Korea
1. TP legislation/guidelines
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
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
If a taxpayer wishes to obtain an APA for transactions with its foreign related parties, then he or she should submit an application for an APA to the National Tax Service (NTS) by the end of the first fiscal year concerned (Unilateral APA). Once the NTS approves the application of a certain method for determining an ALP, both the NTS and the taxpayer are bound by the method agreed upon in the APA. The roll-back of a unilateral APA to the prior 3 years is permitted (Unilateral APAs had previously applied on a progressive basis only).
An applicant for an APA may withdraw his application for an APA or change the particulars of such an application. Any data submitted with the application for an APA will be used to only determine whether or not to grant an APA. If an application for an APA is refused or withdrawn, such data will be returned to the applicant in order to safeguard the confidentiality right of the taxpayer.
In case where an APA is obtained, a taxpayer is required to file an annual report which shows the inter-company price which was determined by the method agreed upon under the APA within six months of the annual tax return submission due date.
A taxpayer who applies for an APA may request that the NTS invoke a Mutual Agreement Procedure (MAP) with the competent authorities of the country in which its related foreign party is a resident under the relevant tax treaty (Bilateral APA). However, the NTS may grant an APA without undergoing a MAP for the taxpayer's convenience. Having obtained an APA, a taxpayer may file an amended tax return that reflects the change from its prior inter-company price with a related party and the price determined under the APA.
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 re-characterized 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 100 million.
Updated: Aug 2011
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.
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