Korea: Sales volume must be considered in determining comparability of transactions for transfer pricing purposes

Administrative Court decision

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September 25, 2024

The Seoul Administrative Court on June 20, 2024, held (2022 GOOHAP 83335) that in determining an arm’s length price for product sales between related parties, the allegedly comparable transactions relied on by the tax authority were not, in fact, comparable because the average sales volume of the allegedly comparable transactions were so different from the taxpayer’s sales volume to render the transactions incomparable for transfer pricing purposes.

Summary

The taxpayer manufactures polypropylene products in Korea and sells such products to both unrelated and related foreign parties. The tax authority claimed that the taxpayer sold its products to the related foreign parties at a price lower than the arm’s length price and initiated corresponding adjustments to the taxpayer’s taxable income in Korea. 

The Administrative Court held that the tax authority selected transactions to be compared with some of the taxpayer’s related foreign-party sales that were not comparable because the tax authority did not consider the size of the sales and did not make reasonable adjustments to eliminate sales volume differences in applying cost-plus methods. The court thus rejected the tax authority’s adjustments based on those allegedly comparable transactions.

However, the court found that for some of the taxpayer’s related foreign-party sales, sales volume did not appear to have a significant effect on cost-plus markups. Thus, the tax authority’s comparable transactions with respect to those sales were actually comparable and could be used to support the tax authority’s adjustments. 

Read a September 2024 report prepared by the KPMG member firm in Korea

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