Recent Korean TP precedents: practical implications for policy and compliance

According to the Ministry of Economy and Finance, South Korea’s national tax revenue for 2024 amounted to KRW336.5 trillion, falling short by KRW30.8 trillion compared with the initial budget. This shortfall was primarily because of a sharp decline in corporate tax revenue, driven by the continued downturn in corporate profitability during 2023. Despite persistent uncertainties in Korea’s political, economic, and diplomatic environment, the government has confirmed its national tax budget at KRW382.4 trillion for 2025, which is a marked increase that suggests heightened revenue pressure.

In response to this fiscal deficit, the National Tax Service (NTS), in its 2025 Operational Plan for the National Tax Administration, has unveiled a more data-driven and aggressive audit strategy. It will focus sharply on large corporations, high-net-worth individuals, and suspected cross-border tax evasion schemes, leveraging big data analytics to proactively identify and target high-risk taxpayers. Additionally, amendments to the Framework Act on National Taxes will now allow enforcement fines on top of existing administrative penalties for documentation failures without reasonable cause, amplifying the risk of non-compliance during audits.

Given the disparity between revenue targets and actual economic performance, tax audits are expected to remain assertive and unforgiving in 2025, with transfer pricing (TP) issues continuing to attract particular scrutiny. In this context, recent Tax Tribunal (TT) decisions provide critical guidance for reviewing TP policies and fortifying alignment with the arm’s-length principle. TT statistics from early 2025 show that while new case filings declined to 9,811 in 2024, the surge to 16,781 in 2023 indicates a growing tendency for taxpayers to seek redress via the TT process, often as a defensive strategy against rising enforcement pressure.

In the TT’s decision 2024Seo0201, issued on January 9 2025, company A imported raw materials from multiple overseas related parties and manufactured engineering plastic resin domestically for sale or resold the imported materials. As its operating margin (OM) declined due to these intercompany transactions, company A received compensating adjustments from overseas related parties identified as the ‘principals’, economically characterised as “entrepreneurs” or full-fledged entities within the group’s TP framework.

While the NTS initially accepted company A’s overall OM, which was calculated by aggregating manufacturing and distribution activities, as compliant with the arm’s-length range after adjustments, it later adopted a disaggregated approach. The NTS split transactions with principals from those with other related parties (‘non-principals’) and recalculated the OMs separately. It concluded that transactions with non-principals generated substandard margins, thereby assessing additional TP adjustments. The key issue was whether this segregated approach was justified, even though company A’s aggregate OM remained within an acceptable range.

The TT ruled in favour of company A, emphasising that principals performed core functions, assumed entrepreneurial risk, and manufactured the key base resin, while company A and non-principals undertook routine functions with limited risk exposure. Importantly, materials from both groups were integrated in the manufacturing process, rendering the transactions economically interdependent.

The TT found the NTS’s disaggregation inappropriate, stressing that such an approach distorted the commercial reality of the transaction structure. Moreover, the TT questioned the legitimacy of the NTS’s methodology, especially since the same taxpayer had previously secured an advance pricing arrangement (APA) in which the NTS accepted an aggregated OM approach. As there were no material changes in company A’s operational model or TP policy, the TT ruled the NTS’s deviation from the APA framework unjustified.

The TT’s ruling affirms that when intercompany transactions are functionally integrated, a holistic, combined transaction analysis is not only reasonable but necessary to preserve the economic coherence of TP assessments.

In the TT’s decision 2023Jung9376, issued on November 7 2024, company B engaged in the design and R&D of handbags and leather goods in Korea, while selling finished products manufactured by Southeast Asian related parties to overseas customers. Company B applied the transactional net margin method, using net cost plus mark-up (NCPM) as its profit level indicator. Because company B supplied raw materials free of charge to its toll manufacturers, it adjusted their cost base by adding the raw material cost to the cost of goods sold when computing the NCPM.

During a tax audit covering the fiscal years (FYs) 2018 to 2020, the NTS determined that the NCPM of one overseas related party (company B1) in FY 2020 exceeded the arm’s-length range and imposed a TP adjustment. Subsequently, company B filed revised tax returns for FY 2017 (company B1) and FY 2018 (another related party, company B2), claiming refunds based on the same audit methodology. However, the NTS rejected these claims. Thus, the key issue was whether company B was entitled to apply the same TP method used during the audit to years and related parties not originally reviewed.

The TT issued a re-audit decision, ordering the NTS to assess whether the FY 2017 and FY 2018 transactions met the arm’s-length standard under the same TP approach. Based on company B’s master file and local file, the TT concluded that companies B1 and B2 were comparable in terms of functions, risks, products, and contract terms, and that applying the same methodology was warranted.

The NTS countered that a revised tax return under the TP rules is designed to relieve double taxation via corresponding adjustments, which assume the presence of a tax assessment in the counterparty jurisdiction. Since no foreign TP assessment had been made, the NTS argued company B’s claims were outside the intended scope. The TT rejected this argument, noting that Korean TP rules do not explicitly prohibit downward adjustments through revised returns in such contexts, particularly where the taxpayer has fulfilled all the procedural requirements and substantiated the claim.

This ruling aligns with earlier TT decisions (2012Seo4614, April 23 2014; 2021Seo2808, December 5 2022; and 2022Jung5394, April 11 2024), which confirmed that downward adjustments can be reviewed when comparable transactions or years exist, and the taxpayer has filed appropriate claims.

In addition, the TT has held that it is inappropriate for tax authorities to apply TP adjustments solely in years where they result in upward income adjustments, without recognising offsetting reductions in other periods (2009Jung1189, November 18 2010). Ultimately, the ruling suggests that taxpayers may consider revised returns for unexamined periods (still within the statute of limitations) or for related parties with similar functional profiles, where audit results imply a potential refund position. While this decision involved an outbound transaction, it may also inform strategic planning for inbound cases.

In the TT’s decision 2023In7168, issued on April 16 2024, company C operated as a wired communication equipment manufacturer under an original design manufacturing model, supplying components to an overseas related party in Vietnam for the production of wireless earphones and other products, which were sold to third-party customers. Under this arrangement, company C incurred intercompany accounts payable (AP) when purchasing the finished products, while intercompany accounts receivable (AR) arose from its supply of components.

During a tax audit, the NTS identified delays in AR collection and treated the delay as an implicit intercompany loan. It applied a deemed interest rate of 4.6% to the outstanding AR balance, calculated on a day-count basis, and imposed a TP adjustment. The key issue was whether the delay in collection constituted a loan transaction justifying a deemed interest charge.

The TT ruled in favour of company C. The TT criticised the NTS for comparing the disputed AR to one-off, low-volume third-party transactions. It highlighted that while company C’s sales involved raw materials, the cited comparables dealt with finished goods or occurred in open-market settings. Moreover, the TT stressed the unique nature of company C’s business, noting that the overseas related party was its sole supplier of finished goods. Under these circumstances, applying uniform AR/AP delay benchmarks was deemed inappropriate. Accordingly, the TT found insufficient grounds to treat the delay as a de facto loan transaction.

The aforementioned TP decisions underscore recurring issues and core TP principles – including transactional integration, methodological consistency, and functional comparability – that are commonly raised during tax audits. With most outcomes favouring taxpayers including a re-audit decision, it is essential for multinationals to understand the TT’s reasoning and use it to strengthen their TP positions and prepare for the next tax audit proactively.

Some of the action plans that multinationals may consider from the above rulings are:

• Review and document economic integration – multinational groups should proactively assess whether their intercompany transactions are economically interrelated and ensure that the documentation (e.g., functional analyses and value chain narratives) supports a combined-transaction analysis. This is especially crucial where a change in method or scope, such as a segregated-transaction analysis, may disadvantage the taxpayer.

• Leverage precedents for downward adjustments – the TT’s affirmation of taxpayers’ ability to file revised returns when substantiated by comparable functional profiles and consistent methods presents a rare but valuable opportunity. Taxpayers should consider reviewing and identifying unexamined years or parties that may benefit from this pathway.

• Evaluate AR/AP practices in a commercial context – where intercompany receivables or payables extend beyond standard benchmarks, multinationals should maintain robust documentation explaining the rationale (e.g., exclusivity, supply constraints, industry norms). This can help to pre-empt challenges based on deemed interest recharacterisation.

• Align audit strategy with APA history – where prior APAs exist, any deviation by tax authorities must be met with a firm challenge grounded in consistency, unless the underlying business model or TP policy has materially changed. Taxpayers should ensure they are consistently applying APA-agreed methodologies and be prepared to defend against any unjustified reinterpretations.

As Korea’s tax authorities deploy more sophisticated tools and broader enforcement mandates, these precedents serve not only as technical guidance but also as strategic anchors. For taxpayers operating in Korea, aligning TP documentation, audit responses, and policy positions with the logic and language of these decisions can offer both protection and opportunity in an increasingly high-stakes tax environment.