Lee Jung-hyun, head of Samil PwC’s tax division, internal transactions between affiliates belonging to large corporate groups are increasing every year. According to the Fair Trade Commission, the proportion of internal transactions among the total sales of business groups subject to disclosure last year was 33.4%. The transaction amount also reached 752.5 trillion won. Since there are necessary transactions even between affiliates, not all internal transactions are illegal. At this time, an important criterion for determining whether internal trading is unfair is the normal price.
Under the Fair Trade Act, normal price refers to the market price that is normally charged when no abnormal judgment is involved. Depending on how much it deviates from this, unfair profits are calculated and the size of the fine is determined. So far, there has been little precedent to know how to calculate the normal price. In August, the Fair Trade Commission announced sanctions against mid-sized company A for internal trading and emphasized, “We conducted an economic analysis for the first time in the process of estimating normal prices.” Afterwards, as the resolution on the measure was made public, it was revealed that the double difference method, a statistical analysis model, and alternative techniques were used to calculate the normal price.
Then questions arose in the market. Was the complex econometric method that can only be learned by majoring in economics really the best? Was there another method that was easier to apply and more reasonable? Companies are responding that it is burdensome to calculate the normal price using a complex economic analysis model for each new internal transaction.
It is not as if there are no domestic laws that can be used as a reference for determining the normal price. Domestic law has laws that deal with concepts similar to arm’s length price in the Fair Trade Act. This is the International Tax Adjustment Act (National Tax Adjustment Act). The National Trade Act regulates whether the price transacted with overseas related parties corresponds to market value. This is called ‘Transfer Pricing Regulation’ and follows the guidelines of the Organization for Economic Cooperation and Development (OECD), an international standard. This guideline has served as a framework for transfer pricing analysis in countries around the world for the past 30 years. The Fair Trade Commission’s administrative guidelines also stipulate that if the transaction market price cannot be confirmed, Article 8 of the National Trade Act, which is a transfer pricing regulation, can be applied. Regarding this, I am curious about the background of the Fair Trade Commission’s use of a complex statistical analysis method.
As internal transactions increase every year, the need for companies to evaluate and prepare for normal prices in advance is increasing. The Fair Trade Commission’s normal price analysis standards should be easier to apply and more familiar to the market. Applying the method already specified in the Fair Trade Commission’s administrative guidelines can be a shortcut to increasing a company’s predictability.
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Lee Jung-hyeon, head of tax division at Samil PwC
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