1. TP legislation/guidelines
The National Tax Services (“NTS”) has a robust TP legislature, rules and guidelines.
2. TP documentation required to be filed with tax return
The taxpayer is required to prepare and maintain transfer pricing contemporaneous documentation. The taxpayer must apply the chosen method to determine its taxable income on its income tax return, and all relevant documents must be maintained on a contemporaneous basis.
3. TP audits done by tax authority
NTS in May 2007 announced that a transfer pricing monitoring system (although the system had been unofficially in place for some time) will be implemented. The system is designed to closely monitor taxpayers’ transfer pricing practices across the border on an annual basis, and to determine the need to conduct full-blown transfer pricing investigations. The NTS has detailed internal guidelines on how to select taxpayers and how to assess whether the selected taxpayers meet the arm’s length principle. The system is now in full swing.
The monitoring process occurs in sequential order. First, after the annual tax return is filed each year, the national office of the NTS conducts a preliminary assessment of taxpayers’ tax return information regarding transactions with overseas related parties. Based on the initial assessment, the NTS selects taxpayers for more detailed information requests. This second phase takes place in December of every calendar year. The regional tax offices across the country then issue information requests to the selected taxpayers.
4. Advance Pricing Arrangement
The APA process in Korea is accessible to all taxpayers. Korea concluded its first APA with the United States in May, 1995. The NTS has so far received a total number of 172 APA requests with 106 cases concluded as of the end of 2008. In recent year, the Korean competent authority has received an increasing number of APA requests year by year. In 2007, the NTS signed its first two APAs for China-based Korean subsidiaries with the Chinese counterpart.
Applicants should submit an application form to the International Cooperation Division by the end of the first taxable year of the covered period. The application form should contain information such as suggested APA term, covered transactions, involved parties, and TPM. Taxpayers usually apply for a 5-year term APA. If taxpayers wish to request a rollback for tax years prior to the covered APA, they may apply for a period of 3 to 5 years case by case
5. Mutual Agreement Procedures
When taxpayers apply for bi-APAs, the NTS progresses the MAP with the relevant foreign competent authorities at the request of taxpayers.
Resolution under the MAP procedure has been increasing in recent years.
6. Basis to recover intra-group service charges
Arm’s length pricing is required for intra-group services in particular evidences of actual services being rendered under contract, anticipated benefits existing and documentation requirements being satisfied.
7. Cross border management fee charges
The management services fees should be qualified as deductible expenses resulting from provided actual services, charges being on arm’s length basis and documentation being available.
A 20% withholding tax would be imposed on such payment to foreign parent company.
8. Inter-company loans
If a Korean company borrows from its controlling shareholders overseas(CSO), an amount greater than three times its equity(six times in the case of financial institutions) interest payable on the excess portion of the borrowing are recharacterized as dividends to which the article on dividends in tax treaty applies and therefore are treated as non-deductible in computing taxable income.
Although the ratio of debt owed to a CSO to equity exceeds 3:1, as long as the conditions and the amount of debt owed to a CSO are reasonable compared to the debt from an independent third party, such debt from the CSO will be excluded from the scope of the debt subject to thin capitalization rules. As a result, interest on such debt will be deductible.
9. Transfer pricing penalties
The tax authorities are empowered to request from a taxpayer the data required for an adjustment of the inter-company price. If a taxpayer fails to submit the requested data within 60 days without any justification, the tax authorities may grant an extension of 60 days when the taxpayer appeals with some justification..
Failure to comply with TP compliance requirements may lead to penalty amounting to KRW 30 million.
This publication has been prepared for the purpose of quick information dissemination to our counterparts in other Countries. Its contents should not be used as a basis for advice or formulating decisions under any circumstances |
