Malsophan City Ltd. (Attorneys White-chul et al., Counsel for the defendant-appellant)

Head of Seodaemun Tax Office

April 19, 2011

1. The Defendant’s imposition of KRW 144,351,540 of corporate tax for the business year 1999, which was made on March 16, 2005, the imposition of KRW 332,601,870 of corporate tax for the business year 2000, which was made on March 28, 2006, and the imposition of KRW 2,212,420,00 of corporate tax for the business year 2001, and the imposition of KRW 1,468,604,640 of corporate tax for the business year 2002, respectively, shall be revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. The Loyman Group (hereinafter referred to as the “Lusheshes Group”) is a multi-national company that engages in the business of collecting the Netherlands corporation and the U.K. corporation, and is engaged in the exploration and extraction of crude oil, the production of refined-restricted petroleum products and chemical products, the production of natural gas, and the production of electricity. The Plaintiff, as an affiliated company of the Pushes Group, has its head office in Hong Kong (hereinafter referred to as the “Plaintiff’s head office”) located in Korea (hereinafter referred to as the “Plaintiff branch”).

B. From January 1, 1999 to December 31, 2003, the Plaintiff’s head office included the total amount of KRW 393,680,399 in the Plaintiff’s head office for the business year of 1999; KRW 563,590,023; KRW 193,78,982 in the business year of 2001; KRW 20,847,355 in the business year of 2002; KRW 14,418,819 in the total amount of KRW 1,186,315,578 in the business year of 209; KRW 293,97 in the Plaintiff’s head office for the business year of 205; KRW 390 in the Plaintiff’s head office for the business year of 209; KRW 2093,578 in the Plaintiff’s interest income; KRW 390 in the business year of 200578,1940 in the business year of 209.

C. From December 9, 2004 to January 26, 2005, the Director of Seoul Regional Tax Office conducted corporate tax investigation for the Plaintiff’s 199 to 203 years. Since the Plaintiff’s principal office is a nominal company on the document, the Plaintiff’s principal office shall be deemed as the Plaintiff’s domestic source profit and loss, and the Plaintiff’s interest income for the business year 199 to 203,186,315,578 as the total of 199 to 207, 238,479 through 2036, 209, 369, 379, 379, 366, 209, 205, 205, 209, 207, 369, 205, 207, 309, 207, 396, 205, 207, 2984, 209

본문내 포함된 표 (단위 : 원) 사업연도 1999 2000 2001 2002 2003 합계 ＼ 적출내용 이전가격 익금산입 5,122,095,648 3,777,856,975 8,899,952,623 수입이자 익금산입 393,680,399 563,590,023 193,778,982 20,847,355 14,418,819 1,186,315,578 지급이자 손금산입 △148,752,122 △578,194 △34,989,573 △39,257,536 △14,901,911 △238,479,336 접 대 비 손금불산입 92,152,389 194,224,547 348,359,851 283,898,479 395,049,972 1,313,685,238 기타(환차손익) 7,975,612 △828,824 △421,814 6,724,974 합계 337,080,666 757,236,376 5,637,220,520 4,042,516,449 394,145,066 11,168,199,077 고지세액 196,878,490 441,963,090 2,394,014,160 1,579,533,250 142,625,780 4,755,014,770

D. Accordingly, the Plaintiff filed an appeal with the Tax Tribunal on each of the above dispositions as of June 15, 2006, June 27, 2006, and September 5, 2006. The Tax Tribunal rendered a decision to dismiss the remainder of the Plaintiff’s claim except for the aggregate of KRW 1,313,685,238, which excluded rebates from deductible expenses as entertainment expenses as of June 7, 2009, September 17, 2009, and September 13, 2010. In accordance with the decision of the Tax Tribunal, the Defendant issued a decision to rectify the tax base and amount of corporate tax (hereinafter “each of the instant dispositions”) as follows:

본문내 포함된 표 (단위 : 원) 사업연도 1999 2000 2001 2002 2003 합계 ＼ 경정구분 당초고지세액 196,878,490 441,963,090 2,394,014,160 1,579,533,250 142,625,780 4,755,014,770 감액경정세액 52,526,959 109,361,225 181,594,164 110,928,616 142,870,105 597,281,069 차가감경정세액 144,351,531 332,601,865 2,212,419,996 1,468,604,634 △244,325 4,157,733,701

[Ground of recognition] Facts without dispute, Gap evidence 1 through 5, Eul evidence 1 and 2, the purport of the whole pleadings

2. The parties' arguments and issues

A. The plaintiff's assertion

1) Each of the instant dispositions is unlawful and unfair as it denies the substance of the Plaintiff’s headquarters, which has been duly established under the laws of Hong Kong, and the transaction relation performed by its headquarters, without any discrimination, in full, and it is deemed as the act of the Plaintiff’s branch.

2) In the event that the assessment of the transfer price is intended to adjust the arm’s length price on the basis of the comparable company, a reasonable adjustment shall be conducted pursuant to Article 5(1) of the former Enforcement Decree of the National Assistance Act. The Plaintiff and the comparable company have significant differences in their handling products or transaction stages, etc., and even though the possibility of comparison is low between the international trade among the related parties and the trades between the unrelated parties, the imposition disposition of the instant case includes a simple comparison of the annual operating income rate between the Plaintiff and the comparable company.

B. Defendant’s assertion

1) The Plaintiff’s headquarters is a document-based company with no physical and human facilities, and did not engage in the business activities, and did not make any decision on the management of funds. Interest income accrued from the Plaintiff’s headquarters generated income from domestic business activities, and the Plaintiff’s branch actually performed the management function of the Plaintiff’s account. Thus, the instant interest income belongs to a domestic business place in accordance with the substance over form principle under the Framework Act on National Taxes, and constitutes domestic source income under Article 132(2)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 18174, Dec. 30, 2003).

2) In relation to the transfer pricing taxation of the instant case, it is reasonable that the Defendant applied the net trade profit ratio method as the arm’s length price calculation method, and the selection procedure of the comparable company is also reasonable, and the Plaintiff and the comparable company conducted reasonable adjustment of financial data. Accordingly, each of the instant dispositions is lawful.

C. Relevant statutes

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

D. Issues of the instant case

Therefore, the issues of this case are as follows: ① Whether the interest income of this case reported by the Plaintiff’s head office to the Hong Kong tax authorities is included in the Plaintiff’s domestic source business income of the Plaintiff’s branch; ② whether the Plaintiff’s transaction price (transfer price) purchased from a third party who does not have any special relationship under the tax law can be deemed as the arm’s length price and can be included in the loss without the tax adjustment under the national conciliation law, i.e., whether the Defendant’s arm’s length price calculated is legitimate.

3. Determination on the first issue

(a) Facts of recognition;

1) The Plaintiff’s head office was established in Hong Kong pursuant to the Hong Kong Act in order to conduct the chemical product business on January 28, 197. As of the end of 1999, the Plaintiff’s head office paid dividends of USD 33,870,00 in total assets, USD 29,363,00 in total assets, USD 4,507,00 in equity capital (= USD 3,027,000 in total assets + USD 1,480,000 in earned surplus + USD 1,480,000 in earned surplus). During 200, the Plaintiff’s principal office paid dividends of USD 7,60,000 in dividends of USD 3,50,000 in earned surplus at the end of 203 (Evidence 6-2 in evidence 6-4).

2) Around March 1977, the Plaintiff’s branch established the Plaintiff’s branch for business activities in Korea. The Plaintiff’s branch is operating a sales support business (i.e., the support business for the Plaintiff’s main office to purchase chemical products from its affiliated companies or non-affiliated companies, and (ii) the business to directly sell chemical products to domestic customers; (iii) the business to collect and provide necessary data and information to its affiliated companies; and (iv) the business funds transferred from the Plaintiff’s main office and the service fees received from each affiliated company while carrying out the business.

3) In the 1970s and 1980s, when the Plaintiff was established, domestic manufacturers of petrochemicals did not have the ability to directly engage in crowdfunding due to lack of international business capacity. Even if there was such ability, under the foreign trade or foreign exchange transaction regulations, domestic companies were prohibited from engaging in trading outside the counter-tra trading in the trading, and there were many legal regulations such as prohibiting domestic companies from purchasing and importing goods outside the country, and resale them outside the country. Therefore, domestic companies were not able to engage in trading with foreign trading companies.

4) The details of division of duties of the Plaintiff head office and the Plaintiff branch regarding the sales business of petrochemicals related to the instant case are as follows.

In the case of the problem of contact with the plaintiff's main office of the plaintiff's branch office, the board of directors, the holding and sale of the general meeting of shareholders, the contact with the domestic customers, promotion, negotiation of sales conditions, investment in dividend decision-making, review and approval of major business contracts, and the general affairs of receiving the purchase price for the general affairs of contact with the signature ○○ and the general affairs of receiving the purchase price for the general affairs of contact with the signature ○○, the contact sales price for the contact affairs is received, and ○ ○○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

5) The Plaintiff’s headquarters, one of the business sections of the Plaintiff’s branch, filed corporate tax returns including all sales and sales cost from domestic source income through the reporting adjustment of “tax free of charge,” as it constitutes a domestic permanent establishment of the Plaintiff’s headquarters under the Corporate Tax Act, where the Plaintiff’s headquarters purchases products from its affiliated companies or non-affiliated companies and sells exports to domestic customers, such as contact with manufacturers related to purchase activities, contact with customers, and determination of resale price.

6) The Plaintiff’s head office provided the Plaintiff’s branch with operating funds (around the end of 2003 KRW 7.7 billion) to conduct business activities in Korea. The Plaintiff’s head office temporarily conducted financial transactions, i.e., recovery and payment of funds, deposit of surplus funds, and borrowing of shortage funds in connection with the transaction of chemical products purchased from overseas, etc. from the Plaintiff’s head office, etc., the Plaintiff’s head office opened an account in the name of the Plaintiff’s head office in Hong Kong Cmat

7) Due to the above deposit of surplus funds and the borrowing of shortage funds, the Plaintiff’s principal office incurred a total of KRW 1186 million interest interest during the business year from 199 to 2003 as follows, and a total of KRW 239 million interest paid (see, e.g., the details of the disposition).

Table (units: KRW 2000 2001 2002 2003 Total income, 394 563 14 1,186 interest 149 35 390 35 39 15 238 interest, 245 563 1563 -181948

8) The Plaintiff’s domestic customer companies, the importer, directly or through the issuing bank of domestic L/C, deposited the Plaintiff’s headquarters’s bank account, a transaction party, directly or under the law without going through the Plaintiff’s branch. The Plaintiff recorded the amount of petrochemicals purchase and sales only in the account book of the Plaintiff’s headquarters.

9) According to the minutes of the board of directors’ meeting held in Hong Kong, foreign directors of the board of directors held in Hong Kong approved the conclusion of a contract for the supply of Alphin products between the Plaintiff and the Blin industry. A number of important management or commercial decision-making were conducted through the board of directors held overseas, such as deciding to sell the Plaintiff’s investment shares to the Blin corporation.

10) The Plaintiff’s headquarters entered into a mutual agreement with the Hong Kong-related related company located in Hong Kong, and entrusted the matters related to the finance and funds of the Plaintiff’s headquarters and the corporate visa function (such as preparation for holding a board of directors, preparation for documents, and submission of various reports, etc.) to the sel Park long-gu.

11) The right to withdraw the Plaintiff’s principal deposit account is authorized only to the signature-holder separately designated in accordance with a resolution of the relevant board of directors (No. 6-1 and 5), and the Plaintiff’s branch did not have the right to manage the said deposit account.

12) Meanwhile, since the establishment of the Plaintiff’s headquarters, the Hong Kong tax authorities filed corporate tax returns on the above interest income and paid interest, but such interest income and paid interest under the Hong Kong tax law were non-taxable items, and thus, there was no tax amount actually paid in Hong Kong.

[Ground of recognition] Facts without dispute, entry of Gap evidence 6, 7, and 8, the purport of the whole pleadings

B. Determination

As to whether the interest income of the headquarters of this case is included in the domestic source business income of the Plaintiff branch, in full view of the following circumstances, the interest income of the headquarters of this case should be viewed as income from the independent business activities of the Plaintiff headquarters, a foreign corporation, and thus, the first imposition disposition of this case imposing corporate tax on the Plaintiff branch and the second imposition disposition related to the first issue of this case is illegal.

1) In light of the legal and economic situation of the country at the time when the Plaintiff was established, it is difficult to deem that the Plaintiff was merely established for the purpose of tax avoidance in the light of the fact that, as seen earlier, it did not establish a legal entity in the country where it imposes a burden on the legal regulation as seen earlier in order to efficiently supply chemical products to domestic consumers, it appears that it established a foreign legal entity and operated its business to establish and support the Plaintiff branch in Korea, maintained the business form for not less than 30 years, and reported domestic source income to the Plaintiff branch by product sales.

2) The Plaintiff’s head office shall hold a board of directors and conduct dividends, and conduct independent activities of the company, such as capital increase and sales of assets, so it is difficult to be deemed a document company.

3) The Plaintiff branch did not have the authority to control, manage, and dispose of the Plaintiff’s bank account at all, nor did it be deemed that the Plaintiff branch deposited funds in the said bank account or invested funds. The Plaintiff’s domestic customer company deposited funds directly into the Plaintiff’s principal office without going through the Plaintiff’s branch. Therefore, the Plaintiff branch did not have the right to temporarily hold the funds.

4) The Plaintiff’s headquarters reported as the domestic source business income of the Plaintiff branch with respect to the transaction in which the Plaintiff’s headquarters exported and sold petrochemicals to the domestic customers (However, the Plaintiff’s branch’s account book did not keep the records on the Plaintiff branch’s account book), which is regarded as related to the business activities of the branch office in Korea, since the Plaintiff’s main office is carrying out an important contract activities such as consulting on the terms and conditions of transaction under the above sales order, and thus, the interest income of the instant main office is generated from the deposit account of the Plaintiff’s main office,

5) The interest and interest paid on the income of the Plaintiff’s headquarters were generated by the independent decision-making on the management of the Plaintiff’s headquarters’s own funds, such as capital increase, dividend, and sale of assets, and there is no direct relation to the activities of the Plaintiff’s branch (the activities for increasing

6) The reason that the Plaintiff’s head office did not pay corporate tax on the interest income of the instant head office in Hong Kong is that the Hong Kong Corporate Tax Act provides that such type of income shall not be imposed. The Hong Kong tax authorities do not exclude the said income from taxation on the ground that it is a domestic source income.

7) According to the statement in the letter of answer (No. 3), the Plaintiff’s branch was engaged in the business related to the sales activities of the Plaintiff’s headquarters. This is merely a statement concerning the division of work and the business activities, and it cannot be readily concluded that the subject of legal attribution of the price is the Plaintiff’s branch.

4. Judgment on the second issue

(a) Facts of recognition;

1) The director of the Seoul Regional Tax Office held that, compared to the gross sales profit ratio of chemical products purchased from a person with a special relationship abroad during the business year 2001 and 2002 by the Plaintiff, the gross sales profit ratio of chemical products purchased from a foreign related party is considerably lower than the average of five years (199 to 2003). Thus, the Plaintiff was suspected of transferring taxable income to the foreign related party.

2) The director of the Seoul Regional Tax Office, among the enterprises deemed to engage in the same type of business as the Plaintiff, selects the enterprises engaged in import and sale of basic industrial compounds (market), synthetic rubber and plastic materials import and sale (market), and basic industrial compound import and sale (market) from among the product wholesale business, and finally selects seven enterprises including (1) 42 corporations, listed corporations and KOSDAQ-registered corporations, and (2) corporations subject to external audit from among the total 1,904 corporations, and (3) 42 corporations subject to external audit, with no financial data for the last three business years, or there is no financial data for the latest three business years, excluding those with related parties, or there is difference in the form of trade, business or principal items, and audit opinion from among the five companies and listed corporations, and one company whose type of transaction is similar to those of the listed corporations, and one company whose type of transaction is similar to those of the KOSDAQ-registered corporations.

3) After calculating the Plaintiff’s annual operating profit ratio in the business sector of the resale of chemical products compared with the annual operating profit ratio of the comparable company, the director of the Seoul Regional Tax Office reviewed the comparableness between the Plaintiff and the comparable company, adjusted the difference between the financial data and risk level in order to enhance comparableness with respect to the difference between the difference between the comparable company and the Plaintiff’s net trade profit, and adjusted the difference as to the impact on the income statement item by calculating the interest cost on the difference in the balance sheet items. This adjusted the Plaintiff’s annual average sales claim and purchase debt amount by converting the Plaintiff’s annual average sales claim and purchase debt amount into the annual average sales amount of the comparable company, and then multiplying the amount calculated by multiplying the amount calculated by multiplying the annual average sales claim and purchase debt amount of the comparable company by a specified interest rate, and adjusted the difference between the Plaintiff and the comparable company’s annual sales expense and the investment capital level for other business assets by similar means.

4) The products and transaction stages between the Plaintiff and the comparable companies are as follows.

본문내 포함된 표 구분 취급 제품 거래단계 원고 유기화학품(석유화학), 광물성 원료(석유 및 1차 가공품 해외에서 국내로 수출 ○○○○상사 동식물성유지, 무기화학품(비석유화학), 유기화학품, 단백질계 물질, 기타화공생산품, 플라스틱 수입하여 국내 재판매 △△산업 무기화학품, 유기화학품, 단백질계 물질, 플라스틱, 고무 수입하여 국내 재판매 □□무역 무기화학품, 유기화학품, 기타 화공생산품, 플라스틱, 고무 수입하여 국내 재판매 ◇◇◇◇ 광물성생산품(소금 등), 플라스틱, 고무 수입하여 국내 재판매 ☆☆케미칼 광물성생산품, 무기화학품, 유기화학품, 기타 화공생산품, 플라스틱 수입하여 국내 재판매 ▽▽▽코퍼레이션 고무, 광물성생산품, 무기화학품, 유기화학품, 기타 화공생산품, 플라스틱 수입하여 국내 재판매(원고의 고객사) ◎◎◎◎상사 유기화학품, 단백질계 물질, 기타 화공생산품, 플라스틱, 고무 수입하여 국내 재판매

5) The Plaintiff’s composition of sales from the resale business of chemical products is as follows.

A person shall be appointed.

6) 원고가 판매한 화학제품은 스티렌모노머, 솔벤트 등 주로 합성수지나 합섬원료와 같은 2차적 화학제품을 생산하는 데 사용되는 기초 석유화학제품으로서 액체 상태로 운반되어 수백 또는 수천 톤 단위로 판매되었으며, ◁◁물산, ▷▷네트웍스 등과 같이 화학제품을 실수요자에게 재판매하는 종합상사나, ♤♤♤♤, ◈◈석유화학, ◐◐◐유화 등 대기업 실수요자에게 주로 판매되었다.

7) The business profit ratio between the Plaintiff and the comparable companies from 1999 to 2003 is as follows.

본문내 포함된 표 연도 1999 2000 2001 2002 2003 평균 ◎◎◎◎상사 2.7% 2.0% 1.8% 0.7% 0.8% 1.6% ☆☆케미칼 6.6% 4.0% 4.6% 5.0% 5.4% 5.1% ○○○○상사 5.8% 6.5% 4.0% 5.5% 5.0% 5.4% ▽▽▽코퍼레이션 6.1% 4.4% 4.8% 3.4% 0.2% 3.8% △△산업 3.6% 4.9% 2.9% 2.4% 2.1% 3.2% ◇◇◇◇ 3.9% 3.3% 0.7% -0.1% 0.0% 1.6% □□무역 5.6% 2.9% 0.8% 1.5% 1.0% 2.4% 상위사분위수 6.0% 4.8% 4.4% 4.6% 4.3% 4.8% 중위수 5.6% 4.0% 2.9% 2.4% 1.0% 3.2% 하위사분위수 3.7% 3.0% 1.1% 0.9% 0.4% 1.8% 원고 13.4% 3.8% -3.3% -1.5% 2.4% 3.0%

8) Meanwhile, according to the 2000s global price trends related to petrochemicals, the facts that continued price decline since 200, and that have been recovered since 2002, can be acknowledged.

[Ground of recognition] Facts without dispute, entry of Gap evidence Nos. 9 through 18, purport of the whole pleadings

B. Determination

1) As seen earlier, the Plaintiff’s petrochemicals transaction is in the form of exporting it to the Republic of Korea from the Republic of Korea to the Republic of Korea. As such, ① the comparable level of international trade between unrelated parties is required to determine the arm’s length price of the instant case, and ② such trade requires a high possibility of comparison with the relevant international trade in question. In determining whether high possibility of comparison exists, the factors such as the function of business activities that may affect the price or profit, contractual terms, risks accompanying the trade, kinds and features of goods or services, market conditions, and economic conditions should be analyzed. Meanwhile, in a lawsuit seeking revocation of a tax disposition, the tax authority bears the burden of proving the legality of the relevant tax disposition, as a matter of principle, the tax authority must prove that the arm’s length price formed in the transaction between the resident and the foreign related party is reasonably calculated based on the data secured by the best arm’s length price, which

2) In light of the above legal principles, in full view of the following circumstances, as to whether the arm’s length price calculated by the Defendant was legitimate, the part relating to the second issue among the second issue of the instant imposition disposition is deemed to have been made based on the arm’s length price calculated based on the comparable companies that failed to meet the requirements for comparison prescribed by the State’s Adjustment Act.

A) In the instant case, the products handled by the Plaintiff are “organic chemical (petroleum chemical) or mineral raw materials (petroleum and primary processed products)” and both constitute organic chemical products, and the Plaintiff’s transaction is in the form of “exporting” only to Korea from abroad. On the other hand, the comparable companies selected by the Defendant are the companies that sell “all items, such as inorganic chemical products and chemical drugs,” “importing” in the Republic of Korea, and there is a qualitative difference in the treatment products or transaction stages, and thus, there is lack possibility of comparison.

B) While the Plaintiff’s profitability changed due to changes in international oil prices and international changes in the petroleum chemical industry, the profitability of comparable companies selected by the Defendant during the same period was stable without any particular influence, it is deemed that such difference has significant impact on the compared price or profit rate.

C) Considering the foregoing economic pattern such as the international price trend related to the petrochemicals, the Plaintiff’s recording of the low operating profit rate in the business year 2001 and 2002, referring to the international market tax, was set at the transfer price, but it appears that the transfer price was due to the Plaintiff’s continuous decline in international market price at the time of the determination of transfer price which is reflected after the international market price, and there is no evidence to deem that the Plaintiff was at a higher level of transfer price regardless of international market price.

D) As seen earlier, the difference adjustment is an adjustment generally conducted at almost all transfer pricings, and the difference between the Plaintiff and the comparable companies’ inherent and most important kinds of products in this case and the impact on net profit on the economic environment and net profit caused by the difference in the kinds of products dealt with in the instant case is deemed not to have been adjusted, and there is no evidence to acknowledge that there has been a reasonable adjustment to the extent that the difference in the instant transaction would have been overcome.

5. Conclusion

Therefore, since each of the dispositions of this case is unlawful, the plaintiff's claim of this case shall be accepted on the grounds of all of them, and it is so decided as per Disposition.

[Attachment]

Judges Lee Jae-hee (Presiding Judge)