Korea: Substance over form principles applied to disregard intermediate third-party suppliers

A Seoul Administrative Court decision concerning substance over form principles when it comes to intermediate third-party suppliers

Substance over form principles applied to disregard intermediate third-party suppliers

The Seoul Administrative Court (2019-73444) applied substance over form principles to disregard intermediate third-party suppliers’ status as exporters of record and then relied on transfer pricing principles to find that the customs duties were not arm’s-length.


The taxpayer, a global multi-level marketing corporation specializing in the development and sale of dietary supplements, imported goods from several third-party suppliers who sourced the goods from a distributor related to the taxpayer. The Seoul Customs Office (SCO) audited the taxpayer in 2019 and applied substance over form principles to disregard the third-party suppliers' status as exporters of record, arguing that the related distributor was the actual exporter. The SCO then applied transfer principles to conclude that the customs values were artificially low (i.e., the transfer prices were not arms-length).

The taxpayer argued that there was no intent to evade taxes, as lowering customs values would ultimately result in higher profits subject to corporate tax and the customs duty rate is lower than the corporate tax rate. However, the court disagreed, stating that the “benefit of increased sales” outweighed the increased corporate tax burden resulting from lower import prices and thus could form the basis of a finding tax avoidance.

Read a December 2023 report [PDF 995 KB] prepared by the KPMG member firm in Korea


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