I received a $5,000 invoice by offsetting a $10,000 receivable from selling a machine against a $15,000 payment for imported dried fruit. Can I declare the customs value of the imported goods as $5,000? Released

In a situation like the one you inquired about, where a buyer pays for imported goods by offsetting a debt owed by the seller, the total amount before the offset serves as the basis for determining the customs value of the imported goods. Even if you sold a machine to the seller for $10,000 and offset that claim against the $15,000 price of the dried fruit you are importing, resulting in an invoice issued for $5,000, the customs value under the Customs Act must be calculated based on $15,000.

Principles of Determining Customs Value under the Customs Act

Article 30 of the Customs Act of Korea adopts the "Transaction Value Principle" as the most fundamental principle for determining the customs value of imported goods. This states that when imported goods are sold for export to Korea, the customs value is determined by the price actually paid or payable by the buyer (hereinafter referred to as the "actual price paid"), adjusted by statutory additions.

Meaning and Scope of "Actual Price Paid"

What is important here is the definition of the "actual price paid." The actual price paid does not simply mean the amount stated on the invoice. It refers to the total amount paid or to be paid by the buyer as consideration for the imported goods and includes all indirect payments such as the following:

• Amounts paid directly by the buyer to the seller (e.g., cash, bank transfer)

• Amounts by which the buyer offsets the seller's debt

• Amounts paid by the buyer to a third party on behalf of the seller

• Amounts deducted by the buyer from the price of the goods as consideration for services or goods provided by the buyer to the seller

In other words, the critical criterion is the total economic consideration for the imported goods, identified by understanding the substance of the transaction. Even if the invoice price is discounted, if that discount was made in the form of offsetting a debt the seller owed to the buyer, that offset amount is considered a practical indirect payment of part of the price of the goods.

Application to Your Case

In your case, you sold a machine to Seller S for $10,000, thereby holding a $10,000 claim against Seller S. You have offset this claim against a portion of the $15,000 price for the dried fruit you are importing this time. This is interpreted as you acquiring the dried fruit in exchange for extinguishing Seller S's debt through the consideration of the machine sale, even though the $10,000 was not directly paid in cash.

Consequently, it is equivalent to you paying $5,000 for the dried fruit as the invoice price and paying the remaining $10,000 through the claim from the machine sale. Therefore, the actual price paid for the dried fruit is $15,000, and you must determine the customs value and declare/pay customs duties based on this amount. You cannot declare based solely on the invoice price of $5,000.

Importance of Accurate Declaration

Since the customs value of imported goods is the basis for calculating various taxes such as customs duty and value-added tax, accurate declaration is very important. Customs can review the substance of a transaction through all supporting documents, including relevant contracts and financial transaction details, in addition to the price on the import declaration. If you declare at the invoice price of $5,000, it may be judged as an under-declaration of the customs value during a subsequent customs audit, and you may face the following disadvantages:

• Collection of under-declared customs duties and internal taxes (demand for additional payment)

• Imposition of additional taxes on the collected tax amount

• Possibility of investigation and punishment for violation of the Customs Act depending on the case

Therefore, if such an offset transaction exists, the most correct method is to clearly explain the details to the customs broker at the time of import declaration and declare the actual price paid of $15,000 as the customs value. Additionally, it is advisable to keep all supporting documents related to the offset, such as the machine sales contract and the offset agreement, so that they can be submitted if customs requests clarification.