By CNET Asia Staff, 5 December 2003 10:00
NEWS Microsoft Korea paid back taxes and penalties for tax evasion to the tune of $27m and is disputing a further $32m payment to the South Korean National Tax Service.
In March, Microsoft Korea admitted that it had evaded taxes in Korea between 1997 and 2001. The Korean subsidiary was charged with inflating expenses by overstating the cost of software imported from its US parent company, thus underreporting its income.
The tax agency investigated Microsoft Korea for seven months in 2002, according to the JoongAng Daily, a Korean newspaper.
Microsoft Korea is disputing the remaining balance of the initial $59m tax assessment, saying that the allegation arose from a difference of opinion between the company and the tax authorities over the way imported software products are priced.
The Korean tax agency has already reviewed Microsoft Korea's charges, following a complaint that the taxation of royalties paid by Microsoft Korea were inapplicable under the US-Korea tax treaty. The 15 per cent tax due on the subsidiaries income from royalties was not billed as a result of the review.
Transfer pricing between affiliated companies matters in taxation because of differing national tax systems. Companies often maximise their expenses and minimise their reported incomes in high-tax jurisdictions, diverting the additional income to a low-tax jurisdiction. Generally, inter-corporate transactions must thus be priced as though the companies were not connected in order to prevent such weighting, a method called "arm's length" pricing, reported the Korea Herald, a Korean daily.
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