Korea: Tax authority’s determination of arm’s length price upheld (Tax Tribunal decision)
Tax Tribunal upheld tax authority’s determination of arm’s length price and related tax assessment
Tax Tribunal upheld tax authority’s determination of arm’s length price
The Tax Tribunal upheld the tax authority’s determination of the arm’s length price and related tax assessment, finding that the tax authority used its best efforts to select comparable companies under similar transaction conditions and determine a reasonable arm’s length price based on all the available data obtained from the taxpayer.
The taxpayer manufactures and sells bearings and accessories. The tax authority claimed that the taxpayer sold products to foreign related parties at a price below the arm’s length price, adjusted the transfer price accordingly, and assessed additional corporate income tax. The taxpayer objected to the assessment and filed a request for adjudication to The Tax Tribunal.
The taxpayer argued that the tax authority’s determination of the arm’s length price using the taxpayer as the tested party was unlawful. The tribunal found, however, that the tax authority had no choice but to determine the arm’s length price by using the taxpayer as the tested party for analysis because the taxpayer did not submit the requested financial data at the time of the tax audit even when the taxpayer was asked for the financial reports of the foreign related parties. The tribunal found that the tax authority used its best efforts to select comparable companies under similar transaction conditions and determine a reasonable arm’s length price based on all the available data obtained from the taxpayer. Moreover, the tribunal found that the local third party comparables used by the tax authority were comparable even though the tax authority had not appropriately adjusted for differences in transaction items or distribution channels between the taxpayer and the comparable companies.
The taxpayer also argued that even if the arm’s length price determined by the authority is legitimate, the adjustment for arbitrarily selected related-party transactions is unlawful because it contradicts Article 4 (1) of the Law for the Coordination of International Tax Affairs (LCITA). The tribunal rejected the taxpayer’s argument, however, on the grounds that although Article 4 (1) of the LCITA allows reassessment by determining the arm’s length price for two or more tax years, it does not require that the arm’s length price be determined for transactions with all foreign related parties in the same business sector and reassessments accordingly imposed.
Read a December 2022 report [PDF 222 KB] prepared by the KPMG member firm in Korea
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