SOUTH KOREA Trends and Developments Contributed by: Dong Shin Lee, Wankyu Jeon, Irene Y. Kim and Young Woong Park, Yoon & Yang LLC
method was rejected as a valid method for the valuation of stock for tax law purposes (Tax Tribunal Decision No 2018seo4770, dated 6 December 2019). However, this case was specif - ically related to the determination of fair market value under corporate tax law, rather than to the purpose of arm’s length price review assessment for the cross-border intercompany transactions under the AITA. Conversely, there are some cases in which the DCF method was accepted as a reasonable transfer pricing method compliant with the pro - visions stipulated in the AITA for determining the arm’s length price of stock valuations (Tax Tri - bunal Decision No 2021bu1131, dated 9 June 2022). To date, among the several valuation methods for foreign unlisted stock, there have been con - flicting views as to which method is most rea - sonable and reliable. In this case, the Tax Tri - bunal once again clarified that the DCF method could be a reasonable transfer pricing method for calculating arm’s length prices in the context of the valuation of foreign unlisted stock. This case appears to provide more comfort to tax - payers looking to choose a reasonable valuation method for foreign unlisted stocks. Tax Tribunal Decision 2022Seo6043, dated 11 May 2023 This concerned whether the “Orbis” database could be used to select comparable companies for transactional net margin method (TNMM) purposes when a foreign affiliate is selected as the tested party for transfer pricing analysis. Summary of the decision The Tax Tribunal concluded that the Orbis data - base utilised by the tax authorities contains infor - mation on approximately 200 million companies
worldwide and provides standardised financial statements with specific company information. Therefore, the selection of comparable com - panies from the Orbis database was deemed appropriate for the transfer pricing analysis pur - pose. Implications When selecting the most reasonable transfer pricing method stipulated in Article 8 of the AITA to calculate the arm’s length price of a cross- border intercompany transaction between a resi - dent and its foreign affiliate, the comparability between the cross-border intercompany trans - action under review and a transaction between unrelated parties must be assessed. In such cases, factors such as the following should be analysed: • type and characteristics of tangibles, intan - gibles or services that may affect the price or profit; • the function of business activities; • risks associated with transactions; • assets used; • contract terms; • economic conditions; and • business strategies. (See Article 14 of the Enforcement Decree of the AITA.) When applying the TNMM as the transfer pricing method for determining arm’s length prices of the intercompany transactions, it is necessary to perform the Functional Analysis of the tested party (such as the functions performed, risks borne and assets utilised with respect to the intercompany transaction under review) as well as the nature of the intercompany transaction, to review comparable companies with high compa -
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