[1] The method of calculating the pertinent arm's length price in a tax disposition based on the arm's length price under Article 4 (1) of the former Adjustment of International Taxes Act for a transaction with a resident's foreign specially related party, and the burden of proving that the pertinent arm's length price was lawfully calculated through the above process (=tax authorities)

[2] Even before the enforcement of the former Enforcement Decree of the Adjustment of International Taxes Act amended by Presidential Decree No. 18628, Dec. 31, 2004, whether a domestic transaction between an independent business operator who has no special relationship with the comparable third party's price method under Article 5 (1) 1 of the former Adjustment of International Taxes Act includes a domestic transaction (affirmative)

[1] In full view of the language and purport of Articles 4(1) and 5(1) and (2) of the former Adjustment of International Taxes Act (amended by Act No. 9266, Dec. 26, 2008; hereinafter “International Tax Act”); Articles 5(1)1 and 6(2) of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628, Dec. 31, 2004; Amended by Presidential Decree No. 22574, Dec. 30, 2010); in order for a tax disposition to be imposed on a resident’s foreign specially related party based on the arm’s length price, the tax authority should reasonably choose the arm’s length price calculation method based on the data collected by the taxpayer upon a request for submission of data, etc.; and in cases where the tax authority reasonably adjusts the transaction’s price or the burden of proving the arm’s length price through the calculation of the arm’s length price.

[2] Article 5(1)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 International Tax Adjustment Act”) provides that “The circumstances before and after the amendment 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 International Tax Adjustment Act”) include not only a special relationship between the parties having special relationship but also a specific method of calculating the arm’s length price among the pertinent transactions, it is reasonable to interpret that there is no reasonable difference between the pertinent special relationship and the pre-amended by Presidential Decree No. 22574, Dec. 30, 2010.” However, it is also reasonable to interpret that there is no special relationship between the pre-amended Enforcement Decree of the International Tax Adjustment Act and the pre-amended by Act No. 2516, Dec. 16, 2004.

[1] Articles 4(1) and 5(1) and (2) of the former Adjustment of International Taxes Act (Amended by Act No. 9266, Dec. 26, 2008); Articles 5(1)1 and 6(2) of the former Enforcement Decree of the Adjustment of International Taxes Act (Amended by Presidential Decree No. 22574, Dec. 30, 2010) / [2] Article 5(1)1 of the former Enforcement Decree of the Adjustment of International Taxes Act (Amended by Presidential Decree No. 18628, Dec. 31, 2004); Article 5(1)1 of the former Enforcement Decree of the Adjustment of International Taxes Act (Amended by Presidential Decree No. 22574, Dec. 30, 2010)

[1] Supreme Court Decision 99Du3423 decided Oct. 23, 2001 (Gong2001Ha, 2581) / [2] Supreme Court Decision 2009Du15357 decided Oct. 13, 201 (Gong201Ha, 2374)

ELS Seoul Specialized Co., Ltd. and four others (Law Firm LLC, Attorneys Yoon-ri et al., Counsel for the plaintiff-appellant)

Head of the District Tax Office and one other

Seoul High Court Decision 2010Nu22728 decided February 11, 2011

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. As to the second ground for appeal

A. Article 4(1) of the former Adjustment of International Taxes Act (amended by Act No. 9266, Dec. 26, 2008; hereinafter “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 place of business) on the basis of the arm’s length price if the transaction price is less than or exceeds the arm’s length price in an international trade between one transaction party and a foreign specially related person.” The main sentence of Article 5(1) provides that “The arm’s length price shall be the price calculated by the most reasonable method among the following methods.” Each subparagraph provides that “The comparable third party’s price method (No. 1), resale price method (No. 2), cost plus method (No. 3), Presidential Decree, and other reasonable methods (Article 5(2) delegates specific matters regarding the arm’s length price calculation method to the Presidential Decree.

Accordingly, Article 5(1)1 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628, Dec. 31, 2004; Presidential Decree No. 22574, Dec. 30, 2010; hereinafter “Enforcement Decree of the International Taxes Act”) provides that “The possibility of comparison between an international trade among related parties and an unrelated party shall be high” as one of the criteria to be considered in choosing the arm’s length price computation method. Here, the high possibility of comparison is “where the difference in the compared situation does not significantly affect the price or net profit of the compared transaction [(a)] or “where a reasonable adjustment is possible to eliminate the difference due to the said impact” [referring to cases where a difference in the function of the arm’s length price can be reasonably adjusted between the unrelated parties or the unrelated parties” (see Article 6(2)5 of the Enforcement Decree of the International Tax Act). Furthermore, Article 6(2)1 of the Enforcement Decree of the International Tax Act provides that the difference in the net trade profit or net trade profit between the pertinent transaction.

In full view of the language, purport, etc. of these provisions, in order for a tax authority to impose a tax on a resident’s transaction with a foreign specially related party based on the arm’s length price, it should select the most reasonable arm’s length price calculation method in consideration of comparative feasibility, etc. based on the data collected through a request for submission of data against the taxpayer. In a case where a difference in the compared situation significantly affects the compared transaction’s price or net profit, the difference must be reasonably adjusted to calculate the arm’s length price, and the burden of proving that the arm’s length price, which forms the basis for the tax disposition, was lawfully calculated through such a process, shall be borne by the tax authority (see Supreme Court Decision 9Du3423, Oct. 23, 201).

B. Upon citing the reasoning of the first instance judgment, the lower court determined that: (a) with respect to the instant transaction of payment of interest arising from the issuance and acquisition of the instant securitization bonds between Plaintiff Dop Asset-backed Specializing in the 2005 business year and 2006 (hereinafter “lsIF”), the Defendants deemed the interest rate calculated based on the issue rate of domestic asset-backed securities at the time of original adjudication as the normal interest rate calculated based on the issue rate of the securities; and (b) notified changes in the amount of the instant corporate tax and income; (c) on the grounds as indicated in its reasoning, the difference between the Plaintiff Dop-backed Specialized in the Postal Asset-backed Securitization Specializing in the 2005 business year and the 2006 business year has a significant impact on the calculation of the normal interest rate; (d) so, it is difficult to view that there is a need to establish a reasonable scope of each of the instant dispositions independent of the Defendants’ trust in calculating the normal interest rate, and thus, it is difficult to view that the aforementioned adjustment is unlawful.

Examining the reasoning of the lower judgment in light of the evidence duly admitted, the lower court’s aforementioned determination is based on the legal doctrine as seen earlier. In so doing, it did not err by misapprehending the legal doctrine on the selection of comparable transactions and the burden of proof, as otherwise alleged in the ground of appeal.

2. Regarding ground of appeal No. 1

A. Article 5(1)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 International Tax Adjustment Act prior to the amendment”) provides, unlike Article 5(1)1 of the Enforcement Decree of the International Tax Adjustment Act, that “an international transaction between the parties having special relations and the unrelated parties are highly comparable between the parties having special relations” but there is no difference between the said international tax law and the said international transaction before and after December 31, 2004.

In addition, Article 5(1)1 of the Enforcement Decree of the International Tax Adjustment Act provides that the comparable transaction on a comparable third party’s price method as “an independent business operator who has no special relationship” is not limited to an international transaction. In addition, Article 5(1)1 of the Enforcement Decree of the International Tax Adjustment Act provides for the elements to be considered in the case of selecting an international transaction among unrelated parties in the course of computing the arm’s length price in order to select the most reasonable arm’s length price calculation method, and does not purport to exclude the domestic transaction between unrelated parties from the comparable transaction. Even if a transaction between unrelated and independent business operators is a domestic transaction, it is not necessary to exclude it from the comparable transaction if it is possible to eliminate the difference from the comparable transaction. In addition, considering the above circumstances and the content and legislative intent of the above international tax law, it is reasonable to interpret that the comparable transaction between the comparable third party and the related business operator is also included in the comparable transaction (see, e.g., Supreme Court Decision 2013Du15301, Jan. 1, 2005).

Therefore, under the premise that domestic transaction could not be included in the comparable third party’s price method prior to December 31, 2004, when the Enforcement Decree of the International Trade Union Act was enforced prior to the amendment, the lower court erred by misapprehending the legal doctrine regarding the transaction between the Plaintiffs, which was conducted in the business year from 2002 to 2004 and the lsIF in the special relationship, regarding the payment of interest on the issuance and acquisition of the instant securitization bonds, which is the domestic transaction, as the comparative transaction, and by calculating the normal interest rate.

B. However, in full view of the reasoning of the judgment of the first instance as cited by the court below and the duly admitted evidence, even in the case of calculating the normal interest rate of the Defendants relating to the business year 2002 or 2004 business years, there is an error of law as to the calculation of the normal interest rate as described in the above Paragraph (1). As long as the Plaintiffs asserted such reason as grounds for revocation in the lawsuit in this case, the transfer price portion and the notice of change in the income amount of the instant disposition concerning the business year 2002 or 204 business years

C. Therefore, the judgment of the court below that made such a conclusion is correct as a result, and it is not erroneous in the misapprehension of legal principles as to the selection of comparable transactions when calculating the arm's length price, which affected the conclusion of the judgment.

3. Regarding ground of appeal No. 3

A. Article 51-2 (1) 1 of the former Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter the same) provides that "in case where a special purpose company under the Asset-Backed Securitization Act distributes not less than 90/10 of the distributable profits prescribed by the Presidential Decree, the amount shall be deducted in calculating the income amount for the pertinent business year," and Article 86-2 (1) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 20619, Feb. 22, 2008; hereinafter the same shall apply) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 20619, Feb. 22, 2008; hereinafter the same shall apply) provides that "the amount of distributable profits shall be added to the net income (referring to the amount excluding the profits and losses from the evaluation of securities; hereinafter the same shall apply) after deducting the carried-over profits or losses

B. citing the reasoning of the judgment of the court of first instance, the court below acknowledged the facts as stated in its holding, and found the increase in the amount of income resulting from the non-deductible of the service costs of this case to be reserved against the above plaintiffs, and therefore, it is legitimate to make an additional dividend resolution, and the dividend should be deducted from the income amount of the above plaintiffs in the business year of 2004 pursuant to Article 51-2 (1) of the former Corporate Tax Act, on the ground that the non-deductible of the service costs of this case, even if the service costs of this case erroneously paid by the plaintiff LSSSS Seoul Specialized Company and the plaintiff LSF Seoul Special Specialized Company were collected, and then the service costs of this case were disposed of as other income without disposing of it as retained earnings. The court below determined that the part of the disposition of this case in relation to the non-Inclusion of the service costs of this case was unlawful since the above plaintiffs had the right to claim damages, and thus, the additional dividend amount should be deducted from the income amount of the above plaintiffs in the business year of 2004.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal principles and the duly admitted evidence, the lower court did not err by exceeding the bounds of the principle of free evaluation of evidence in violation of logical and empirical rules, or by misapprehending the legal doctrine on the income deduction of dividends from a special purpose company, as otherwise alleged in the ground of appeal.

4. Conclusion

Therefore, all appeals are 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 Shin Young-chul (Presiding Justice)