Korea: Transfer pricing adjustments with respect to subsidiary loan and subsidiary performance guarantees affirmed
A High Court decision concerning transfer pricing adjustments with respect to subsidiary loan and subsidiary performance guarantees
A High Court decision concerning transfer pricing adjustments
The High Court of Korea affirmed transfer pricing adjustments made by the tax authority with respect to both a subsidiary loan and subsidiary performance guarantees.
Summary
The taxpayer borrowed funds from a third-party and on-loaned the funds to its subsidiary but did not charge the subsidiary interest on the loan. The tax authority imposed a transfer pricing adjustment, using the cost-plus method to mark up the interest rate on the third-party borrowing and thereby determine an arm’s length interest rate on the subsidiary loan. The taxpayer proposed that the comparable uncontrolled price (CUP) method be used instead to establish an arm’s length rate of interest on the loan. However, because the interest rate on the third-party loan was a government-subsidized interest rate in accordance with the “Overseas Resource Development Project Act,” the court found that the third-party loan was not an ordinary transaction and thus that the CUP method could not be used to calculate an arm's length rate. The court found that in this case, the most reasonable transfer pricing method was the cost-plus method.
The taxpayer also provided a performance guarantee to its subsidiaries but failed to receive any performance guarantee fee from the subsidiaries. The tax authority imposed a transfer pricing adjustment, using a report prepared by an accounting firm to calculate an appropriate performance guarantee fee in accordance with the risk approach method, which the court affirmed.
Read a November 2022 report [PDF 1 MB] prepared by the KPMG member firm in Korea
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