SOUTH KOREA Trends and Developments Contributed by: Dong Shin Lee, Wankyu Jeon, Sung Hyun Ryu and Young Woong Park, Yoon & Yang LLC
Whether comparability should be evaluated for each individual transaction and whether calculating the arm’s length price without separate adjustments is lawful when applying the TNMM to transfer pricing transactions where product supply and maintenance service transactions are combined (Supreme Court Decision 2024du54065 The Supreme Court held that the tax assessment, which calculated the arm’s length price using the TNMM under Article 8 of the LCITA, was lawful regarding a domestic corporation that performed maintenance service support while receiving medical equipment from a foreign related party. Specifically, the Court viewed that the medical equipment supply transaction and the related maintenance service sup - port transaction were not readily distinguishable as separate and independent transactions in substance. It further determined that there was insufficient objec - tive evidence to establish that such service support had a material effect on the overall operating profit margin of the party tested. dated 16 October 2025) Summary of the decision The Supreme Court held that if the tax authorities have selected companies with similar transaction conditions and circumstances to those transactions under review, it is not necessary to isolate the ancil - lary maintenance service transaction as a separate transfer pricing transaction for purposes of conduct - ing an independent comparability assessment or mak - ing distinct price adjustments. This decision indicates that even where a transfer pricing arrangement exhib - its hybrid characteristics, the inherent nature of the TNMM allows the reasonableness of the arm’s length outcome to be recognised without a separate detailed adjustment process if the comparability of the overall profit margin is secured. On that basis, the Supreme Court reversed the part of the lower court’s judgment regarding the medical equipment business sector, which had concluded that substantive requirements for the arm’s length price calculation process were not satisfied, and remanded the case.
Implications This precedent is significant in that it provides practi - cal guidelines on the combined analysis of transac - tions when calculating arm’s length prices using the TNMM, particularly in a situation where multinational enterprises increasingly adopt complex and integrat - ed intercompany transaction structures. This ruling suggests that when analysing intercompany transac - tions where the supply of main goods is combined with supportive services, it is not invariably necessary to disaggregate the arrangement into separate trans - actions for the purpose of establishing comparability. Instead, a consolidated analysis may be permissible where the overall profit-level indicator adequately reflects the economic substance of the arrangement. In particular, in industries such as medical equipment where product sales and after-sales services are com - monly provided as a package, the court’s reasoning suggests that, if the economic impact of maintenance services on the operating profit margin is insignificant, an aggregated profit-level analysis may suffice to sup - port the appropriateness of the arm’s length price. Companies, therefore, should analyse the independ - ence and interconnection of individual transactions when establishing transfer pricing policies with foreign related parties in the future, thereby securing the valid - ity of combined analysis. In conclusion, where evaluating the functions and risks assumed in intercompany transactions, multina - tional enterprises must clearly identify the economic linkage between the principal and ancillary elements and prepare logic supporting analyses to substantiate that position. At the same time, tax authorities, in dis - charging their burden of proof, are expected to apply comparability assessment standards consistent with the characteristics of the TNMM and to enhance the objectivity and substantive alignment of the selected comparable companies with the actual transaction profile under review.
226 CHAMBERS.COM
Powered by FlippingBook