[1] Whether a domestic transaction is also included in the transaction between an independent business operator who has no special relationship with the comparable transaction under Article 5(1)1 of the former Adjustment of International Taxes Act (affirmative)

[2] In a case where Gap corporation issued bonds at 19% interest rate to foreign corporations with a special relationship under Article 2 subparagraph 8 of the former Adjustment of International Taxes Act, and repaid bonds at 8% interest rate to Byung bank located in the Republic of Korea, and the tax authorities imposed the above loan transaction at a price with a normal interest rate exceeding the normal interest rate, and the above loan transaction was selected as comparative transaction and the normal interest rate of the bond issuance transaction was 10.2%, and the corporation Gap disposed of the disposition of non-deductible losses in excess of the interest paid to the foreign corporation, the case affirming the judgment below holding that the above disposition is legitimate

[1] Articles 4 and 5(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002; hereinafter “the Act”), Article 5(1)1 and 3 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004; hereinafter “Enforcement Decree”), and the legislative purport of Article 5(1)1 and Article 5(1)1 of the former Enforcement Decree of the Adjustment of International Taxes Act, and Article 5(1)1 of the Act provide that the comparable transaction between an independent business operator who has no special relationship with the third party is not limited to the comparable transaction. In applying Article 5(1)1 and 3 of the Enforcement Decree of the Adjustment of International Taxes Act, where an international transaction between the unrelated parties is selected as the comparable one between the domestic parties, it is possible to exclude the comparable one between the domestic parties, not between the unrelated parties.

[2] In a case where Gap corporation issued bonds to a specially-related foreign corporation under Article 2 subparagraph 8 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002; hereinafter “the Act”) at an interest rate of 19%, and borrowed money to Byung bank in Korea (hereinafter “loan transaction”) at an interest rate of 8%, and the tax authorities imposed a disposition of non-taxation in excess of the interest paid to Gap corporation to the foreign corporation, the case affirming the judgment below holding that the comparative disposition is lawful on the ground that the pertinent loan transaction and loan transaction are identical to the purpose of use of the loan transaction, and there is no fundamental change in the economic condition and the management environment of both corporations as the loan transaction and the loan transaction are adjacent.

[1] Articles 4 and 5(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002); Article 5(1)1 and 3 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004) / [2] Articles 4 and 5(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 6779 of Dec. 18, 2002); Articles 5(1)1 and 3 and 6(2) of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004)

ELS Co., Ltd. (Attorneys Kim Su-soo et al., Counsel for the plaintiff-appellant)

The director of the tax office of the astronomicalan District Office (Law Firm Gyeongsung, Attorneys Kim Jae-sung et al., Counsel for the plaintiff-

Daejeon High Court Decision 2009Nu513 decided August 13, 2009

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

We examine the grounds of appeal.

1. Regarding ground of appeal No. 1

Article 4 of the former Adjustment of International Taxes Act (amended by Act No. 6779, Dec. 18, 2002; hereinafter “the Act”) provides that “The tax authorities may determine or rectify the tax base and tax amount of a resident (including a domestic corporation and a domestic business place; hereinafter the same shall apply) on the basis of an arm’s length price if the arm’s length price is below or exceeds the arm’s length price in an international trade between one of the parties to the trade.” Article 5(1)1 of the former Enforcement Decree of the Adjustment of International Taxes (amended by Presidential Decree No. 18628, Dec. 31, 2004; hereinafter “Enforcement Decree”) provides that “the method of assessing the arm’s length price” is one of the method of calculating the arm’s length price between the parties with a special relationship and the parties with a foreign special relationship with a view to determining the arm’s length price.” Article 5(1)1 of the former Enforcement Decree of the Adjustment of International Taxes Act provides that the arm’s length price between the parties with a special relationship with a view should be determined.

Article 5(1)1 of the Act provides that a transaction subject to comparison between an independent business operator who has no special relationship with a comparable third party is not limited to an international transaction, and Article 5(1)1 and 3 of the Enforcement Decree provides that in applying the arm’s length price computation method as stipulated by the Act, including comparable third party pricing method, if an international transaction among the trades between unrelated parties is selected as a comparative transaction, it is interpreted that it does not purport to exclude the domestic transaction between unrelated parties from the comparative transaction. In full view of the above, if a reasonable adjustment can be made to eliminate a difference from the domestic transaction, even if the transaction between unrelated independent business operators is a domestic transaction, it is not necessary to exclude it from the comparative transaction, the comparable transaction between unrelated independent business operators is also included in the domestic transaction among the trades between unrelated independent business operators.

In the same purport, the lower court is justifiable to have determined that not only the international transaction but also the domestic transaction among the trades between unrelated parties can be deemed the comparable transaction in the comparable third-party price method, not only the provisions of Article 5(1) of the Enforcement Decree can be deemed the comparable transaction.

The court below did not err in the misapprehension of legal principle as to comparable third party price method as otherwise alleged in the ground of appeal.

2. As to the grounds of appeal Nos. 2 and 3

Article 6(2) of the Enforcement Decree provides that “In the event that an arm’s length price is calculated under Article 5 of the Act, if there is a difference in the applicable price, etc. due to a difference in functions performed, risks assumed, transaction terms, etc. between the relevant trade and unrelated parties, the difference in the relevant price, etc. shall be reasonably adjusted.”

Based on the evidence of employment, the lower court: (a) deemed that the Plaintiff, a domestic corporation, and the Plaintiff, at the time of the instant 10th issuance of lsF I, Ltd. (hereinafter “lsF 3K”) and Lone Star International Finance, Inc. (hereinafter “lsF”) were all established by Lone Star Fund, which is a U.S. private equity fund, and was in the lower control; (b) deemed that the Plaintiff had a special relationship set forth in subparagraph 8 of Article 2 of the Act with LF3K and LSF, and (c) on August 31, 200, the amount of the instant 10th redemption interest rate of 7th redemption of the instant 5th redemption interest rate of 0 billion won (hereinafter “SF 28th redemption interest rate of 7th redemption interest rate of 5th redemption interest rate of 10 billion won (hereinafter “the instant 20th redemption interest rate of 7th redemption interest rate of 7th redemption interest rate of 20 billion won (hereinafter “the instant bonds”).

Based on such factual basis, the lower court determined that it was justifiable to have determined that the Defendant calculated the normal interest rate of 10.2% by applying the comparable third party price method in applying the comparable third party price method, on the grounds that the instant loan transaction and the instant loan transaction are identical to the purpose of use, are identical to the purpose of use as monetary borrowed transaction, and there was no fundamental change in economic conditions and the Plaintiff’s business environment in close proximity to the timing of both transactions.

In light of the above provisions and relevant legal principles and records, we affirm the judgment of the court below as just.

The court below did not err in the misapprehension of legal principles as to the calculation of normal interest rate and the burden of proof as otherwise alleged in the ground of appeal.

3. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Yang Chang-soo (Presiding Justice)