How to Prove Relationships’ Influence on Import Prices in Customs Valuation: Implications from Transfer Pricing and Korean Court Cases

Affiliates of multinational enterprises (“MNEs”) may set import prices below market value to avoid tariffs in cross-border related transactions. Customs administrations may evaluate the customs value of imported goods and impose additional tariffs on importers, if the relationships between such affiliates influence the import prices. However, it is difficult for customs authorities to prove whether the relationships affect the import prices. Moreover, tax and customs agencies may apply different criteria to determine the impact of the relationships on the import price, which can create inconsistencies between transfer pricing and customs valuation. The author compares customs valuation with transfer pricing and reviews the Korean court rulings on MNEs’ customs valuation issues. Next, this article analyzes the rulings’ facts and reasoning which can be used for critical criteria for determining whether the relationships influence the import prices. The findings and implications of this article are summarized as follows. First, transfer pricing and customs valuation are used to calculate income tax and customs duties, respectively, by applying the arm’s length principle to transactions between related parties. If there is a significant gap between import prices and transfer pricing rules and the gap does not stem from the intention of complying with customs valuation regulations, it is difficult to accept the prices for customs valuation purposes. Second, according to the analysis of the court rulings, the key circumstantial or indirect facts for determining whether the relationships affect the import prices are unilateral pricing, exclusion of major pricing factors, unusual or unreasonable pricing structures and business strategies. However, they are not exhaustive, but illustrative. Third, the court rulings examined in this article are expected to function as important precedents for customs agencies. Fourth, tax and customs authorities need to categorize relevant cases and set up common standards through exchange of information, joint case studies and combined audits. Fifth, it is advisable to revise customs valuation rules and transfer pricing regulations of Korea in order to bridge the gap between the two systems pursuant to this article’s recommendations. Sixth, the court rulings of this article may be good starting points for the World Customs Organization to establish standards for the relationships impact on the import prices.