[2] In a case where the arm's length price is calculated by a comparable third party's price method under Article 5 (1) 1 of the former Adjustment of International Taxes Act, whether the "domestic transaction" can be deemed as the comparable one (affirmative)

[3] The case holding that since the difference between the issue of bonds and the loan transaction is too large to have a significant impact on the calculation of the normal interest rate, the loan transaction is difficult to be the subject of the issue of bonds, and there was no reasonable adjustment to the extent that it can overcome the difference in the situation, the taxation which merely takes the loan transaction as the subject of comparison with the loan transaction after adjustment only at the time of the loan is illegal

[2] In light of the purport of the transfer price system and the contents and form of relevant provisions, such as Article 4 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002), the purport of Article 5(1) of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004) shall not be deemed to have been calculated based solely on the comparison of international trade as the comparative trade. Rather, even in cases where the comparative trade is a domestic trade, if a reasonable adjustment is possible to eliminate the difference caused by the impact, it shall be deemed that the arm's length price can be calculated based on the comparable third party's price method.

[3] The case holding that since the difference between the issue of bonds and the loan transaction is too large to have a significant impact on the calculation of the normal interest rate, the loan transaction is difficult to be the subject of the issue of bonds, and there was no reasonable adjustment to the extent that it can overcome the difference in the situation, the taxation which merely takes the loan transaction as the subject of comparison with the loan transaction after adjustment only at the time of the loan is illegal.

2. The costs of the lawsuit are assessed against the defendant.

A. On August 28, 200, the Plaintiff is a domestic corporation established under the laws of Korea, Nonparty 1 is a community corporation established in accordance with the laws of the Republic of Korea, and Nonparty 2 is a Ireland corporation established in accordance with the laws of the Republic of Korea. Both the Plaintiff, Nonparty 2, and Nonparty 1 were established by Lone Star Fund (a large-scale private equity fund was established in 1991 and was funded in the Republic of Korea around the time of the IMF foreign exchange crisis) and were in control of Lone Star Fund. Among them, the Plaintiff was established for the purpose of investment, such as purchase and management of buildings as follows.

B. In order to raise funds for the purchase of ○○ building and its appurtenant land (hereinafter “○○ building”) located in Jung-gu, Seoul (hereinafter “ omitted), the Plaintiff, on August 31, 200, issued bonds to Nonparty 1 on the condition of US dollars 6,748,250,98 (7.5 billion won), interest rate of 19%, maturity of 7 years (hereinafter “instant bond issuance transaction”), and Nonparty 1 again transferred the above bonds to Nonparty 2 on January 23, 2001, at US$ 7,268,241.21.

C. On September 7, 2001 and August 13, 2002, the Plaintiff borrowed a total of KRW 6.5 billion from Korea Exchange Bank Co., Ltd. (hereinafter “Korea Exchange Bank”) at an interest rate of 8% (hereinafter “instant loan transaction”) and completed the repayment of the principal and interest on October 15, 2002. The total amount of interest paid by the Plaintiff to Nonparty 2 during the said process is US$273,624.75 (2,905,190,277).

D. The Defendant deemed that the interest rate of the instant bond issuance transaction exceeds the normal interest rate, and selected the instant loan transaction as the comparative transaction, and determined the normal interest rate of the instant bond issuance transaction as 10.2% through the adjustment of the time according to the comparable third party’s price method. Specifically, at the time of the instant loan transaction, the 3-year corporate bond BB + the grade BB + 7.94% at the time of the instant loan transaction and the interest rate of the same grade as of August 31, 2000 is 10.2%, and thus, the normal interest rate of the instant bond issuance transaction also deemed 10.2%.

E. Accordingly, on January 206, the Defendant imposed corporate tax of 435,797,630 won and corporate tax of 1,782,840 won (including additional tax) on the Plaintiff on December 20, 2002 and April 2003.

[Reasons for Recognition] Unsatisfy, Gap evidence 1-2, Gap evidence 3-5, Gap evidence 7-9, Eul evidence 1-2, Eul evidence 3-2, Eul evidence 3-1, 2, Eul evidence 4, Eul evidence 7-1, 7-2, and the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The parties' assertion

(1) A feet;

Since the issuance of the instant bonds is highly comparable to the instant loan transaction, the adjusted interest rate of 10.2% of the instant loan transaction according to the comparable third party price method under Article 5(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 6779, Dec. 18, 2002; hereinafter “State Adjustment Act”) constitutes the normal interest rate of the instant bond issuance transaction, and accordingly, the instant disposition of taxation, which was adjusted, is legitimate.

(2) Won high

(A) Article 5(1) of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628, Dec. 31, 2004; hereinafter “Enforcement Decree of the National Coordination Act”) does not recognize the comparableness between the international trade and the domestic trade. Thus, it is unreasonable to adjust the interest rate on the issuance of bonds of this case based on the comparison of the instant loan transaction, which is a domestic transaction, as the comparison.

(B) Even if domestic transactions may be compared, there is a big difference between the issuance of the instant bonds and the instant loan transactions, and thus, in order to apply the comparable third party price method, the difference must be removed through a reasonable adjustment process, but it is impossible to eliminate the difference through a reasonable adjustment. Thus, there is no possibility to compare the instant loan transactions with the issuance of the instant bonds.

(C) Nevertheless, the Defendant calculated the adjusted interest rate by simply adjusting only the loan time without disregarding the various significant differences in the loan transaction in this case, and thus, it cannot be deemed the normal interest rate applicable to comparable third party price method.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Facts of recognition

(1) Lone Star Fund established the Plaintiff on August 28, 200 in accordance with the Korean Commercial Act for the purpose of purchasing ○○ building through a domestic corporation.

(2) On August 31, 200, the Plaintiff traded the instant issuance of bonds to raise funds for purchasing ○ building. The main contract is as follows.

① The Plaintiff shall pay the principal and accrued interest of the bonds before August 31, 2007 with maturity.

(2) Interest on the balance of the principal of bonds shall be calculated by 19% per annum as the welfare of each month, and all payments under the contract shall be made in US dollars.

③ The Plaintiff may pay in advance, or repay all or part of the principal and accrued interest without Nonparty 1’s consent, from the day after one year has elapsed from the date of issuance even before maturity. In such cases, the redemption commission shall not be imposed.

(3) On August 29, 200, the Plaintiff entered into a contract with ○○○ Co., Ltd. to purchase all the ○ building and its accessories and related assets at KRW 10.4 billion, and paid the purchase price with the funds raised through the instant bond issuance transaction.

(4) On September 7, 2001, the Plaintiff traded the instant loan transactions with a foreign exchange bank (a loan of KRW 6 billion at the beginning, but the actual loan amount is KRW 5.5 billion by early repayment of KRW 5 billion on September 10, 2001), a total of KRW 6.5 billion on August 13, 2002, a total of KRW 8 billion at interest rate of KRW 6.5 billion on August 13, 2002, and three years at maturity, and the main contents are as follows.

1. The Plaintiff may repay all or part of the credit balance from time to time before the due date: Provided, That in such case of occasional repayment, the Plaintiff shall pay to the foreign exchange bank the amount calculated by multiplying the loss rate and the amount of repayment before due date by the number calculated by dividing the number of months elapsed from the due date to the due date by 12 months, as commission: Provided, That no separate commission or penalty surcharge shall be imposed if the credit balance is repaid according to the sale of the building offered as security, and the time of repayment exceeds one year from the date of withdrawal under the loan transaction agreement of this case.

(2) Where the payment of interest is delayed, interest shall be deposited in the deposit account opened in the name of the plaintiff on the seventh day of each month, 18% compensation for delay per annum shall be paid.

(5) In order to secure the principal and interest of ○○ building arising from the instant loan transaction, the Plaintiff completed the registration of creation of each comprehensive collateral security (based on the maximum debt amount in the case of collateral security) with respect to ○○ building as of September 7, 2001, the maximum debt amount of 7.8 billion won, and the maximum debt amount of 650 million won on August 8, 2002. At the time, the total amount of priority claims (based on the maximum debt amount in the case of collateral security) with priority over each of the above collateral security interests was KRW 887,970,00 as of September 7, 2001, and KRW 897,970,000 as of August 8, 2002.

(6) On August 29, 200, at the time of the Plaintiff’s purchase of ○ building, the rental rate of this building was 58.92%, but thereafter, on September 2001, borrowed KRW 5.5 billion from the foreign exchange bank due to the improvement of the lease situation, the lease rate was 71.89%, followed by the additional 1 billion loan around August 2002.

(7) The details of 2,273,624.75, which the Plaintiff paid to Nonparty 2 as the interest of bonds, are as follows.

* US dollars 1,446,702.50 on September 2001; June 2002: US$ 611,482.66; August 2002; US$ 119,013.07; US$ 96,426.52

[Reasons for Recognition] Each of the above evidence, Gap evidence Nos. 6-1 to 3, Gap evidence No. 10, 11, and the purport of the whole pleadings

(d) Markets:

(1) Method, etc. for computing arm's length prices

(A) Method of computation

Article 5(1) of the Act provides that "The normal price shall be the price applied or deemed applicable to ordinary transactions with a resident, a domestic corporation, or a domestic business place, other than a foreign related party (Article 2(10) of the Act), and Article 5(1) of the Act provides that "the normal price shall be the price calculated by "the reasonable method," among the methods in the following subparagraphs, but the method in subparagraph 4 shall be limited to cases where the arm's length price cannot be calculated by the methods in subparagraphs 1 through 3, subparagraph 1 provides that "the comparable third party price method in subparagraph 2, the resale price method in subparagraph 3, the cost plus method in subparagraph 4, and Article 4 of the Enforcement Decree of the Act provides that "any other reasonable method as prescribed by Presidential Decree" shall mean any of the following methods, and Article 5(1)1 of the Act provides that "the method in which profits are divided, the net trade profit ratio in subparagraph 2, the ratio of gross sales profit in subparagraph 3, and any other method in which Article 4(4) of the Enforcement Decree of the Act provides that method shall apply.

(B) Selection Criteria

The arm's length price is to be calculated at the price calculated by "the reasonable method". The arm's length price method is to be so determined, as provided in Article 5 (1) of the Enforcement Decree of the State Assistance Act, in order to raise the possibility of comparison between the international trade between the related parties and the unrelated parties (Article 5 (1) of the Enforcement Decree of the State Assistance Act), 1, 2, 2, 3, 3, 3, 3, 4, 4, 4, 4, 5, 5, 5, 5, 5, 5, 5, 5 (1), 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 5, 1 (1).

On the other hand, Article 5(2) of the Enforcement Decree of the National Assistance Act requires an analysis of the function of business activities that may affect price or profit, contractual terms, risks accompanying trades, kinds and features of goods or services, changes in market conditions, economic conditions, etc. by assessing the difference between the comparable third party transaction and the pertinent international transaction, and Article 6(7) of the Enforcement Decree of the National Assistance Act newly established on August 24, 2006 lists the amount of debt, maturity of debt, guarantee of debt, debtor's credit standing.

(C) The burden of proving the arm's length price

Generally, the burden of proving the facts of taxation in a lawsuit seeking revocation of a tax disposition is against the taxpayer. In order to determine the tax base and tax amount based on the arm's length price on the basis of the resident's length price on the grounds that the transaction price falls short of or exceeds the arm's length price in an international transaction between the resident and the foreign related party, the taxpayer must prove that the arm's length price, which forms the basis for the taxation disposition, is reasonably calculated based on the data secured by the best effort, such as the data and documentary evidence requested by the taxpayer in accordance with Article 11 (2) of the National Assistance Act and Article 19 of the Enforcement Decree of the National Assistance Act, and it does not need to prove that the transaction price exceeds the arm's length price range. Meanwhile, the taxpayer need to prove that there are several types of independent business transactions with the foreign related party as reliable figures, and that the transaction price with the foreign related party does not fall short of or exceed the arm's length price (see Supreme Court Decision 9Du3423, Oct. 23, 2001).

Therefore, the defendant has the burden of proving whether the arm's length price, which was the basis for the disposition of this case, is the reasonable arm's length price calculated in accordance with the provisions of the above related laws based on the data secured by the best effort to request the submission of data and documentary evidence under Article 19 of the Enforcement Decree

(2) Whether comparative transactions are limited to international transactions

In general, a multi-national company tend to reduce the income of an enterprise located in a country with a relatively lower tax rate by manipulating the transaction price in the transaction of goods and services between the related enterprises, and reduce the income of an enterprise located in a country with a higher tax rate, thereby minimizing the overall tax burden of the multi-national company. It is a transfer price taxation system to regulate the act of tax avoidance by manipulating such transaction price and to protect its own right to taxation.

Under the title of "tax adjustment by the arm's length price" in Article 4 of the National Assistance Act, "the tax authorities may determine or rectify the resident's tax base and tax amount based on the arm's length price if the transaction price falls short of or exceeds the arm's length price in an international trade which is a foreign related party of a transaction," so that the resident may deny the transfer price so as to adjust the tax base and tax amount based on the arm's length price between independent enterprises, and as seen earlier, the method of calculating the arm's length price by the most reasonable method among the comparable third party's price method, resale price method, cost plus method, etc.

Meanwhile, based on the most reasonable method under Article 5(1)1 of the Enforcement Decree of the National Assistance Act, the term “high possibility of comparison between international trades between related parties and those between unrelated parties” is defined as “price applied or deemed to be applied to ordinary trades between unrelated parties (Article 2 subparag. 10).” Under the National Assistance Act, the term “the method of calculating comparable third party’s price method is not limited to ordinary international trade prices.” Under the same Act, the term “the method of deeming the transaction prices between unrelated parties as the arm’s length prices between unrelated parties in similar transaction situations between residents and foreign related parties” is not limited to the comparable trade. In deciding the most reasonable method in Article 5(1)1 of the Enforcement Decree of the same Act, the term “high possibility of comparison between related parties and those between unrelated parties” means “high possibility of comparison between related parties,” and “high possibility of comparison between unrelated parties or between unrelated parties,” and where there is a considerable difference in the circumstances or net profits of the trades, the term “high possibility of comparison” means a difference in the circumstances or circumstances.

In light of the purpose of the transfer pricing system and the contents and form of the above-mentioned provisions, it cannot be deemed that the arm’s length price should be calculated based solely on the purpose of Article 5(1)1 of the Enforcement Decree of the National Assistance Act as the comparative transaction. Rather, even in cases where the comparative transaction is a domestic transaction, if the difference is not significantly affected by the compared international transaction’s price or net profit, or if a reasonable adjustment is possible to eliminate the difference due to the impact, it shall be deemed that the arm’s length price can be calculated based on the comparable third party’s price method.

Therefore, we cannot accept the Plaintiff’s assertion that the Defendant’s act of deeming the loan transaction between the Plaintiff and the foreign exchange bank as the comparative assessment for calculating the arm’s length price in this case is unlawful.

(3) Whether the loan transaction of this case is highly likely to compare with the loan transaction of this case

The Defendant adopted a comparable third party price method in calculating the normal interest rate for the issuance of the instant bonds, and selected the Plaintiff’s loan transaction with the Plaintiff’s foreign exchange bank as the comparative transaction.

However, as seen earlier, ① the loan transaction of this case is a high risk transaction with 7.5 billion won issued without collateral and without collateral. On the other hand, the loan transaction of this case is a relatively low risk transaction with 8.5 billion won in total and 6.5 billion won in loan, and the loan transaction of this case is more likely to be redeemed at an early rate of 7.5% in excess of the redemption rate of this case, since the loan transaction of this case is merely a high risk transaction with 0.5 billion won in loan without collateral and the loan transaction of this case, and there is no difference between 0 billion won and 9.5 billion won in loan transaction of this case. The loan transaction of this case is more likely to be redeemed at an early rate of 7.5 billion won in excess of the redemption rate of this case.

(4) Conclusion

Although the issuance of this case’s loan transaction was made between foreign related parties, it is difficult to be compared to the issuance of this case’s loan transaction, as seen above, because the possibility of comparison is low, and there was no reasonable adjustment to the extent that it would be able to overcome the difference in the situation between the two parties. Thus, the Defendant’s disposition of this case’s loan transaction was unlawful, i.e., the loan transaction was conducted merely after adjustment based on the loan period, without disregarding these circumstances.

3. Conclusion

The plaintiff's claim is justified and accepted.

Judges Hwang Sung-ju (Presiding Judge)

1) The rate of return of a State bond with three-year maturity notified on the date of withdrawal means the excess rate where the repayment period notified on the date of redemption exceeds the rate of return of a State bond adjacent to the said remaining period or in the family.