Korea: Related-party marketing fee subject to customs duty

Korea: Related-party marketing fee

An administrative court in South Korea agreed with the Korean Customs Service that a Korean entity was liable for additional customs duty on international marketing fees paid by the Korean entity to its corporate international headquarters.

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Background

A licensing agreement between the Korean entity and the multinational entity’s international headquarters provided that the Korean entity would pay 4% of its net sales as an “international marketing fee” in addition to the standard brand royalty payments.

The Korea Customs Service made an additional assessment of customs duties with respect to the international marketing fee of approximately KRW 5.9 billion (approximately U.S. $5.5 million).

Administrative court case

The issue before the administrative court, therefore, was whether the international marketing fee was in substance consideration for the use of the brand, i.e., a royalty.

The Korean entity asserted that the international marketing fee differed from the brand royalty payment in that the fee was an allocation of global advertising expenses incurred by the international headquarters.

However, the administrative court found that:  

  • The international marketing fee was not based on the actual advertising cost of the headquarters but was actually based on net sales of the Korean entity. 
  • The license agreement stated that the international marketing fee would be charged without any increase in the brand royalty, notwithstanding the expanded global marketing activities conducted by the headquarters. 
  • The Korean entity paid withholding tax with its remittance of the international marketing fee, as a “royalty.”

The administrative court decision is being appealed to the Seoul High Courts.

KPMG observation

The administrative court’s interpretation and treatment of the international marketing fee as a brand royalty payment was based, in part, on a finding of no evidence of actual advertising costs provided to the Korean entity by the international headquarters. The fact that the international marketing fee was an obligatory payment (in lieu of increase in royalty payment) further implied that both the international marketing fee and royalty payments were, in substance, the same. Moreover, the Korean entity’s own treatment of the related withholding tax payment under the classification “royalty” indicated that it too recognized that the international marketing fee was a royalty payment.

Transfer pricing professionals in Korea have observed that the case offers some insight into what may be described as the administrative court’s aggressive and broad interpretation of royalty payments. The case also demonstrates that prudent taxpayers need to consider the nature of their related-party payments and possible challenges to payment classifications by both customs and tax authorities.

 

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services in South Korea:

Tae Hyun (Pius) Park | +82 (2) 2112 6757 | taehyunpark@kr.kpmg.com

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