For use of a trademark “TM Corp” paid the trademark owner a royalty of 0.2 per cent of its consolidated sales plus additional royalties on sales of its overseas subsidiaries. However, no royalty was received from the overseas sales subsidiaries for their use of the trademark.
The tax authorities issued an assessment, where royalties had been added to the taxable income of “TM Corp”.
Not satisfied with the assessment, an appeal was filed with the Seoul Appeals Commission.
In its appeal, TM Corp stated
(a) Under the transfer pricing policy of “TM Corp”, the overseas sales subsidiary is only compensated for the price within the normal profit margin, and all excess profits related to overseas business are attributed to the claimant, so the economic benefits of using the trademark are also attributed to the claimant.
(b) The Overseas Sales Entity is acting as a mere distributor, purchasing and selling the Products from “TM Corp” under the control and direction of “TM Corp” , while maintaining margins within the normal profitability range, and all major functions, including product research and development, purchasing, production and marketing strategy formulation, are performed by “TM Corp”.
(c) Trademark royalties are paid in exchange for the economic benefits of using the trademark, and in practice, the trademark royalty rate is calculated based on the present value of the brand attributable portion of the future excess profits of the trademark
(d) It is reasonable that “TM Corp” that enjoys excess profits should bear the trademark royalty rate in light of this method of calculating the trademark royalty rate.
Decision
The Appeals Commission was of the opinion that “TM Corp”‘s overseas sales subsidiaries are not mere distributors, but general wholesalers, and that “TM Corp” should receive royalties from the overseas sales subsidiaries for the use of the trademark rights at issue. In view of the fact that the personnel composition of “TM Corp”‘s overseas sales subsidiaries is relatively small, ranging from 6 (OOO subsidiary) to 21 (OOO subsidiary), making it difficult to consider them as general wholesalers, and that the transfer pricing reports of the OOO group alone do not indicate that “TM Corp”‘s overseas sales subsidiaries are in the same position as the overseas production subsidiaries that pay “TM Corp” the royalties for the use of the trademark in question, the decision to deduct the OOO on the grounds that the claimant did not receive the royalties for the use of the trademark in question from the overseas sales subsidiaries is erroneous.”
In its decision reference was made to the paragraphs in the OECD TPG para 6.4, 6.10, 6.11, 6.13 and para. 41 in the annex to chapter 6.
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