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South Korea: Korean courts narrowly interpret mitigating circumstances for non-compliance with FTA requirements

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Joseph Hong

Recently, the number of free trade agreement-related disputes has increased in Korea, and many cases involve country-of-origin verification by the customs authority of the exporting country under what is called an 'indirect verification regime'. In this regime, the customs authority of the exporting country conducts origin verification at the request of the customs authority of the importing country, and the FTAs adopting this regime usually require that the reply from the exporting country must be provided within a certain period and the reply must contain detailed information related to origin determination unless there are exceptional circumstances. However, the term 'exceptional circumstances' has been very narrowly interpreted by Korean courts and, as a result, importers are being punished for the failure by the customs authority of the exporting country to comply with the requirements under the FTAs. In 2014 Guhap 51777 (November 25 2014), the Seoul Administrative Court held that the unavailability of relevant documents due to a short document retention period under the law of the exporting country is not one of the exceptional circumstances which justifies non-compliance with the requirements under the relevant FTA. In this case, the importer at issue (Company N) is a Korean subsidiary of a Swiss-based multinational pharmaceutical company. In 2007 and 2008, Company N imported pharmaceutical products from a Swiss company. Preferential duty rates under the Korea-EU Free Trade Agreement (EU FTA) were applied based on the certificate of origin issued by the exporter.

In November 2011, however, the Korean customs authority requested its Swiss counterpart to conduct origin verification regarding the pharmaceutical products. In September 2012, the Swiss customs authority replied that, because the document retention period under Swiss law is three years, the Swiss customs authority was not in a position to conduct origin verification regarding the certificates of origin issued before December 2008. However, the Swiss customs unit also said that there was no evidence which showed that the pharmaceutical products at issue did not satisfy the origin requirements under the EU FTA. Based on this reply, the Korean customs authority denied the application of preferential duty rates under the EU FTA and assessed duties and penalties on the pharmaceutical products covered by the certificate of origin issued before December 2008 on the ground that the reply does not contain sufficient information to determine the authenticity of the document in question or the real origin of the products.

Article 27(7) of the EU FTA provides that, if the reply does not contain sufficient information to determine the authenticity of the document in question or the real origin of the products, the customs authority of the importing country shall – except in 'exceptional circumstances' – refuse entitlement to the preferential duty rates under the FTA. In upholding the duty assessment by the Korean customs authority, the Seoul Administrative Court stated that 'exceptional circumstances' should be interpreted as a specific situation beyond the control of the manufacturer, the exporter or the customs authority of the exporting country which justifies non-compliance with the requirements under Article 27(7). The Court then reasoned that, if the term 'exceptional circumstances' is not narrowly interpreted, it will be difficult to achieve the purpose of article 27(7) of the EU FTA which is to expedite the origin verification by the customs authority of the exporting country and the Court also pointed out that, when the Swiss customs audited Company N's parent in Switzerland regarding the origin of the products at issue, the parent company submitted origin-related documents covering five years and not just for the three years required by law.

In November of last year, the Busan District Court held that even an error committed by the customs authority of the exporting country in processing an origin verification request is not one of such exceptional circumstances which justifies non-compliance with the requirements under the relevant FTA (2014 Guhap 20903, November 21 2014). In this case, the importer at issue (Company P) is an importer of sports apparel. In 2008 and 2009, Company P imported shoes made in Indonesia into Korea from a Taiwanese company. By submitting the certificate of origin which shows that the shoes were of Indonesian origin, Company P imported the shoes at the preferential duty rates under the Korea-ASEAN Free Trade Agreement (ASEAN FTA).

In March 2012, the Korean customs authority requested its Indonesian counterpart to conduct origin verification and under the ASEAN FTA, the entire origin verification process must be completed within six months unless there are exceptional circumstances. However, the reply from the Indonesian authorities stating that the certificate of origin at issue satisfies the origin requirements under the FTA was received by the Korean customs unit in November 2012, and therefore, the Korean authorities denied the preferential duty rates under the ASEAN FTA and assessed duties and penalties on the ground that the Indonesian customs authority failed to reply to origin verification request within six months as required by the ASEAN FTA.

However, it later turned out that the delay was caused by a mistake of a mailman in Indonesia in forwarding the request from the Indonesian customs to the agency which is to conduct origin verification. Nevertheless, the Busan District Court ruled that such exceptional circumstances must be interpreted narrowly to preserve the effectiveness of the six month limitation, and only the circumstances beyond the control of the manufacturer of the goods, the exporter of the goods and the exporting customs authority qualify as such exceptional circumstances. The Court reasoned that the delay cannot be viewed as a result of the circumstances which are beyond the control of the exporting customs authority because, after sending the request to the responsible agency, the Indonesian customs unit could have checked whether the agency has received the request and by doing so, could have prevented the delay.

We now have to wait and see whether these decisions will be overturned by the appeals court, but until then we need to have our fingers crossed, praying that the exporting customs authority diligently do their job in responding to origin verification requests from the Korean customs unit.

Joseph Hong (joseph.hong@leeko.com)

Lee & Ko, Seoul

Tel: +82 10 772 5925

Website: www.leeko.com

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