Korea: Criteria for selection of comparable companies (Tax Tribunal decision)

Tax authority entitled to re-assess the arm’s length interest rate on related-party loan

Tax authority entitled to re-assess the arm’s length interest rate on related-party loan

The Tax Tribunal held (2020 Seo 2311, 9 June 2022) that the tax authority is entitled to re-assess the arm’s length interest rate on a related-party loan when the loan bore an interest rate (8%) seemingly higher than the conventional rate and the taxpayer failed to provide evidence of its arm’s length nature.


The taxpayer imported and sold automotive and industrial semiconductors during 2015-2018. The taxpayer calculated and reported its income using the transactional net profit margin method (TNMM), and its profit level indicator was operating margin (OM).

Using the same arm’s length calculation method but different comparable companies, the tax authority determined that the taxpayer purchased a semiconductor product from a related party at a higher price than the arm’s length price. The tax authority first selected comparable companies based on market structure, physical characteristics of products, and sales volume. Then, after considering the similarity of products, the size of the customer base, and post-sales technical support, the tax authority selected seven comparable companies.

The taxpayer objected to the comparable companies selected by the tax authority on the grounds that the tax authority failed to appropriately consider the characteristics of customers, research and development (R&D) functions, and overseas sales. In addition, the tax authority excluded semiconductor agencies from its comparable companies based on the fact that, unlike the taxpayer, those companies mainly deal with small and medium-sized enterprises. However, because the taxpayer is functionally similar to a semiconductor agency, it would be reasonable to include those agencies that have a significant proportion of transactions with large enterprises as comparable companies.

The Tax Tribunal held that the tax authority must reconsider its selection of comparable companies, and in so doing, consider transaction stage, sales volume, customers, as well as business environment, and include semiconductor agencies with similar functions to the taxpayer.

Read an April 2023 report [PDF 324 KB] prepared by the KPMG member firm in Korea



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