Microsoft Korea hit with $27 million back-tax assessment

Microsoft Korea paid 32 billion won ($27 million) in back taxes and penalties to the National Tax Service in March after admitting to having evaded taxes between 1997 and 2001, the JoongAng Ilbo learned yesterday. A Microsoft Korea official said yesterday that the tax agency conducted an investigation of the Korean subsidiary of the U.S. software giant for seven months last year. After its investigation, the tax service levied retroactive taxes and penalties of 70 billion won. Microsoft Korea admitted it had inflated expenses during the period by exaggerating the cost of software it imported from its U.S. parent. The company has paid the entire 32 billion won levied by the tax service regarding those charges. The question of “transfer pricing” between affiliated companies is important because of differences in tax liabilities in different national tax jurisdictions. Given a choice, companies try to maximize the expenses and lower the reported income of affiliates in high-tax jurisdictions and show the additional income in a jurisdiction where the tax bite is lower. Therefore, the general rule is that inter-corporate transactions must be priced as if the companies had no connection ― “arm’s length” pricing. The tax agency, however, did back down on the balance of its original tax assessment, which involved the taxation of royalties paid by the Korean affiliate in the course of its software sales here. The tax service had billed the parent company, Microsoft Corp., for the 15-percent tax due on its income from those royalty fees. Microsoft asked for a review of the case, arguing that the U.S.-Korea tax treaty was being applied improperly; after a review, the National Tax Service agreed. by Jeong Jae-hong