When Oner and other specially related parties trade stocks or services, the price set by the parties is not automatically recognized under tax law. If they traded at an excessively low or high price to reduce taxes, the tax authorities can reimpose taxes based on the "market price." The question is whether that market price can be proven objectively.
Tax rulings that came out a day apart on LIG Oner family stock transactions and former chief producer Lee Soo-man related to SM Entertainment(SM Entertainment(041510)) diverged on this point.
In the LIG case, the offering price of 76,000 won for LIG Defense&Aerospace(079550) (LIG D&A·then LIG Nex1) was recognized as an objective standard for valuing the shares, reviving the tax assessment. In contrast, in the SM case, despite finding that the compensation paid to the former chief was excessive, the National Tax Service failed to prove the objective market price for the former chief's producing services, leading to the cancellation of about 12.9 billion won in corporate taxes and value-added taxes.
◇ LIG had an "offering price" price tag… the key is "three months"
The LIG case began in 2015 when Oner of LIG Co. transferred shares held by 10 shareholders to Chairman Koo Bon-sang of LIG and Vice Chairman Koo Bon-yeop at 3,876 won per share. At the time, LIG Co. held a 51% equity stake in LIG Nex1, which was preparing for an initial public offering (IPO).
The tax authorities then recalculated the value of LIG Co.'s shares to 12,036 won per share by reflecting the finalized LIG Nex1 offering price of 76,000 won. The issue was whether the not-yet-finalized offering price could be used as of June 3, the share valuation date.
The first trial did not side with the tax authorities, saying it was more than three months until Sept. 21, when the offering price was finalized. But the Seoul High Court Administrative Division 11-1 (Presiding Judge Bae Hyeong-won) overturned this on the 26th of last month. It viewed the timing of the "securities filing" under tax law as Aug. 6, when the initial securities registration statement was submitted, not the date the offering price was finalized. Because this was within three months from the valuation date, the subsequently finalized offering price could be reflected in the share value.
The LIG case had an objective price indicator—the offering price—and a statutory valuation method to apply it. In the end, the outcome turned on which filing date to use to calculate "three months."
◇ They averaged Park Jin-Young, Yang Hyun-suk, and Bang Si-hyuk… "cannot compare with Lee Soo-man"
From 2015 to 2019, SM paid the former chief 6% of the settlement-eligible revenue from albums, content, and concerts as compensation for overall producing. Over five years, it totaled about 61.5 billion won.
The tax authorities broke down the payments by item. About 20.2 billion won related to albums and music was recognized as an expense because services were actually provided. In contrast, about 23 billion won linked to appearance fees and royalties was deemed to have no corresponding services, and about 14.6 billion won linked to vocal appearance fees was judged excessive. In evaluating the 14.6 billion won, they used as a benchmark the average total compensation of about 2 billion won for three other major agency chief producers—Park Jin-Young, Yang Hyun-suk, and Bang Si-hyuk—from 2015 to 2019.
The Seoul Administrative Court Administrative Division 5 (Presiding Judge Lee Jeong-won) also found that the compensation SM paid the former chief was excessive and fell under the "denial of unjust calculation." This is a system that recalculates based on the market price under tax law if the tax burden is reduced through abnormal transactions with specially related parties.
However, it found that the comparison benchmark presented by the National Tax Service was insufficient to prove the market price. Each agency differs in its roster of artists, album release volume, and the scale and structure of revenue, and producers' duties and contributions also vary, making simple comparisons of other producers' compensation difficult. The thrust is that the judgment of "it paid too much" and the judgment of "then how much should it have paid" are separate issues.
◇ "It paid a lot" and "how much should it pay" are separate
Contract interpretation also influenced SM's victory. The tax authorities held that there had to be separate services corresponding to each revenue item to recognize the payment as an expense. The court, however, found that the former chief's work was a comprehensive service of "music, content, and artist producing," and that each revenue item served as a basis for calculating compensation.
It also found that value-added taxes are not considered "invoices different from the facts" solely because they differ from the appropriate market price under tax law, if payments were made according to the actual contract and tax invoices were exchanged for those amounts. As a result, about 8.8 billion won in corporate taxes and about 4.064 billion won in value-added taxes were canceled.
Tax experts explain the difference between the two cases as the presence or absence of an "objective price tag." For shares, the valuation method is relatively detailed under tax law, and there are price indicators like the offering price. In contrast, there is no set price tag for personal services that buy and sell a person's abilities and contributions.
Attorney Kim Young-sim of Dongin LLC explained that the SM ruling did not recognize the amount SM paid as appropriate per se. The crux of the ruling, separate from the finding that the payment was excessive, is that the National Tax Service failed to prove the appropriate market price.
Kim added that corporations need to keep objective records from the time of the transaction when dealing with specially related parties, including the basis for price calculation, actual duties and contributions, and comparables.
SM did not issue a separate statement on the ruling. LIG said this case was a lawsuit by the then share transferors, separate from the current LIG, and that it could not know whether the plaintiffs would appeal.