Seoul High Court 2008Nu37611 ( November 12, 2009)

National High Court Decision 206Do1633 ( December 22, 2006)

It is legitimate to calculate the arm's length price with the resale price method by calculating the normal profit rate from domestic trade.

In computing the arm's length price with a resale price method, if a reasonable adjustment can be made to eliminate the impact of the difference between the transaction price and the interest in the case where the comparable company makes not only the international trade but also the domestic trade, the trade profit rate can also be calculated from the domestic trade. The tax disposition is legitimate on the ground that the difference between the selection of the comparable company

Article 4 of the Adjustment of International Taxes Act and Article 5 of the Adjustment of International Taxes Act

Article 5 of the Adjustment of International Taxes Act

209Du24122 Revocation of revocation of disposition of imposing corporate tax

XXBK Co., Ltd.

O Head of tax office

Supreme Court Decision 2008Du14364 Decided December 14, 2008

Seoul High Court Decision 2008Nu37611 Decided November 12, 2009

October 13, 2011

The appeal is dismissed.

The costs of appeal are assessed against the Plaintiff.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 2

A. Article 4(1) of the former Adjustment of International Taxes Act (amended by Act No. 7956, May 24, 2006; hereinafter "the former Adjustment of International Taxes 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 the arm's length price if the transaction price is less than or exceeds the arm's length price when one of the parties to an international transaction is an overseas specially related person." Article 5(1)2 of the former Enforcement Decree of the Adjustment of International Taxes Act provides that "in cases where a resident trades assets with an overseas related party and a purchaser of the assets again sells such assets to an unrelated party, the method of determining the arm's length price shall be the arm's length price." Article 5(1)2 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628, Dec. 31, 2004; hereinafter referred to as "the former Enforcement Decree of the Adjustment Act") provides for a reasonable comparison between related parties.

B. Based on its employment evidence, the court below rejected the plaintiff's assertion that the defendant violated Article 5 (1) 1 of the Enforcement Decree, even though Article 5 (1) 1 of the Enforcement Decree limits the comparative transactions for calculating the arm's length price to the "international transactions" among those who did not make any transactions with the plaintiff, and thus, it cannot be deemed that the comparative companies should calculate the arm's length price, based on its employment evidence, if a reasonable adjustment can be made to eliminate the difference between the comparative companies and domestic transactions as well as international transactions, if it is possible for the comparative companies to assess the arm's length price from the total transactions, including the domestic transactions of the comparative companies, to calculate the arm's length price.

C. In full view of the contents and purport of the above provisions and the purpose of its legislation, in particular, Article 5(1)1 of the Enforcement Decree of the Act on the Resale Price Method, the elements to be considered when an international transaction among the trades between unrelated parties is selected as a comparative transaction, and it is interpreted that the domestic trade between unrelated parties is not excluded from the comparative transaction. Such determination by the court below is just, and there is no error in the misapprehension of the legal principles as to Article 5(1)1 of the Enforcement Decree as otherwise alleged in the ground of appeal.

2. Regarding ground of appeal No. 3

In order to have a special relationship under Article 2 (1) 8 of the Act and Article 2 (1) of the Enforcement Decree of the Enforcement Decree, it is insufficient to simply say that there is a reason under each item of Article 2 (1) 4 of the Enforcement Decree between one party and the other. The case where one party can make a substantial decision on the whole or essential part of the business policy of the other party by the same method as the reason under each item of subparagraph 4 above is the same as the judgment of remand.

The court below acknowledged the facts as stated in its reasoning based on the employment evidence, and found that among the comparable companies of this case selected by the defendant in order to calculate the normal profit ratio, 53% of the total purchase amount was purchased from O, a foreign corporation, in the business year 2003, and △△△ General Co., Ltd. (hereinafter referred to as "△△ General Co., Ltd.") concurrently held office as the representative director of △△ Co., Ltd. (hereinafter referred to as "△△") after March 1, 1998, and 19.73% of the total purchase amount was 19.73% from July 1, 2002 to June 30, 2003 and 21.46% from July 1, 2003 to June 30, 2004, the court below did not err in the misapprehension of legal principles as to the total purchase amount, and it did not err in the misapprehension of legal principles as to the special relation between O and △△ General Co., Ltd.

3. Regarding ground of appeal No. 6

The court below rejected the plaintiff's assertion contrary to Articles 4 and 5 (1) 2 of the Act on the ground that in the case of calculating the arm's length price by resale price method, the resale price of the goods less the normal profit of the comparable company shall be deemed as the arm's length price, and the remaining part shall be imposed by adjusting the difference between the transaction price with the foreign related party and the transaction price, and that the difference shall be separately calculated by transaction country. In light of the relevant provisions, legal principles and records, the judgment of the court below is just, and there is no error in the misapprehension of legal principles as to the calculation of

4. As to the remaining grounds of appeal

Based on the facts stated in its reasoning, the lower court determined that, in the case of △△ Chemical Co., Ltd., the purchase amount from domestic wholesale and retail companies shall not exceed 40% and the transaction level shall not be applicable to the comparable companies capable of calculating the normal profit ratio, and even if there exists a difference between the Plaintiff and the comparable companies in the sales size and import function, there is no possibility of rational adjustment to the extent that it is impossible, and other advertising expenses, publicity expenses, entertainment expenses, etc. claimed by the Plaintiff are not subject to the difference adjustment because they are not an element affecting the normal profit ratio. In light of the relevant provisions, the lower court’s determination is just and acceptable, and there is no error of misapprehending the legal principles on the specific application of resale price method

5. 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.