Recent Korean TP precedents: reinforcing requirements for comparability and functional evidence

According to the Ministry of Economy and Finance, South Korea’s national tax revenue in 2025 reached KRW 373.9 trillion, representing a significant recovery from the previous year and slightly exceeding the supplementary budget target. The rebound was largely driven by stronger corporate earnings and steady wage growth, which supported increases in both corporate and income tax revenues. Despite this improvement, the broader fiscal outlook remains uncertain as external and domestic pressures continue to weigh on the economy.

Looking ahead, the outlook for 2026 may be affected by a potential slowdown in exports amid a cooling global economy, as well as subdued domestic consumption under persistently high interest rates and inflation. In addition, geopolitical uncertainties may continue to pose risks to tax revenues that rely heavily on corporate performance and household income. Against this backdrop, maintaining stable and sustainable tax revenues remains an important policy objective for the government.

In response, the National Tax Service (NTS), in its 2026 Operational Plan for National Tax Administration, has indicated that it will maintain the overall scale of tax audits broadly in line with recent years while allocating audit resources more selectively to areas presenting higher tax risks. Particular attention is expected to be directed at multinational enterprises, especially in cases involving business restructurings or arrangements that may shift valuable functions or profits overseas without appropriate compensation.

At the same time, the NTS is seeking to strengthen its enforcement framework. This includes expanding cooperation with foreign tax authorities to facilitate cross-border tax collection and exploring legislative measures to address situations in which taxpayers delay or fail to submit requested information. These initiatives follow recent legislative developments that introduced enforcement fines in addition to existing administrative penalties for failures to provide documentation. Taken together, these developments suggest a more demanding compliance environment for multinational enterprises, particularly in the area of transfer pricing (TP).

In Supreme Court decision 2024Du54065 on October 16 2025, the court provided guidance on the application of the transactional net margin method (TNMM) and the assessment of comparability in TP analyses.

The case concerned company A, a Korean entity engaged in the domestic wholesale distribution of products imported from foreign related parties. Company A organised its operations into three divisions consisting of medical equipment, small domestic appliances, and lighting, and applied the TNMM using operating margin (OM) as the profit level indicator for each division.

During a tax audit, the NTS reclassified company A’s operations into four divisions comprising medical equipment, small domestic appliances, automotive lighting, and general lighting. The NTS applied the TNMM separately to each segment and concluded that company A had purchased products from its foreign related parties at prices exceeding the arm’s-length range in several divisions, which resulted in TP adjustments.

The Seoul High Court largely ruled in favour of company A. It held that the NTS had not conducted a sufficiently specific comparability analysis regarding the medical equipment supply transactions and the alleged maintenance service support transactions. The court also found that the selection of comparables in the small appliances division was inappropriate.

The Supreme Court partially disagreed with this reasoning. It emphasised that the TNMM evaluates profitability at the net margin level and is therefore generally less sensitive to differences in product characteristics or transaction stages than other TP methods. Where the NTS selects comparables engaged in broadly similar transactions and determines the arm’s-length range, the analysis cannot be considered incorrect solely because adjustments were not made for differences in product types or distribution stages.

The court also held that the maintenance service support provided by the foreign related party did not constitute a separate international transaction, as there was no separate contract or remuneration and the support appeared to be an ancillary condition of the equipment supply.

However, the Supreme Court agreed with the lower court regarding the small appliances division. Company A performed limited functions, such as providing market information and assisting with price adjustments, whereas the selected comparables operated as full distributors generating profits through independent marketing activities. Given this functional disparity, the court concluded that the selection of those comparables and the resulting arm’s-length analysis were not appropriate.

In Supreme Court decision 2024Du64901 on March 13 2025, the court dismissed the NTS’s appeal without further trial, thereby upholding the lower court’s ruling on the selection of comparables under the TNMM.

The case concerned company B, a Korean manufacturer of electronic components and springs. Company B exported bedding cleaners to Japan. Initially, the exports were conducted through an independent Japanese wholesaler, but the distribution structure was later changed so that the products were exported through a foreign related party in Japan. Company B applied the profit split method, arguing that both company B and the Japanese affiliate possessed technology and marketing intangibles relevant to the business.

During a tax audit, the NTS took a different view. The NTS characterised the Japanese affiliate as performing routine sales functions and treated it as a limited distributor. On this basis, the NTS applied the TNMM, selected the Japanese affiliate as the tested party, and conducted a benchmarking analysis using selected comparables, which resulted in TP adjustments.

The Suwon High Court ruled against the NTS. It held that the selected comparables were not sufficiently similar to the tested party, particularly in terms of product types and transaction stages. The court emphasised that when applying the TNMM, the NTS must ensure adequate comparability or reasonably adjust for material differences between the tested transaction and the comparable transactions.

The court also questioned the consistency of the NTS’s screening process. While certain companies had been excluded because their products or business activities differed from those of the tested party, the companies ultimately selected as comparables appeared to exhibit similar differences. The court therefore found it unclear on what basis the qualitative screening had been conducted. It further noted that the NTS had not made adjustments relating to advertising and promotion expenses, despite the tested party performing functions that could distinguish it from a typical wholesaler.

Finally, the court observed that differences in product characteristics may significantly affect net margins through factors such as market entry barriers, competition, and product differentiation. Where such differences are substantial, the resulting arm’s-length range cannot be considered reliable unless appropriate adjustments are made. The court rejected the NTS’s reliance on a working capital adjustment, noting that such adjustments address only differences in receivables, payables, and inventory and cannot resolve fundamental differences in product types or transaction stages.

In Tax Tribunal (TT) decision 2024Seo3820 on December 1 2025, the TT addressed the factors to be considered when selecting the tested party under the TNMM.

The case concerned company C, a Korean distributor of household appliances such as vacuum cleaners. Company C imported products from foreign related parties – including a procurement entity in Sweden and manufacturing entities in Sweden, Hungary, and Thailand – at a mark-up of 0.2% or 5% on manufacturing costs. In its TP analysis, company C selected the foreign related parties as the tested parties and concluded that their profit margins were within the arm’s-length range.

During a tax audit, the NTS rejected this approach. The NTS considered company C to perform less complex functions than the foreign procurement and manufacturing entities and therefore selected company C as the tested party. Applying the TNMM with OM, the NTS benchmarked company C against domestic comparables, which resulted in TP adjustments.

The TT disagreed with the NTS’s analysis. It observed that company C’s OM had fluctuated considerably over time and declined during the audit period, while the market share of its main product also fell. The TT considered this pattern inconsistent with a routine distributor that would normally earn a stable margin and instead indicative of exposure to inventory and market risks.

The TT also noted that the level of company C’s advertising and promotion expenses was relatively high compared with other multinational appliance distributors operating in Korea. This suggested that company C undertook significant independent marketing activities. In addition, internal communications indicated that company C exercised meaningful discretion in decisions concerning product selection, purchasing volumes, and the timing of new product launches.

In these circumstances, the TT concluded that it was difficult to regard company C as less complex than the foreign related parties. The TT further observed that the NTS had not substantiated its claim that company C performed simpler functions. Accordingly, the TT held that the selection of company C as the tested party was inappropriate and that the resulting TP adjustment was not justified.

In TT decision 2023Seo9158 on April 9 2025, the TT reaffirmed a fundamental principle of TP analysis that comparability and arm’s-length prices should generally be evaluated on a year-by-year basis. The case concerned company D, a Korean entity engaged in the importation and distribution of a specific brand of vehicles and related components to domestic dealers. During the audit period, company D prepared local files for each fiscal year applying the TNMM with OM. For benchmarking, company D selected imported car dealers primarily engaged in retail activities as comparables and confirmed that its OM fell within the arm’s-length range in each year.

During a tax audit, however, the NTS rejected company D’s approach to comparable selection. Instead, the NTS recalculated the arm’s-length range by including only those companies that had remained in the comparable set throughout the entire five-year audit period. As a result of this retrospective filtering, company D’s OM fell below the revised arm’s-length range, which resulted in TP adjustments.

The TT ruled in favour of the taxpayer. It emphasised that, except in special circumstances, TP analyses should be conducted based on the conditions existing at the end of each fiscal year. This approach reflects the principle of period-based taxation under Korean corporate tax law, under which taxable income and arm’s-length prices are assessed separately for each fiscal year. The TT also observed that company D had followed a systematic benchmarking process. According to the local files, the taxpayer first identified a pool of potential comparables based on Korean Standard Industrial Classification codes and then applied both quantitative and qualitative screening criteria to select appropriate companies for each year.

By contrast, the TT found that the NTS had excluded several comparables solely because they had not been selected in all five years of the audit period. The TT held that this did not constitute a reasonable adjustment to improve comparability and that the NTS had not demonstrated that the retrospective exclusion enhanced the reliability of the analysis. Accordingly, the TT concluded that the resulting assessment was not justified.

The four decisions discussed above provide practical guidance on the application of the TNMM. As the TNMM remains the most commonly applied TP method in Korea, these cases address issues frequently raised during tax audits and appeals, which include:

• Flexibility with limits – although the TNMM may tolerate certain differences in product types or transaction stages due to its focus on net margins, taxpayers should ensure that their TP documentation contains sufficiently robust functional analyses supporting the selection of comparables;

• Comparable selection under scrutiny – given the courts’ close examination of comparables selection, taxpayers should carefully review the comparables and screening criteria used by the NTS during tax audits;

• Tested party determination – the selection of the tested party should be supported by a thorough analysis of functions, risks, and decision-making authority among the related parties; and

• Year-by-year analysis – the confirmation that comparability should generally be assessed on a fiscal year basis may provide useful support for taxpayers when challenging retrospective adjustments to comparable sets during tax audits.

Together, these precedents highlight the increasing scrutiny of key methodological choices in TNMM analyses in Korea.