Korea: Services fee arrangement satisfied arm’s length principle (Tax Tribunal decision)
A Tax Tribunal decision concerning whether a services fee arrangement satisfied the arm’s length principle
Services fee arrangement satisfied arm’s length principle
The Tax Tribunal held (2021 Suh 5598, 9 August 2023) that a services fee arrangement between the taxpayer, a Korean company, and a related foreign company satisfied the arm’s length principle.
Summary
The taxpayer provided contents-related support services, including information regarding the local contents market, local contents production support, and administration services, to a foreign related party in exchange for a service fee of the related costs with a 10% markup.
The tax authority argued that the taxpayer was actually a contents distributor that also performed key functions such as the purchase and sale of contents, rather than just simple administration or support functions, and thus that the cost plus markup arrangement between the taxpayer and its affiliate was not appropriate. Rather, the affiliate must also compensate the taxpayer for the difference between the purchase price for the contents and related expenses (representing the cost of goods sold (COGS)).
The tribunal rejected the tax authority’s argument, finding that the tax authority did not:
- Provide adequate grounds for its recharacterization of the arrangement between the taxpayer and its affiliate
- Make any comparability adjustment between the existing transaction structure and the restructured transaction, which may affect factors/transactional terms and conditions considered in calculating the arm’s length price
- Provide any specific reason that the transfer pricing method and the comparable companies selected by the taxpayer were inappropriate
Read an October 2023 report [PDF 952 KB] prepared by the KPMG member firm in Korea
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