The Supreme Court recently decided that the existing National Tax Service Model (“NTS Model”) is no longer acceptable as a legitimate transfer pricing calculation method for payment guarantee fees by a Korean parent to an offshore subsidiary.  Also, the applicability of the Moody’s Model, which has been presented by the National Tax Service (“NTS”) as an alternative, should be determined based on facts of each case and general practices.

Background:

Domestic companies often provide payment guarantees for its offshore subsidiaries and receive payment guarantee fees.  In 2012, the NTS developed a “transfer pricing model of guarantee fee for overseas subsidiaries” (“NTS Model”), which led to tax assessments of many companies on the ground that the guarantee fee rate paid by domestic companies were lower than the rate calculated by the NTS Model.  However, many lower courts determined the NTS Model could not be used as a legitimate transfer pricing calculation method and rendered judgments in favor of the taxpayers.  

After losing many cases under the NTS Model, the NTS introduced another transfer pricing calculation method created by a credit rating agency (“Moody’s Model”) and continued to maintain its previous tax assessment position.  Accordingly, the Supreme Court made a judgement on both the NTS Model and Moody’s Model.

Case Details:

The Seoul High Court affirmed that the NTS Model was not a legitimate transfer pricing calculation method.  Further, while the Moody’s Model was generally acceptable, it was not reasonable to apply the Moody’s Model to this case (i.e., newly established corporation) in light of the facts of the transaction and general practices¹.  After the tax authorities appealed such decision to the Supreme Court, recently it ultimately dismissed the case and accepted the Seoul High Court’s decision². 

Significance:

As a result of the Supreme Court decision, the NTS Model will no longer be used for tax assessments on payment guarantee fees.  Further, the applicability of the Moody’s Model would depend on the facts of the case, e.g., whether the payment guarantee fee is within the transfer pricing range presented in the Moody’s Model, whether the offshore subsidiary is a new corporation, etc.  We believe this decision would have great significance to taxpayers who have been assessed on their payment guarantee fees based on the NTS Model or Moody’s Model.