DAPA Announces Reduction in Cost Compensation for Imported Goods

Only Items with Imported Cost Below 51% of Weapon Parts Are Considered 'Domestic'

[Asia Economy Yang Nak-gyu, Military Specialist Reporter] The Defense Acquisition Program Administration (DAPA) announced on the 8th that starting next year, it will significantly reduce cost-profit compensation for parts prices of weapon systems made using imported components.

On the same day, DAPA announced the revision of the "Enforcement Rules on Cost Calculation of Defense Cost Target Items," conveying this change.

Until now, when transactions occurred between domestic trading agents and defense contractors, even if imported parts were traded, they were regarded as domestic transactions, and profit compensation was provided as applied to domestic parts.

According to DAPA, domestic trading agents import parts through the domestic branches of foreign companies and trade the imported goods without additional manufacturing or processing. However, since these are reported as domestic transactions, they have received higher profits.

Through this enforcement rule, DAPA decided to raise the origin distinction criteria for domestic parts with contract amounts of 500 million won or more. Accordingly, when distinguishing the origin, only when the amount excluding the import price from the manufacturing cost accounts for 51% or more of the manufacturing cost will the product be recognized as domestic.

DAPA expects that by fairly compensating profits for genuinely domestic products through this enforcement rule, the use of products from high-quality and competitive domestic small and medium-sized parts manufacturers will expand.

A DAPA official stated, "Considering the preparation period for companies, the revised system will be applied from January 1 of next year," adding, "To protect domestic small and medium parts companies and to encourage the localization motivation of domestic parts developers, we will gradually expand the applicable items by lowering the standard amount and other methods."