“Wholesale Distributor Corp”, a Korean subsidiary of a French luxury goods group, imported luxury products from a Hong Kong-based affiliate and sold them to unrelated domestic duty-free retailers. It reported its transfer pricing using the RPM and filed accordingly with the tax authorities.
Following a tax audit, the tax authorities rejected the use of the RPM for the relevant years, concluding that the method had not been properly applied and that the reported transfer prices exceeded the normal price range. A reassessment of corporate income tax was issued accordingly.
On appeal, the Tax Tribunal upheld the use of the RPM but required the tax authorities to re-investigate and revise the adjustments made, particularly those related to brand value and other functional differences between the taxpayer and comparable entities.
During the re-investigation, the tax authority maintained the RPM and recalculated the arm’s length price by adjusting for differences in sales and administrative expenses between the taxpayer and the comparables. The authority limited these adjustments to categories that it deemed significantly affect gross profit, such as sales commissions and personnel expenses under general administrative expenses. Based on these adjustments, a revised normal price range was established, and a refund of part of the original tax assessment was issued. The taxpayer appealed again, arguing that the re-investigation failed to fully implement the Tribunal’s instructions.
Not satisfied with the new assessment a new appeal was filed by “Wholesale Distributor Corp”
Judgment
The Tribunal dismissed the appeal and upheld the tax authority’s assessment. It reaffirmed that the RPM was appropriate for the taxpayer’s transactions and that the scope of functional adjustments made during the re-investigation was reasonable. While acknowledging the taxpayer’s functional differences with the comparables, the Tribunal held that adjusting for all operating expenses, including those that do not materially impact gross profit, would effectively apply TNMM rather than RPM. The Tribunal found that the tax authority’s adjustments for sales-related personnel costs, brand-related functions, and working capital sufficed to reflect material functional differences, and the taxpayer’s demand for additional adjustments lacked legal basis under the RPM framework.