Cosmos International Management Co., Ltd.

News (Novemver 8, 2011)

NTA issued partially revised transfer pricing taxation (Circular and TP Directive) and result of requested public comments.

The National Tax Agency (NTA) as of August 12 announced a proposed partial revisions of Chapter 11 (Corporate Tax Section) of the Act on Special Measures concerning Taxation (gASMT Circularh) and Commissionerfs Directive on the Operation of Transfer Pricing (gTP Directiveh), both of which make up a primary part of transfer pricing regulations, and also asked for public comment. On October 28, NTA announced gOutline of public comments and opinion from NTA to these public commentsh and published the finalized revisions in the form of old and new comparable list. (as of October 27)

Although the following explanation of main revision points overlaps with our news as of September 1, 2011, this time the opinions from NTA were included.

(1) Clarification of armfs length range in case of multiple comparable transactions (ASMT Circular 66.4(3)-4 ƒnew„ )
NTA newly defined that in case there exist multiple comparable transactions in foreign related-party transactions, in which the armfs length prices form a certain range and the prices for foreign related-party transactions are in the range, the ASMT Article 66-4(1) is not applicable (i.e., transfer pricing adjustment would not be imposed). This revision means that in doing transfer pricing analyses, the usage of the range is accepted. The definition of range is not clarified in the revision, however, the NTAfs opinion indicates that the range should be sufficiently screened-out multiple comparable transactionsf full range (between maximum and minimum).

As the US transfer pricing regulations are influential on transfer pricing analyses, usually comparable transactions are fully screened out and the range is further narrowed by statistical methods such as interquartile range. But the use of the whole range can be advantageous for taxpayers as the range will be spread, so future transfer pricing analyses should consider this.

(2)Attention with regard to application of using secret comparables (TP Directive 2-5)
Regarding application of secret comparables etc. (confidential information about the comparable data obtained by tax authorityfs inspection or already owned by tax authority), current pre-condition is, gin case where a corporation is requested to present or submit documents, the corporation fails to submit such documents without delayh. In contrast, the revision additionally defines that ‡@ corporationfs extension of the submission deadline shall be given if there is any rational reasons, and ‡Aapplication of secret comparables should be enforced only in case that the extensions are repeatedly given and after a certain period, the documents are still not presented or submitted by the corporation.

The proposed revision did not mention about the specific reasons for being able to allow the delay of the submission, but the finalized revision in Note 3 exemplified gdisasterh as the specific reasons.

In case a corporation does not prepare transfer pricing analysis at the initiation of tax examination, it will usually take at least a few months to newly prepare, but it could be considered that the request for extension for such a reason may not be allowed. It means that documentation including transfer pricing analysis should be prepared in advance of tax examination.

(3)Advantages of the three transaction-based methods in transfer pricing methods (TP Directive 3-2ƒnew„)
As the FY2011 tax reform revised laws regarding transfer pricing taxation, so called gbest methods ruleh was introduced. However the revision clarified that on the basis of advantages of the three transaction-based methods (calculating armfs length price directly), if any of those methods are applicable, the three transaction-based methods would be gmost appropriate methodh as followed by the OECD guidelines. Accordingly, the revision seems the adjustment of gbest methods ruleh in effect, so the three transaction-based methods still actually have the priority order. In this regard, the revision is just as we indicated in the article of our website (News (December 24, 2010)).


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