＜Abstract＞

A Study on Arm’s Length Principles Using the Cases of Law Court

Ham, Ho Jin & Jun, Tae Young

Collecting corporate tax from multinational firms has become a difficult task. Unlike national companies, MNEs can minimize tax by shifting profits using transfer pricing for intra-company trade. Following the OECD Model Tax Convention, the standard approach of tax authorities is to invoke the arm’s length principle which states that the transfer price between two associated enterprises should be the price that would be paid for similar goods in similar circumstances by unrelated parties dealing at arm’s length with each other.

The purpose of the present paper is to review the judgements of Korean law courts on international transfer pricing of MNEs and to propose a guideline for the arm’s length principles of international trade between associated parties. We reviewed 27 cases which are associated with arm’s length prices of MNEs operating in Korea. The cases include disputes over an arm’s length interest rate of privately issued bonds, evaluation of investments in kind toward overseas subsidiaries, relevance of imported price of raw materials and products, value estimation of softwares and intellectual property rights imported from parent companies abroad, evaluation of stocks and bonds traded among related parties. Considering that the National Tax Office has been defeated in 17 cases among 27 cases, a better guideline for an acceptable arm’s length pricing is requested.

We think it is advised that the financial instruments for an arm’s length comparison should be similar in the form of issuance, expiration date, loan to value(LTV), reinforcement of credit, issued currency, issued date. Regarding the investment in kind, circulation market should be checked. Concerned with the tangible as well as intangible imported products, arm’s length transactions are better to be searched among internationally traded samples. When the authorities could not find arm’s length transactions, related articles in Inheritance and Gift Tax Law could be used in a very limited way.

▶ Key Words：arm’s length price, international transfer price, tax law cases, international taxation, multinational enterprise

** Published on March 2017
** Full article available in Korean only
** Download here → 11-2 A Study on Arm’s Length Principles Using the Cases of Law Court.pdf