Declaring Customs Value for Imports Involving Debt Offsetting: Is the Net Invoice Price Acceptable? Released

In cases where a buyer settles the payment for imported goods by offsetting a debt owed by the seller, the gross amount before the offset serves as the basis for determining the customs value. Even if your invoice shows a net amount of $5,000 due to a $10,000 credit from a machine sale, the customs value under the Customs Act must be calculated based on the full transaction value of $15,000.

Principles of Customs Valuation under the Customs Act

Article 30 of the Korean Customs Act adopts the 'Transaction Value' principle as the primary method for determining the customs value of imported goods. This principle dictates that when goods are sold for export to Korea, the customs value is determined based on the Price Actually Paid or Payable (PAPP), adjusted by statutory additions.

Definition and Scope of 'Price Actually Paid or Payable' (PAPP)

The term 'Price Actually Paid or Payable' refers to the total payment made or to be made by the buyer to or for the benefit of the seller for the imported goods. It is not limited to the amount stated on the commercial invoice and includes all direct and indirect payments, such as:

• Direct payments made by the buyer to the seller (e.g., cash, wire transfers).
• Amounts used by the buyer to offset a debt owed by the seller.
• Payments made by the buyer to a third party to satisfy an obligation of the seller.
• Reductions in the price of goods in exchange for services or goods provided by the buyer to the seller.

Ultimately, the determination depends on the economic reality of the transaction. Even if the invoice price is reduced, if that reduction represents the settlement of a debt, the offset amount is legally considered an indirect payment for the imported goods.

Application to Your Case

In your situation, by selling a machine for $10,000, you gained a receivable from the seller. Offsetting this against the $15,000 price of the dried fruit means that although $10,000 was not transferred in cash, you effectively paid that amount by extinguishing the seller's debt. Consequently, your PAPP for the dried fruit is $15,000 ($5,000 cash + $10,000 offset). You must declare $15,000 as the customs value and pay duties accordingly; declaring only the $5,000 invoice price is not permitted.

The Importance of Accurate Declaration

Because the customs value is the basis for calculating customs duties, VAT, and other import taxes, accurate reporting is critical. Customs authorities may review contracts and financial records to verify the substance of the transaction. If you declare only the offset price of $5,000, you may face the following consequences during a customs audit:

• Collection of underpaid customs duties and internal taxes (Back taxes).
• Imposition of penalty taxes on the under-reported amount.
• Potential investigation and sanctions for violations of the Customs Act.

Therefore, when such offsetting transactions occur, it is essential to clearly explain the details to your Customs Broker and declare the full $15,000 as the customs value. Furthermore, you should maintain all supporting documentation, such as the machine sales contract and the offset agreement, to respond to any information requests from Korea Customs Service.