“French Luxury Goods Corp”, imported branded goods from a Singaporean affiliate and sold them through its own stores and department stores in Korea. For FY 2014 to 2018, the taxpayer applied the resale price method (RPM) to verify its transfer prices.
Following a tax audit, the tax authority accepted the taxpayer’s choice of method and some of its adjustments (notably for marketing expenses and working capital). However, it rejected the taxpayer’s adjustment for brand value and the comparables used, and issued a reassessment that increased the taxable income.
“French Luxury Goods Corp” appealed, and on 13 December 2022, the Tax Tribunal upheld the use of RPM but instructed the tax authority to re-examine and make reasonable adjustments for functional differences, excluding the brand value method previously used. In its re-investigation, the tax authority recalculated the arm’s length pricing using RPM, adjusting for differences in sales-related expenses and including a portion of labour costs under general administrative expenses. It based the adjustment on the assumption that 85.9% of the taxpayer’s employees were engaged in sales activities. This led to reduction of the overall assessment
Still not satisfied with the re-assessment, the “French Luxury Goods Corp” filed a further appeal, arguing that the tax authority had not fully complied with the Tribunal’s instructions.
Judgment
The Tribunal concluded that the method remained valid and that most of the tax authority’s re-assessment followed the law and its prior ruling. However, it found that the authority had underestimated the number of employees engaged in sales-related activities and thus the cost base used in the PLI calculation.
The Tribunal determined that, in reality, 95.5% of employees performed such functions, which included roles in product repair, customer service, online sales, and marketing—functions the tax authority had excluded from its calculation. Therefore, the Tribunal ordered the authority to recalculate the income adjustment based on the corrected 95.5% figure.
The Tribunal rejected the taxpayer’s argument that all sales and administrative expenses should be adjusted, ruling that doing so would effectively shift the analysis to TNMM, which was not permitted under the circumstances. The tax authority was instructed to revise the assessment accordingly.
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