The Supreme Court (Image courtesy of Yonhap)
SEOUL, Nov. 19 (Korea Bizwire) — South Korea’s Supreme Court has overturned a lower-court ruling that sided with Philips Korea in a high-profile dispute over transfer pricing taxes, sending the case back to an appellate court for further review.
In a decision disclosed Wednesday, the court reversed a ruling that had canceled most of the 90.5 billion won (US$66 million) in corporate taxes levied on Philips Korea in 2017 by the Namdaemun District Tax Office.
The assessment covered the company’s 2012–2015 fiscal years and stemmed from transfer pricing rules governing transactions between multinational parent companies and local subsidiaries.
Transfer pricing—how multinational groups set internal transaction prices—can be used to shift profits across borders. When authorities judge that prices deviate from arm’s-length standards, they may recalculate the tax base using a “normal price” benchmark.
A Seoul appellate court previously ruled in favor of Philips Korea, finding that only 24.7 billion won of the assessed amount was justified and ordering the cancellation of the remaining 65.7 billion won.
The judges took issue with how tax officials selected comparable companies, arguing they failed to separate “medical equipment supply” transactions from “maintenance service support,” which should have been independently evaluated.
But the Supreme Court rejected that reasoning. It held that Philips’ “maintenance service support” activities amounted to group-level policies rather than meaningful, standalone transactions that materially contributed to the subsidiary’s domestic operating profit.
Because the court found no independent transaction existed, it ruled that tax authorities were not required to separately assess comparability for maintenance services when determining the normal price for the medical equipment business.
However, the justices upheld part of the lower court’s ruling that had sided with Philips Korea regarding transfer-pricing calculations for its small home-appliance division.
The Supreme Court ordered the case returned to the Seoul High Court to reassess the proper tax amount.
The dispute—rooted in the same transfer-pricing framework that has tripped up numerous multinational firms operating in Korea—will now undergo a fresh round of judicial review.
Jerry M. Kim (jerry_kim@koreabizwire.com)
