Korea: Tax Board Rules on Transfer Pricing Adjustments

July 14, 2025

In April 2025, the South Korean Tax Review Board (Review Board) partially ruled in favor of “Acrylic Resin Manufacturer Corp” in a complex international tax audit case for the 2020–2022 fiscal years. The company faced a series of adjustments set by the tax administration related to related-party transactions, under claims of non-market prices, excessive payments, and improper allocations 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 regarding each contested item. 

Clarification: For confidentiality reasons, the related entities involved in this case have been identified by letters (such as “subsidiary D,” “subsidiary F,” or “company J”), as per the nomenclature used in the official case documentation published by the Korean Review Board. 

Background: Several Adjustments and Technical Allegations

The audit resulted in seven key adjustments that gave rise to the company’s claim: 

  1. Adjustment for sales to affiliate D: Management questioned the transfer value for failing to meet market conditions. 
  2. Dismissal of labor costs: Related to seven employees posted abroad. 
  3. Undervaluation of guarantee fees: From its subsidiary F. 
  4. Interest on accounts receivable: Due to delays in payments from affiliates in China. 
  5. Overpayments for technical assistance: Made to affiliate J. 
  6. Denial of R&D tax credits: Regarding three internal employees. 
  7. Incorrect application of unremitted income tax. 

In response to these adjustments, Acrylic Resin Manufacturer Corp filed a pre-assessment review request in January 2025, claiming that all related-party transactions had been at the Arm’s Length Principle, and that its policies, including warranty fees, credit terms, and service fees, were commercially reasonable, supported by comparability analysis. 

Arguments of the Parties

During the review process, Acrylic Resin Manufacturer Corp alleged that all its related-party transactions were at the Arm’s Length Principle. The company emphasized that the decisions taken—such as determining warranty fees, 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 employees in question performed genuine research and performance work, for which R&D tax credits were applicable. 

In response, the tax administration asserted that the Transfer Pricing studies filed by the company contained inadequate comparables and that the methodology employed to allocate the costs of the assigned personnel had not been sufficiently supported. It argued that the warranty fees employed were below market standards and that the contractual terms did not reflect independent party agreements. Additionally, 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 unremitted income. 

Board Decision: Individual Treatment of Each Adjustment

The Board adopted a detailed and differentiated approach to each of the adjustments. Regarding sales to affiliate D, the analysis could not be concluded without reassessing the set of comparables and calculating the interquartile range. Therefore, it ordered a further investigation of this point, without definitively confirming or rejecting the adjustment proposed by the authority. 

On the other hand, it did confirm the inadmissibility of recognizing labor costs related to employees assigned abroad, considering the lack of documentation supporting their effective link to local activities or benefits attributable to the company in Korea. Additionally, it held the adjustment related to the warranty fees charged to subsidiary F, considering that the rate applied did not reflect market conditions and was not sufficiently supported. 

Regarding 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 annulled that adjustment. Conversely, regarding payments for technical assistance to the company J, the adjustment was confirmed by establishing that the proportionality and economic necessity of the paid services were not demonstrated. 

Regarding R&D credits, the Board held that the company did not adequately prove that the three employees in question performed substantial research activities, and therefore upheld the tax authority’s denial. Finally, regarding the tax applicable to unremitted income, 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 exemplifies a model case of technical disaggregation by a reviewing authority, which addresses each category of transaction under analysis individually and applies differentiated criteria based on the available evidence. 

In addition, it reaffirms fundamental principles: 

  • The evidentiary burden lies on the taxpayer to support appraisals, rates, services, and functions. 
  • The tax authority must support each adjustment with a solid functional analysis, particularly when rejecting specific comparables or commercial practices. 
  • Habitual contractual terms in the market—such as a 120-day credit term—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 grounds. 

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 mention the Arm’s Length Principle. Conversely, it must provide substantial evidence and appropriate comparative analysis to demonstrate that the agreed terms of related parties align with the market. 

For multinational companies operating in Korea, this precedent apprises the levels of documentation required, particularly in areas such as personnel allocation, guarantee fees, technical services, and the use of tax incentives. 

 

Source: TPCases

Contact Us

In order to contact us, please fill out the following form: