In April 2025, the South Korean Tax Review Board (Review Board) ruled partially in favor of the company “Acrylic Resin Manufacturer Corp” in a complex international tax audit case covering the 2020–2022 fiscal years. The company faced a series of adjustments determined by the tax administration related to transactions with related parties, under allegations of non-market prices, excessive payments, and improper allocation of costs and revenues.
The case, referred to as file No. 2025-0001 of the Gwangju Regional Office, became a significant milestone due to the breadth of issues addressed and the technical criteria adopted by the Board for each contested item.
Explanatory note: For reasons of confidentiality, the related entities involved in this case have been identified by letters (such as “subsidiary D,” “subsidiary F,” or “company J”), in accordance with the nomenclature used in the official case documentation published by the Korea Review Board.
Background to the case: multiple adjustments and technical allegations
The audit resulted in seven key adjustments that led to the company’s claim:
- Adjustment for sales to subsidiary D: management questioned the transfer value on the grounds that it did not reflect market conditions.
- Rejection of labor costs: related to seven employees posted abroad.
- Undervaluation of guarantee fees: from its subsidiary F.
- Interest on accounts receivable: for late payments by subsidiaries in China.
- Excessive payments for technical assistance: made to affiliate J.
- Denial of R&D tax credits: regarding three internal employees.
- Incorrect application of tax on unremitted income.
In response to these adjustments, Acrylic Resin Manufacturer Corp filed a pre-assessment review request in January 2025, arguing that all related-party transactions had been conducted in accordance with the arm’s length principle and that its policies, including guarantee fees, credit terms, and service fees, were commercially reasonable and supported by comparability analysis.
Arguments of the parties
During the review process, Acrylic Resin Manufacturer Corp maintained that all its transactions with related parties were carried out in accordance with the arm’s length principle. The company emphasized that the decisions taken—such as the determination of guarantee fees, the credit terms granted to its affiliates, and payments for technical assistance—were commercially reasonable and supported by comparability studies. It also argued that the employees in question performed strategic functions aligned with its international operating model and that the three workers in question performed genuine research and development work, for which the tax credits associated with R&D activities should be applied.
The tax administration responded by stating that the transfer pricing studies submitted by the company contained inadequate comparables and that the methodology used to allocate the costs of the seconded personnel had not been sufficiently justified. It argued that the guarantee fees used were below market standards and that the contractual terms did not reflect agreements between independent parties. In addition, it indicated that substantive compliance with research functions by the employees in question had not been proven, nor had the appropriateness of the tax treatment applied to the unremitted income.
Board’s decision: individual treatment of each adjustment
The Board adopted a detailed and differentiated approach to each of the adjustments. With regard to sales to subsidiary D, it considered that the analysis could not be concluded without a reassessment of the set of comparables and the calculation of the interquartile range. It therefore ordered that this point be referred for further investigation, without confirming or definitively rejecting the adjustment proposed by the authority.
On the other hand, it did confirm the inappropriateness of recognizing the labor costs related to employees posted abroad, as it considered that no documentation had been presented to prove their effective link with local activities or benefits attributable to the company in Korea. It also maintained the adjustment related to the guarantee fees charged to subsidiary F, considering that the rate applied did not reflect market conditions and was not sufficiently justified.
With regard to the interest calculated on accounts receivable from Chinese affiliates, the Board concluded that the agreed terms of 120 days were consistent with commercial practice in comparable transactions and therefore canceled that adjustment. On the other hand, with respect to payments made for technical assistance to company J, the adjustment was confirmed, as it was determined that the proportionality and economic necessity of the services remunerated were not proven.
With regard to R&D credits, the Board held that the company did not adequately prove that the three employees in question were engaged in substantial research activities, and therefore upheld the tax authority’s denial. Finally, regarding the tax applicable to unremitted income, it was concluded that the amounts arising from the adjustments should be excluded from the calculation basis, thereby granting partial relief to the taxpayer.
Technical and tax relevance of the ruling
This ruling represents a model case of technical disaggregation by a reviewing authority, addressing each category of transaction under analysis individually and applying differentiated criteria in accordance with the available evidence.
In addition, it reaffirms fundamental principles:
- The burden of proof lies with the taxpayer in terms of justifying valuations, rates, services, and functions.
- The tax authority must substantiate each adjustment with a robust functional analysis, especially when rejecting specific comparables or business practices.
- It is confirmed that common market terms—such as a 120-day credit period—should be considered valid when properly supported.
- Local rules, such as those in the Corporate Tax Act and the International Tax Adjustment Act, are interpreted under an approach that seeks technical balance and economic reasonableness.
Conclusion
The case against Acrylic Resin Manufacturer Corp in South Korea reinforces the importance of comprehensive and transaction-specific documentation. The Tax Board’s mixed decision demonstrates that, in an increasingly demanding tax environment, it is not enough to invoke the arm’s length principle: it is essential to demonstrate with substantive evidence and appropriate comparable analysis that the terms agreed with related parties are consistent with the market.
For multinational companies operating in Korea, this precedent serves as a clear warning about the levels of documentation required, particularly in areas such as personnel allocation, guarantee fees, technical services, and the use of tax incentives.
Source: TPCases