If you are being attacked by a stronger opponent, sometimes you need a strong shield. Korea Customs is such an opponent with all the power of the government behind them, how can importers protect themselves?
One defensive shield available is the ‘ACVA’ program.
You may recall from my earlier post, Think You Are Doing Just Fine? Korea Customs Auditors Might Not Think So, about how aggressive Korea Customs can be when it comes to customs valuation between related parties it is not uncommon for valuation related audits to result in additional duty, VAT, and penalties of hundreds of thousands or even millions of US dollars. Moreover, additional VAT collected as a result of a Customs audit has been nonrefundable since July 2013.
In Korea, a customs audit can happen at any time. Generally speaking, a foreign company operating in Korea can expect to be audited every 2-3 years. The main focus of every Korea Customs’ audit is on the declared customs value between related parties. The reality is that Korea Customs can take some very aggressive positions with regards to things like transfer pricing, royalty payments, and other payments overseas.
So, how does one manage this risk? What shield is available?
Tradewin has an answer: ACVA!
ACVA stands for Advanced Customs Valuation Arrangement. It is a mutual agreement between the Customs authority and the importer on the proper manner to determine the customs value of imported goods in transactions between related parties. Through the adoption of an ACVA, the importer can reduce the risk of having a long, intrusive, and likely costly customs investigation into its transfer pricing and can instead concentrate on its business.
The importer can also enjoy the following other benefits by utilizing ACVA:
- Deferral or Exemption from Customs audit/investigation: No customs audit covering the items applied for under ACVA will occur between the time of application to the time of authorization. Once authorized, the dutiable value of authorized items will be subject to an exemption of customs audit for 3 years.
- Enhancement of corporation credibility: Customers and customs authorities can rely on the import price of goods.
- Provisional value declaration and exemption of penalties: Provisional value declaration is available once applying for ACVA. As a result, the taxpayer is exempt from penalties that result from final price declaration under normal non-ACVA circumstances.
- VAT recover: Additional VAT due to change of import value during the course of ACVA application is recoverable.
- Shortcut to AEO: ACVA corporations receive benefits when they are AEO (Authorized Economic Operator) certified.
- Reconciliation available for T/P adjustment: An ACVA corporation is available to utilize the new reconciliation scheme for T/P adjustment according to the revised Customs Act (July, 2017)
Reconciliation warrants a bit more explanation. Until now, there was no way for importers in Korea to report transfer pricing adjustments to Korea Customs. They would have to wait until there was an audit and then pay penalties and interest. If duties were overpaid due to a TP adjustment there was no way to claim a refund.
Korea Customs is now opening a reconciliation system to account for transfer pricing adjustments. This will now require qualified importers to declare a provisional value at the time of import and true up after any adjustments are made. The program is somewhat similar to the US Customs & Border Protection (CBP) value reconciliation system.
Only importers who have obtained ACVA with Korea Customs Service or APA (Advance Pricing Agreement) with the Tax Bureau are qualified to utilize this new scheme.
ACVA not only benefits the taxpayer but Korea Customs authority as well. Korea Customs can save audit/investigation resources, secure stable tax revenue, and also can avoid conflicts with taxpayers and inefficiency as a result of custom audit/investigation. In this regard, Korea Customs has recently revised the ACVA application process by simplifying and shortening the process.
Effective communication between a foreign parent corporation, its Korean subsidiary, and professional assistance from a Korea Customs attorney are key to a successful ACVA.