“Car Lrd Corp” operated as a limited risk distributor, importing and selling finished vehicles and auto parts from related parties. It applied the TNMM with operating profit margin as the profit level indicator, but incurred substantial losses between 2017 and 2021, largely because regulatory issues led to a temporary suspension of sales.
To address the downturn, the subsidiary undertook market penetration measures and recorded high selling, general and administrative expenses and promotional costs, which reduced its margins. The foreign parent also provided financial support in the form of loss compensation and reimbursements for certain expenses, which the subsidiary initially treated as non-operating income.
The tax authorities disputed this treatment of the compensations and reimbursements, arguing that as a limited risk distributor the company was not entitled to bear the costs of a market penetration strategy. The taxpayer countered that these measures were a legitimate response to the sales crisis.
Judgment
The National Tax Tribunal upheld the tax authority’s position.
It held that a limited risk distributor does not have the commercial rationale to assume such expenses, which properly belong to the principal that benefits directly from sustaining sales in Korea. The tribunal also ruled that reimbursements from the parent should be classified as operating income under the TNMM, in line with the matching principle.
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