Customs examination and investigations on foreign exchange have been reinforced according to the current government’s policy of focusing the function and manpower of customs offices on increasing tax revenue.  The Korea Customs Service recently discarded the current method of selecting target companies for periodic customs investigations and expanded its scope of investigation to companies that have had an annual import amount of USD 50 million or more for the past two years (approximately 770 companies in 2013), and also has been focusing on examining capital transactions between related parties and foreign exchange dealings.  The burden of export and import companies is expected to increase due to (i) the implementation of the system of origin verification on companies that are to receive preferential treatment under free trade agreements (“FTAs”), as the market grows due to the FTAs, and (ii) amendments to customs related laws such as the Act on Special Treatment on the Refund of Customs Duties, etc. Levied on Raw Material for Export (e.g., limiting tax refunds) and the Value-Added Tax Act (e.g., exclusion of input tax deduction).

The Customs and Trade Practice Group of Yoon & Yang wishes to assist clients on promptly and effectively responding to the dramatically-changing customs environment under the new government by providing a brief summary of the newly strengthened customs examination process.

How is the Customs Examination Process Reinforced under the New Government?

Customs examination, which the current government is focusing on, is performed by the government investigating the overall process of import-export customs clearance.  This includes reviewing the accuracy of taxes reported under the Customs Act and the Act on Special Cases of the Customs Act for the Implementation of Free Trade Agreements, requesting and further examining or investigating related materials and goods, and conducting inspections of international trading businesses and related persons through on-site visits or review of documents.

The government, through customs examination, examines the taxable value of goods, classification of items, country of origin, customs tax refund, customs tax exemption, foreign exchange transactions, intellectual property, legality of custom clearance, requirements of import and export (items to be confirmed by the customs office and permit/approval terms under Comprehensive Public Notifications), etc.  Although the main focus areas are the taxable value and classifications of items, the government recently also has been stressing the examination of foreign exchange transactions and the legality of customs clearance (i.e., whether import qualifications are met).

When conducting customs examination, generally a group of four to six public officials from a Main Customs Office (Seoul, Incheon, Busan, Gwangju, Daegu) analyze information on the target company, and for a period of two to three weeks thereafter investigate whether the target company has complied with import-export customs clearance requirements and relevant laws and regulations by reviewing documents and interviewing personnel on site.

Companies, in preparation of customs examination, should become fully familiar with customs inspection matters and thoroughly check whether they have all materials necessary for the inspection.  Through this process, companies will be able to eliminate or decrease the risk they may be subject to, and further actively and effectively respond to, additional tax imposition or criminal charges brought against them.