In July 2020, the Lee & Ko Tax Practice Group successfully obtained a favorable ruling by which a KRW 6 billion corporate income tax assessment imposed on the client was cancelled.
In this case, Lee & Ko represented a manufacturer of automotive components that has subsidiaries in China. The client received royalties for patents and technological information from one of its Chinese subsidiaries. The National Tax Service (“NTS”), however, attested that since the client also provides technology and sales support to its other Chinese subsidiaries, the profits derived from such support, and the arm’s length price thereof, should be considered on a “combined profits” basis for transfer pricing purposes. As a result, the NTS decided to impose corporate income tax on the client, based on the so-called arm’s length royalties on a “combined profits” basis. The Lee & Ko Tax Practice Group skillfully defended the client against the NTS’ position, successfully arguing: that there is no legal basis under Korean tax law for taxation based on the concept of “combined profits”; that the NTS’s rationale conflicts with domestic transfer pricing rules as well as OECD Transfer Pricing Guidelines; and that the NTS position was also inconsistent with the relevant rules for determining a foreign related party. After over two years of legal battle, the court accepted Lee & Ko’s arguments and cancelled the NTS’ corporate income tax assessment in its entirety.
This case is of substantial precedential importance, being the first time that a court has scrutinized the NTS’ recent practice of employing the novel concept of “combined profits” in transfer pricing. After the arguments for and against this NTS practice were aired in court, the practice was found to be unlawful. Therefore, the Lee & Ko Tax Practice Group, through their victory in this case, have set an important precedent for taxpayers facing the NTS’ aggressive approach of applying novel concepts in transfer pricing.