with you from the beginning of the audit preparing relevant documents. And we will stay with you during the 2-3 weeks of on-site audit to help defend you against the auditors. We will be by your side until we get a better final audit result through further discussion with KCS.
Lastly, I would encourage you to proactively review your Korean subsidiaries current import/export activities and make any necessary changes, including voluntary disclosure which will lead you to fewer penalties and will enable a VAT refund – prior to potentially being audited.
Remember! Customs risks are best preventable when well-prepared.