【South Korea】Luxury Jewelry Customs Dispute: ‘Exhibition Price’ vs ‘Post-Event Negotiated Price’

A luxury jewelry (high jewelry) item was temporarily brought into the country for an exhibition. Initially, it was not a general import for immediate sale. It was imported under a ‘temporary import for re-export’ procedure, intended to be sent back overseas after the event.

However, during the exhibition, a customer expressed interest in purchasing a specific piece, changing the situation. The importer renegotiated the price with the overseas headquarters and received a new invoice with a lower price than the amount originally recorded on the customs clearance certificate.

The core question: Which price should be used to calculate the customs duties? The price on the original certificate when it first entered the country, or the discounted price agreed upon later for the actual sale?

The incident began when a local subsidiary of a global jewelry company brought high jewelry into Korea from May 2021 to April 2023 for domestic exhibitions and order collection. The customs procedure used was an ‘A.T.A. Carnet’ (Temporary Importation Certificate), a system for items brought into the country for a fixed period, like exhibition goods, which are then re-exported.

Since these jewels were not initially for sale, the principle was to re-export them after the exhibition. However, if a customer expressed interest during the exhibition, the local subsidiary renegotiated the price with the overseas headquarters. They then received a discounted invoice compared to the Carnet price and applied to customs for ‘approval for use other than the declared purpose’ – a procedure to convert exhibition goods into domestic sale items.

Customs intervened upon reviewing these transactions. A customs audit revealed that from January 2022 to June 2023, the dutiable value for 98 high jewelry items that received this approval was declared lower than the price originally stated on the Carnet certificate.

Customs determined that at the time of import, the goods had not yet been sold to anyone, so no transaction price existed. Following the sequential valuation methods under the Customs Act, they adopted the Carnet price as the dutiable value and recalculated the duties, issuing a pre-assessment notice. The importer disputed this and filed a pre-assessment review with the Korea Customs Service.

The case ultimately hinges on three key issues: whether the Carnet price can be dismissed as merely a reference; whether the discounted price negotiated later with the headquarters can be used as the dutiable value; and whether the fact that customs repeatedly approved the change of use exempts the importer from penalties.

The local subsidiary argued that the price on the Carnet was not the actual transaction price. They claimed it was merely a conservative reference price used to set the security amount required for the certificate. For high-value items like high jewelry, negotiations only begin upon a customer’s explicit purchase request. They argued that the final price agreed with the headquarters, based on the domestic selling price with discounts applied according to general trade practices, was the true transaction price.

The Korea Customs Service rejected this argument. They stated that even if the Carnet price wasn’t the final price for an export sale, it was the only dutiable value declared to customs at the ‘time of import declaration,’ which is the standard under the Customs Act.

The local subsidiary contended that the later-issued invoice price was the ‘actual amount paid’ finalized after coordination with the customer and headquarters, and thus should be recognized as the dutiable value.

However, in customs valuation, the timing of when a price is established is as important as the amount paid. In this case, the high jewelry had already been temporarily imported into Korea with the Carnet declaration accepted. Customs’ ‘approval for use other than the declared purpose’ is merely an act allowing a change in use for goods already imported, not an acceptance of a new import declaration.

A specific review case highlights this timing difference. One pair of earrings was temporarily imported in July 2022 at the Carnet price. Only two months later, in September, did the importer submit an application for change of use based on a discounted invoice.

The Korea Customs Service clarified in its pre-assessment review that this discounted price was formed post-importation, after customer purchase and headquarters negotiation, and was not a price verifiable at the time of import. Therefore, a post-event discounted price cannot replace the original dutiable value at the time of the initial import declaration.

The final issue was the justification for imposing penalties. The local subsidiary argued that since they submitted relevant documents (Carnet, item details, discounted invoices) with their change-of-use applications, and customs approved 119 such applications over two years without raising any issues, imposing penalties was unfair.

The pre-assessment review did not recognize this as a ‘justifiable cause’ to waive penalties. It pointed out that the customs director’s approval for change of use is merely an administrative decision allowing the goods to be used for a different purpose (e.g., sale). It does not guarantee that the taxpayer’s declared dutiable value or tax amount is correct.

The application form for change of use is designed for the taxpayer to calculate and declare the item’s price and the tax payable themselves. The customs authority determined that the mere fact that customs had previously accepted these declarations does not establish the price calculation method as a legitimate administrative practice.

Consequently, the Korea Customs Service rejected the importer’s claim in the pre-assessment review, ruling that the customs office’s decision to recalculate the dutiable value based on the Carnet price and impose penalties was lawful.

[Reference Case: Korea Customs Service – Adequacy Review – 2024-24]