Korea: Tax authority not entitled to select only certain local distributors for transfer pricing adjustment
Tax Tribunal held that the tax authority was not entitled to adjust the transfer prices for only certain of the taxpayer’s local distributors
Tax Tribunal held that the tax authority was not entitled to adjust the transfer prices
The Tax Tribunal held that the tax authority was not entitled to adjust the transfer prices for only certain of the taxpayer’s local distributors when such distributors conducted similar businesses and had similar functions, risks and assets profiles.
Summary
The taxpayer was a multinational enterprise operating in 25 countries that manufactured and distributed dental implant products. In July 2013 the taxpayer prepared a group transfer pricing policy in relation to the arm’s length price for its local distributors by region (Asia, America, Europe). On its corporate income tax return filed for FY2014 - 2018, the arm’s length price was calculated using the transactional net margin method (TNMM), but no transfer pricing adjustments were made to those local distributors whose operating margins exceeded or fell below the arm’s length range stated in the transfer pricing policy.
The tax authority subsequently audited the taxpayer for the 2014 - 2018 financial years and imposed additional corporate income tax on the taxpayer following a transfer pricing adjustment to the profit margin of one of the local distributors that exceeded the arm’s length range stated in the transfer pricing policy. The taxpayer then sought to adjust the profit margins of other local distributors whose profit margins fell below the arm’s length range stated in the transfer pricing policy, but the tax authority refused, and the taxpayer appealed to the Tax Tribunal.
The tribunal held that the tax authority was not entitled to adjust the transfer prices for only certain of the taxpayer’s local distributors based on the taxpayer’s transfer pricing policy, when such distributors conducted similar businesses and had similar functions, risks and assets profiles. On the other hand, the tribunal also stated that the taxpayer bore the burden of proving that the transfer pricing adjustments it sought based on its transfer pricing policy were in fact reasonable.
Read a February 2023 report [PDF 333 KB] prepared by the KPMG member firm in Korea
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