SOUTH KOREA Trends and Developments Contributed by: Dong Shin Lee, Wankyu Jeon, Irene Y. Kim and Young Woong Park, Yoon & Yang LLC
HQ at the foreign affiliate may constitute a ser - vices transaction between the HQ (service pro - vider) and the foreign affiliate (service recipient) for transfer pricing purposes, and whether a 5% mark-up constitutes an arm’s length price under the relevant facts. Summary of the decision Certain Korean HQ employees were dispatched to a foreign affiliate as expatriates and allegedly performed certain work; for the portion of such work that was benefitting the foreign affiliate from its business operation’s standpoint, the Tax Tribunal determined that the portion of the relevant work reasonably allocable to the for - eign affiliate (in light of their comparative sales amount, among other things) should be rechar - acterised as a services transaction between the HQ (service provider) and the foreign affiliate (service recipient) for transfer pricing purposes. Under the relevant facts, the Tax Tribunal con - cluded that such work at issue does not consti - tute high value-adding services directly related to the core business activities of the HQ and the foreign affiliate, and that it should be classi - fied as a low value-adding service (for which a five-percent mark-up is deemed to be an arm’s length price) in accordance with the Enforce - ment Decree of the AITA. Implications The Tax Tribunal’s decision suggests that, when a Korean HQ dispatches its employees to a foreign affiliate, certain work performed by dis - patched employees could be recharacterised as intra-group services for purposes of transfer pricing, depending on the nature of such work and the true beneficiary of such work in sub - stance over form.
Also, this decision suggests that the actual sub - stance of the work performed should be ana - lysed in order to determine whether it constitutes low value-adding services. The authors note that the Enforcement Decree of the AITA stipulates that, in the case of a ser - vice-related cross-border intercompany transac - tion with a foreign related party, if the service is supportive in nature and not directly connected to the core business activities of the Korean domestic company and its foreign related party (ie, low value-adding services), a 5% cost-plus mark-up is deemed to be an arm’s length price. Tax Tribunal Decision 2022Seo6334, dated 22 December 2023 This concerned whether the arm’s length price of foreign unlisted stock could be determined under the discounted cash flow (DCF) method for transfer pricing purposes. Summary of the decision In this decision, the Tax Tribunal suggested that the DCF method could be one of the valid trans - fer pricing methods for determining an arm’s length price for foreign unlisted stocks. Implications The DCF method is a valuation method that cal - culates the present value of cash basis income and expenses expected to be generated in the future by applying a discount rate (eg, weighted average cost of capital). The key considerations of the DCF method are cash flow, discount rate and growth rate. Some view the DCF method as not taking into account the present value, and that it is also heavily reliant on the appraiser’s subjective judgement, leading to inconsistent results. As such, there are some cases where the DCF
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