Seoul Administrative Court 2009Guhap37982 ( October 10, 2011)

If the transfer price with a foreign specially related person appears to be different from the normal price reasonably calculated on the basis of data secured by the tax authority's best effort;

If the tax authority reasonably calculates the arm's length price based on the data secured by the best efforts, the taxpayer is responsible for proving that the arm's length price can be within the range of the arm's length price, and that the transfer price with a person with a special relationship to the foreign country cannot be deemed to lack economic rationality due to

Articles 4 and 5 of the Adjustment of International Taxes Act

2014Nu7222 Revocation of revocation of disposition of imposing corporate tax

2014Nu7239(combined) revocation of disposition of imposing corporate tax

AAA Corporation

Head of Seodaemun Tax Office

Seoul Administrative Court Decision 2009Guhap37982 decided June 10, 201;

2010Guhap45873 (Joint Judgment)

Judgment prior to remand

Seoul High Court Decision 2011Nu21272, 21289 (Consolidated) Decided December 20, 201

Supreme Court Decision 2012Du1747, 1754 Decided September 14, 2014 (Consolidation)

February 26, 2015

March 19, 2015

1. Of the judgment of the court of first instance, the part against the defendant regarding the imposition of corporate tax for the business year 2001 and 2002 shall be revoked and the plaintiff's claim corresponding to the above revocation portion shall

2. Of the total litigation costs, 80% is borne by the Plaintiff, and the remainder is borne by the Defendant, respectively.

1. Purport of claim

The defendant's disposition of imposition of the corporate tax of 2001 on June 1, 2006 against the plaintiff (the first plaintiff claimed revocation of the disposition of the corporate tax of 2001, but the court reduced the purport of the claim) and the disposition of imposition of the corporate tax of 2002 shall be revoked, respectively.

2. Purport of appeal

The same shall apply to the order.

1. Scope of the judgment of this court;

In the first instance court, the Plaintiff sought revocation of the imposition disposition of each corporate tax for the business year of 1999, 200, 2001, and 2002, and the judgment of the first instance court accepted the Plaintiff’s claim. The Defendant appealed against this, and the judgment of the appellate court (the judgment before remanding the case) dismissed the Defendant’s appeal. The Defendant appealed the part against the Defendant regarding the imposition disposition of each corporate tax for the business year of 2001 and 2002, which reversed the part regarding the imposition disposition of each corporate tax for the business year of 2002 against the Defendant, and remanded this part of the case to the court of this case (the Defendant’s appeal was dismissed and finalized with respect

After the remand, the Plaintiff, upon ex officio reduction and correction of the corporate tax for the business year 2001 dated September 23, 2014 by the Defendant, reduced as stated in the above purport of the claim for corporate tax for the business year 2001.

Therefore, the scope of this Court's trial after remand is limited to each of the bills of law in 2001, 2002.

2. Details of the disposition;

This Court's explanation is identical to the corresponding part of the reasoning of the judgment of the court of first instance, except for the following reasons. Thus, this Court's explanation is acceptable in accordance with Article 8 (2) of the Administrative Litigation Act, Article 420 of the Civil Procedure Act, and Article 420 of the Civil Procedure Act.

Parts used for cutting.

○ The 4th page 14 to 16 pages are deleted.

○ The following shall be added to not more than 22 pages 42:

E. On September 23, 2014, the Defendant revoked ex officio the OOO(s) of the corporate tax for the business year 2001 (hereinafter “the disposition of this case”) (in addition to the disposition of imposition of corporate tax for the business year 2001 and the disposition of imposition of corporate tax for the business year 2002, “the disposition of this case”).

3. Whether the instant disposition is lawful

A. The parties' assertion

1) The plaintiff's assertion

A) If the Plaintiff and the comparable enterprise intend to adjust the arm’s length price tax based on the comparable enterprise when assessing the transfer price, a reasonable adjustment should be made pursuant to Article 5(1) of the former Enforcement Decree of the Adjustment of International Taxes Act. The instant disposition includes an error of simply comparing the annual operating income ratio of the Plaintiff and the comparable enterprise, even though the possibility of comparison is low between the international trade among related parties and the trades between unrelated parties due to a serious difference in their handling products, transaction stages, etc.

B) The Plaintiff’s main product BB (BB) and CCC (CC) are formed an international market price. Accordingly, the Plaintiff set the price at which the Plaintiff imports BB, CCC, etc. from its affiliate company or non-affiliated company. The transfer price initially reported to the Seoul Director of the Regional Tax Office is not only within the scope of the arm’s length price but also within the economic rationality. However, the instant disposition of imposition based on the arm’s length price that the Defendant denied it and calculated based on the net trade profit ratio method is unlawful.

2) The defendant's assertion

A) In relation to the transfer pricing taxation of the instant case, the Defendant applied the net profit rate method as the arm’s length price calculation method to the Defendant, not only is reasonable, but also is reasonable and reasonable to select the comparable company, but also performs reasonable adjustment of financial data of the Plaintiff and the comparable company. Accordingly, the instant disposition is lawful.

B) The Plaintiff’s calculation method of the transfer price of the instant case is unreasonable as it designed a profit structure that could not occur in the transaction between independent companies by setting the sales price at the current market price by reflecting the current market price in the sales price, at the pre-monthly or three months prior to the increase in the sales price, only operating income is generated in the country where the sales price is set at the lower level, and at the lower level of the sales price, only operating loss is determined

B. Relevant statutes

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

C. Whether the Defendant’s arm’s length price computation method is legitimate

1) According to Articles 11 and 13 of the Adjustment of International Taxes Act, Articles 7 and 23 of the Enforcement Decree of the Adjustment of International Taxes Act, etc., a taxpayer who engages in international trade with a foreign related party bears the obligation to submit a specification of international trade, the obligation to choose and choose the most reasonable arm's length price calculation method, the obligation to keep and keep necessary data relating to the arm's length price calculation method, and the tax authority does not have to consider the above scope of arm's length price. Therefore, in a case where the transfer price with a foreign related party is different from the reasonably calculated arm's length price based on the data secured by the best effort by the tax authority, if the transfer price with an independent related party to the foreign country shows a difference from the arm's length price based on the data secured by the best effort, the transaction price between the independent business entity having a possibility of comparison may constitute the scope of the arm's length price, and the need to prove that the transfer price with the foreign related party cannot be deemed to lack economic rationality due to the scope of the arm's length price.

In addition, the method of net trade profit ratio is calculated on the basis of net profit ratio, index, or operating profit ratio reflecting business expenses, such as sales cost and sales cost, and the arm’s length price calculation method is, unlike comparable third party pricing method based on the transaction price among other arm’s length price calculation methods or resale price method and cost plus pricing method based on the gross sales profit ratio, which are different from the method of calculating the arm’s length price. Therefore, in applying the net trade profit ratio method in the calculation of the arm’s length price, if the tax authority reasonably calculated the arm’s length price on the basis of data secured by the best efforts, barring any special circumstances, it cannot be readily concluded that the arm’s length price calculated on the ground that the pertinent transaction conditions and the pertinent transaction conditions were not conducted separately and reasonably based on the difference in the transaction stage, etc.

2) The following facts can be acknowledged in full view of the respective descriptions of evidence Nos. 9 through 18 and the purport of the entire pleadings.

A) The Plaintiff purchased liquid chemical products, such as BB and CCC, from AA’s affiliated companies or non-affiliated companies, and sold them in white or in veterinary tons to domestic companies. The Plaintiff reported each corporate tax for the business year of 2001 and 2002 with respect to the sales and sales cost arising from the sale of products through the Plaintiff’s branch, a domestic business place, and reported each of the corporate tax for the business year of 2001, and the business operating profit ratio for the business year of 2001 based on the reported content is 3.3% and -1.5%.

B) The director of the Seoul Regional Tax Office deemed that there was a suspicion of transferring taxable income to a foreign related party by trading the instant chemical product purchased from a foreign related party to AAA company in excess of the arm’s length price. Accordingly, the director of the Seoul Regional Tax Office notified the Defendant of the amount calculated by adjusting the arm’s length price of the Plaintiff’s length price by comparing seven companies of Dchemical, EE industry, FF trade, GG materials company, HHK company, IIIFK company, and JJK company as the comparative company, and calculating the operating profit rate for the business year 201, 2002. Based on the above, the director of the Seoul Regional Tax Office calculated the arm’s length price by adjusting the financial data and risk level between the Plaintiff and the comparative company, the inventory assets holding amount, and the level of investment capital for other business assets, compared with the gross profit ratio for the Plaintiff’s chemical product resale business, and the gross profit ratio for the business year 2001 and the transfer income ratio and the transfer income ratio for the business year 2002.

C) The Defendant imposed the instant disposition on the Plaintiff based on the foregoing notification.

3) According to the above facts, the comparable company selected by the defendant is among the companies that import and sell basic chemical products or basic chemical compounds, including organic chemical products, into the Republic of Korea, and engaged in transactions similar to the conditions of the transaction in this case conducted by the plaintiff branch. The arm's length price calculated by the defendant according to the net trade profit ratio is also adjusted to the driver's origin, etc. which may affect the operating profit ratio. Thus, the defendant can be deemed to reasonably calculate the arm's length price based on the data secured by best efforts. Thus, unless the plaintiff proves that there exists a certain scope of arm's length price and the transfer price of the transaction in this case cannot be deemed to lack economic rationality due to the existence of a certain scope of arm's length price and the transfer price of the transaction in this case, it cannot be concluded that the arm

D. Whether the transfer price of this case is within the range of the arm's length price

1) Recognized facts

A) The director of the Seoul Regional Tax Office determined that there was a suspicion that the Plaintiff transferred taxable income to a foreign related party on the grounds that the gross sales profit ratio (-0.49%, 1.6%) of chemical products purchased from a foreign related party during the business year 2001 and 2002 was significantly lower than 5.59% of the gross sales profit ratio of the chemical products purchased from a foreign related party with no special relation with a foreign country (5.59% of the average value in 1999 or 2003).

나) 원고가 판매한 화학제품은 BBB, CCC 등 주로 합성수지나 합섬원료와 같은 2차적 화학제품을 생산하는 데 사용되는 기초 석유화학제품으로서 액체 상태로 운반되어 수백 또는 수천 톤 단위로 관매되었고, KK물산, LL네트웍스 등과 같이 화학제품을 실수요자에게 재판매하는 종합상사나, MMM, NN석유화학, PP유화 등 대기업 실수요자에게 주로 판매되었다.

C) The Plaintiff’s form of trading chemical products is largely comprised of Stock sales and B2B sales. The ratio of each type of sales accounts for 30% of Sock sales and 56% of B2B sales.

D) The price of the instant chemical product that the Plaintiff purchases from the foreign related party (i.e., the transfer price of the instant chemical product) was determined by subtracting an adequate margin from the actual average sales price of the customers for the preceding one month or the preceding three months in accordance with the transfer price policy prescribed in AA. AA sets the appropriate margin rate of 1% after January 1, 1998, but in fact, the said margin was not observed. The Plaintiff’s actual net sales price was -3.3% to 13.4% from 1999 to 2003, and the average operating profit rate for that period was 3.0%.

E) According to the competition pattern, such as the international price trend related to petrochemicals, the continuous price decline since 2000, and the rise in the 2002.

[Ground of recognition] Facts without dispute, Gap 8, 9-18 evidence, Eul 5, 7 evidence, the purport of the whole pleadings

2) Determination

A) According to the above legal principles, in a case where the transfer price with a foreign specially related person appears to be different from the reasonably calculated arm's length price based on the data secured by the tax authority's best efforts, the taxpayer is responsible for proving that the transaction price among independent business operators with a comparable possibility exists as a reliable figure, and that the transfer price with a foreign specially related person cannot be deemed to lack economic rationality due to the lack of economic rationality in the scope of the arm's length price. Thus, although the transfer price with the foreign specially related person is different from the arm's length price presented by the Defendant, the Plaintiff must prove that there was a transaction price with a reliance on the trust in forming the scope of the arm's length price, and that the transfer price has economic rationality within the scope of

B) However, the Plaintiff has formed an international market price with respect to BB and CCC, one month or three months in linkage with the determination of the price of BB and CCC, which reflects the difference, and the economic rationality exists. Moreover, the Plaintiff has failed to assert and prove that the change in the international market price of petrochemicals has influenced the Plaintiff’s net profit ratio. However, the Plaintiff has emphasized that the international market price of petrochemicals has influenced the Plaintiff’s change in the international market price of petrochemicals, but it has not disclosed in detail whether there is an inevitable circumstance to determine the price later than the price set later in line with the market price, and whether there is an economic rationality in determining the price later than the price set later.

C) Meanwhile, the Plaintiff asserts to the effect that the transfer price in the instant case is economic rationality, as the annual average profit rate of 3%, and this is within the scope of the annual average profit rate of 7 comparable companies. However, according to the principle of fixed-term taxation, the transfer price and the arm’s length price are compared for each business year. However, inasmuch as there was no provision regarding the utilization of data for three years at the time of the enforcement of the former Adjustment of International Taxes Act, the average price for a multi-year period may not be reflected in the calculation of the arm’s length price (see Supreme Court Decision 2012Du1969, May 24,

D) Comprehensively taking account of the aforementioned circumstances, it is difficult to view that there exists a comparable arm’s length price with the transfer price in this case and that the transfer price in this case has an economic rationality as the arm’s length price, and therefore, the Defendant’s disposition of this case is lawful

4. Conclusion

If so, the disposition of this case is legitimate, and thus, the plaintiff's claim shall be dismissed. Since the judgment of the court of first instance is unfair with different conclusions, the defendant's appeal is accepted, and the part of the defendant's failure regarding the disposition of this case among the judgment of the court of first instance is revoked, and the plaintiff's claim as to the above revocation portion