K-GAS Corp had issued loans and performance guarantees to overseas subsidiaries but received no remuneration in return.
The tax authorities issued an assessment where additional taxable income was determined by application of the arm’s length principle.
An appeal was filed by K-GAS with the district court.
Decision of the Court
The court upheld the decision of the tax authorities and dismissed the appeal of K-GAS Corp.
Excerpts related to loans
“In light of the following circumstances, which can be known by the above acknowledged facts, in light of the above legal principles, it is not economically reasonable for the Plaintiff to decide not to receive interest on the self-financing portion of the case loan to the subsidiaries in question 1 until the end of the exploration phase, and there is no illegality in the method of calculating the normal price of the Defendant.
…the Plaintiff lent the money raised from the outside to the subsidiaries in the first issue, and in this type of financial transaction, it is the most reasonable and direct method to view the interest obtained by adding a certain profit to the borrowing interest corresponding to the procurement cost according to the cost plus method as the normal price (the Plaintiff also argued for the above effect on the normal price on the premise of ‘general loan and loan transactions’ (page 18 of the Complaint)). However, the Defendant not only calculated the normal price by applying the interest rate on the loan in this case, which is lower than the borrowing interest rate of the self-funding in this case, but also the price is lower than the interest rate calculated according to the Comparable Third Party Price Act when the Plaintiff lends funds for overseas resource development projects to Australian subsidiaries at the same time, so it cannot be considered that the normal price calculated by the Defendant exceeds the range of the price that is applied or is expected to be applied in ordinary transactions.”
Excerpts related to performance guarantees
“In light of the following circumstances, which can be seen by the above acknowledged facts, in the light of the legal principles seen in Paragraph (1) of A.A., it is not economically reasonable for the Plaintiff to not receive the performance guarantee fee from the subsidiaries, etc. of the third issue on the performance guarantee in this case, and there is no illegality in the method of calculating the normal price of the Defendant.
As seen earlier, the Plaintiff has received a performance guarantee fee when he/she guarantees the performance of the liability to pay the price under a gas sales contract of another overseas subsidiary or second-tier company. In cases of the performance guarantee in this case, it is deemed that there exists a reasonable ground not to receive the performance guarantee fee, in distinction from the above transaction, only a difference in the details of the principal obligation subject to the guarantee exists. The Plaintiff also explains that the above transaction is a payment guarantee for the business of an overseas subsidiary in the same position as an independent third-party company, so it is natural to receive a commission in return for the risks borne by the Plaintiff. There is no reason to deem otherwise in that the performance guarantee in this case is also for the business carried out by the subsidiary, etc., which is independent from the Plaintiff.
The calculation of the reasonable performance guarantee fee by the Defendant for the provision of performance in this case is based on the risk approach that is the method of calculation of the performance guarantee fee that the Plaintiff has actually received from the overseas subsidiary, and as seen earlier, it is hard to deem that there is any illegality in the method of calculation of the reasonable performance guarantee fee by the Defendant, unless it is impossible to deem that the Plaintiff has no risk of performance guarantee in this case.”