Korea vs “Semicon-Distributor”, May 2021, Seoul High Court, Case No 2020누61166

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A Korean subsidiary in the “Semiconductor-group” was active in distribution and sales services. At issue was which transfer pricing method was the most appropriate for determining the arm’s length remuneration for these activities in FY 2013.

Judgement of the Court

The Court dismissed the claims of the company and upheld the decision of the tax authorities.

“However, the following circumstances that can be comprehensively acknowledged in the foregoing evidence and description in Evidence A No. 21, namely, (1) OECD Transfer Price Taxation Guidelines 2.101 stipulate that in order for a Gross Margin Ratio to be applied, a taxpayer shall not perform other important functions (manufacturing functions, etc.) that must be compensated using other transfer price methods or financial indicators in a related transaction, which are very sensitive to cost classification, such as operating expenses and other expenses, and thus may cause problems of comparability and irrelevant costs; and (2) Charles H. Berry, which devised the Gross Margin Method of the Transactional Net Margin Method, stated in the paper “Berry Ratios” that, in a case where a company performs other functions in addition to simple sales activities, the distinction between the cost of sales and the cost of operations is unclear and thus the gross margin ratio of sales can be artificially changed, and thus the Gross Margin Method of the Transactional Net Margin Method may not be applied. (3) Although the Plaintiff may perform a service installation and guarantee business, part sales business, in light of the above laws, it is difficult to apply the gross profit margin method among the transactional net margin methods to the Plaintiff’s sales support service transactions (even if the gross profit margin method among the Transactional Net Margin Methods can be applied, as the Plaintiff claims, the following circumstances that can comprehensively acknowledge the purpose of the entire pleadings in each of the descriptions of A Nos. 18 and 19, that is, (1), the codes of 508 companies extracted by the Plaintiff according to the industrial classification codes of the Korean Standard Industrial Classification are “46539: Other industrial machinery and equipment wholesale business, 46592: Medical, Precision and Scientific Equipment wholesale business, 46594: Machinery and equipment for electricity, wholesale business, 46599, and other wholesale business,” (1) In the case of the Plaintiff’s direct comparison of the technical support services and the wholesale business of the Plaintiff, which can be directly determined by the method (1) Four comparable companies were selected, and the difference in the degree of holding inventory assets, trade receivables, and purchase obligations was adjusted for comparability. Considering the characteristics of the Plaintiff in which inventory assets, trade receivables, and purchase obligations do not exist, it is difficult to deem that such adjustment is an ordinary net profit margin that can be generally accepted.
Therefore, we do not accept the Plaintiff’s allegation in this part.”

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Korea 270521

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