Korea

  1. A. Transfer pricing documentation requirement
    1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
  2. What is the content of the documentation that must be prepared?
  3. B. Country-by-Country reporting (“CbCR”)
    1. Did your jurisdiction implement the obligation to file a CbCR? If not, is the introduction of the CbCR in your jurisdiction contemplated and, if so, when?
    2. If the obligation to file a CbCR is in force, what is the tax year from which this obligation applies and what is the deadline for filing the CbCR?
    3. Which taxpayers have to file a CbCR in your jurisdiction?
    4. Is the content of the CbCR fully in line with the OECD model (final report on Action 13 of the BEPS project)? If not, what are the differences?
    5. What is the penalty for failing to file the CbCR on time? Can local subsidiaries of a foreign group suffer the local penalty if the foreign group has not filed the CbCR?
    6. Are there tax treaties in force in your jurisdiction allowing the communication of CbCR with other jurisdictions?
    7. Any other relevant aspect not addressed above?
  4. C. As the case may be, other documentation/filing requirement in relation to transfer pricing?
    1. In your jurisdiction, are there any other documentation/filing requirements in relation to transfer pricing?
    2. If so, what is the content of such documentation/filing requirement? What language(s) are to be used by taxpayers?
    3. What is the deadline for meeting this documentation/filing requirement?
    4. Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
    5. What is the penalty for failing to meet this requirement on time?
    6. Any other relevant aspect not addressed above?

A. Transfer pricing documentation requirement

1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

According to the legislative actions to implement BEPS, the Law for the Coordination of International Tax Affairs (“LCITA”), which is the Korean transfer pricing regulations, was revised to require certain Korean taxpayers engaged in international transactions to prepare and submit transfer pricing documentation (hereinafter referred to as “Combined Report of International Transactions Information” or “CRITI”), which is comprised of the Master File, Local File and Country-by-Country Report (“CbCR”) of the BEPS Action 13 final report, within 12 months from the parent company’s fiscal year-end.

This new transfer pricing documentation rules is effective since 1 January 2017. Thus, the taxpayers in the scope of this documentation requirement having the fiscal year-end at 31 December 2016 should submit the first CRITI by 31 December 2017.

If the total international related party transaction is KRW 50bn (including service, tangible and intangible transactions) or more and the total revenue of a taxpayer in Republic of Korea is KRW 100bn or more for a fiscal year, the taxpayer should mandatorily prepare and submit the Master file and the Local file to the tax authorities.

Other taxpayers below the above threshold are still required to maintain reasonable transfer pricing documentation (hereinafter referred to as “Contemporaneous Transfer Pricing Documentation”) by the due date of filing the corporate tax returns and submit them within 30 days upon the Korean tax authorities’ request. In this case, if the taxpayers submitted to the tax authorities a Contemporaneous Transfer Pricing Documentation prepared in good-faith and reasonably, an underreporting penalty tax (i.e., 10% penalty on additionally levied corporate income tax) may be waived.

2. What is the content of the documentation that must be prepared?

The content of the CRITI closely follows BEPS Action 13’s Master File, Local File and CbCR. The content of the Contemporaneous Transfer Pricing Documentation is similar to that described in the existing Chapter V of the OECD Transfer Pricing Guidelines.

Furthermore, the Korean tax authorities may ask the below information along with the Contemporaneous Transfer Pricing Documentation as specified in the LCITA.

  1. Various relevant contract documents concerning the transfer or purchase of assets;
  2. Price list of products;
  3. Statement of manufacturing costs;
  4. Specification of trades by item, distinguishing between the related parties and the unrelated parties;
  5. Documents corresponding to subparagraphs 1 through 4, in the cases of the offer of services or other trades;
  6. Organizational chart of a corporation and a table of division of office duties;
  7. Data for determination of international trade prices;
  8. Internal guidelines for pricing among the related parties;
  9. Accounting standards and methods relating to the relevant trades;
  10. Details of business activities of the parties involved in the relevant trades;
  11. Current status of mutual investments with the specially-related parties;
  12. Forms or items omitted at the time of returns on the corporate income tax;
  13. Materials related to service transaction;
  14. Materials related to cost sharing arrangement
  15. Other data necessary for computing proper prices
a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?

All transactions with associated enterprises should be documented.

b) What is the definition of “associated enterprises” for the purposes of this requirement (in particular, are transactions between a permanent establishment and its head office in the scope of the documentation requirement)?

The special relationship for “associated enterprises” exists if one party owns directly or indirectly 50 percent or more of the total shares of another party or has substantial control and common interests exist between both parties. Also, transactions between a permanent establishment and its head office are required for transfer pricing documentation.

c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?

Not applicable.

d) For all countries (and, in particular, OECD countries), is the content of the documentation similar to that described in the revisions to chapter V of the OECD transfer pricing guidelines (final report on Action 13 of the BEPS project)? If not, are taxpayers entitled to choose between the local requirements and the OECD approach?

The content of the CRITI closely follows BEPS Action 13’s Master File, Local File and CbCR. The content of the Contemporaneous Transfer Pricing Documentation is similar to that described in the 2010 Chapter V of the OECD Transfer Pricing Guidelines.

e) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?

Yes. According to the Korean corporate income tax law, for both domestic corporations which have their headquarters, main office or actual business management place in Republic of Korea and foreign corporations located in foreign countries with income from Republic of Korea, if they have the obligations for payment of the corporate income tax in Republic of Korea, they have the responsibility for preparing or submitting any specific information requested by the Korean tax authorities.

f) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?

The LCITA does not clearly stipulate whether the local Korean comparable transactions or Korean companies should be used as a basis for constructing arm’s length ranges. Regional benchmark studies may be accepted by the Korean tax authorities when local comparable transactions or Korean companies are not sufficiently available. However, in a practical sense, the Korean tax authorities strongly prefer the use of the local benchmarking study containing Korean comparable companies included in the KIS Line, which is a local electronic database, especially during the tax audit.

g) If comparable studies are to be provided in general, are safe harbours/specific circumstances exempting taxpayers from preparing benchmark studies (such as the EU Joint Transfer Pricing Forum guidelines on low value adding services1 or revisions to chapter VII of the OECD transfer pricing guidelines about low value adding intra-group services) in your jurisdiction or are there situations in which tax authorities do not request benchmark studies? If so, in which circumstances taxpayers are exempted from benchmark studies?

The Korean tax authorities have not explicitly adopted safe harbours in deriving arm’s length price, and thus, benchmarking studies are generally requested. For instance, the Korean transfer pricing regulation has not yet adopted the OECD BEPS’ approach for low value-adding services (i.e., application of a 5% mark-up without benchmarking analysis).

h) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?

The “Local File” and the Contemporaneous Transfer Pricing Documentation should be prepared and submitted in Korean. Exceptionally, the “Master File” can be firstly prepared and submitted in English, but if a translation of the Master File into Korean is required, it should be submitted within 1 month from the original submission date.

3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?

In general, transfer pricing documentation must be submitted within 60 days upon the Korean tax authorities’ request. A one-time extension of 60 days may be allowed when justifiable reasons exist. However, a taxpayer should submit the Contemporaneous Transfer Pricing Documentation within 30 days upon the Korean tax authorities’ request in order to receive the potential benefit of the 10% penalty waiver.

According to the newly enacted transfer pricing documentation rule in Republic of Korea, the deadline for filing the Master file, Local file and CbCR is within 12 months from the parent company’s fiscal year-end.

4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.

The penalty of KRW 10m will be imposed for failure to comply with the complete submission of each of the Master file, Local file and CbCR by the due date, or for submission of the Master file, Local file and CbCR containing false information. Therefore, the total documentation-related penalties could be KRW 30m.

Although there is no specific penalty for failure to prepare the Contemporaneous Transfer Pricing Documentation, the failure for submission of transfer pricing documentation within due date upon the tax authorities’ request would eliminate the underreporting penalty tax waiver. In addition, a penalty up to KRW 100m may be imposed for failure to provide transfer pricing information within due date (generally 60 days from the request) upon the Korean tax authorities’ request.

5. Does the absence or incompleteness of documentation reverse the burden of proof as regards the arm’s length character of the transactions?

Yes, the absence or incompleteness of documentation will reverse the burden of proof as regards the arm’s length character of the transactions. In such cases, generally, the Korean tax authorities will prepare the arm’s length analysis and apply it to the related transactions with a view to determine the transfer pricing adjustment.

6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?

The documentation-related penalty with a transfer pricing reassessment does not prevent the taxpayer from initiating any mutual agreement procedure. The mutual agreement procedure (“MAP”), however, may not be permissible in case that (i) there is a judgement conclusion from the court, (ii) the purpose for MAP is to avoid tax, or (iii) a taxpayer applies for the MAP after 3 years from the date of tax assessment.

7. Any other relevant aspect not addressed above?

Not applicable.

B. Country-by-Country reporting (“CbCR”)

1. Did your jurisdiction implement the obligation to file a CbCR? If not, is the introduction of the CbCR in your jurisdiction contemplated and, if so, when?

Yes. Under the revised LCITA, the CbCR is required to be filed effective from 2017.

2. If the obligation to file a CbCR is in force, what is the tax year from which this obligation applies and what is the deadline for filing the CbCR?

Under the revised LCITA, a taxpayer who meets the conditions for filing a CbCR should comply with the filing requirements effective from 2017. The deadline for filing a CbCR is within 12 months from a ultimate parent company’s fiscal year-end (i.e., for fiscal year ending 31 December 2016, the first deadline will be 31 December 2017).

3. Which taxpayers have to file a CbCR in your jurisdiction?

Under the revised LCITA, the CbCR should be filed by a domestic multinational company with its total revenue of over KRW 1trn on the consolidated financial statements for the previous fiscal year of filing a CbCR. Exceptionally, a local subsidiary or a permanent establishment of a multinational company is also required to file a CbCR to the Korean tax authorities if its ultimate parent company is not required to file a CbCR in their jurisdiction or is located in a country where exchange of a CbCR is not agreed with the Korean tax authorities. Both domestic and foreign invested multinational companies in Republic of Korea with the group’s total revenue of over KRW 1trn on the consolidated financial statements for the previous fiscal year are required to submit the reporting entity notification form of the CbCR by 30 June 2017 to the Korean tax authorities.

4. Is the content of the CbCR fully in line with the OECD model (final report on Action 13 of the BEPS project)? If not, what are the differences?

Yes. The content of the CbCR is fully in line with the OECD model.

5. What is the penalty for failing to file the CbCR on time? Can local subsidiaries of a foreign group suffer the local penalty if the foreign group has not filed the CbCR?

In general, the penalty for failing to file a CbCR on time is KRW 10m. However, as the Korean government has not announced the detailed regulations about the penalty application for failing to file the CbCR in the case where a foreign group has not filed the CbCR, it is not clear at the moment whether local subsidiaries of such foreign group will suffer the local penalty.

6. Are there tax treaties in force in your jurisdiction allowing the communication of CbCR with other jurisdictions?

Republic of Korea has concluded the Multilateral Competent Authority Agreement on the Exchange of the CbCR from 2018 on 30 June 2016.

7. Any other relevant aspect not addressed above?

Not applicable.

C. As the case may be, other documentation/filing requirement in relation to transfer pricing?

1. In your jurisdiction, are there any other documentation/filing requirements in relation to transfer pricing?

Yes, there is transfer pricing related disclosure requirement for the corporate tax return filing purpose other than the CRITI and Contemporaneous Transfer Pricing Documentation.
Taxpayers engaged in international transactions with a foreign related party shall submit (1) Statement on International Transactions, (2) Statement on Selection of Most Appropriate Transfer Pricing Method, and (3) Summary of Income Statement of Foreign Related Party.

2. If so, what is the content of such documentation/filing requirement? What language(s) are to be used by taxpayers?

The form “Statement on International Transactions” requires basic information about the foreign related party (e.g., company name, business registration number, establishment date, address, business type, relationship) and transaction status (e.g., transaction type, transaction volume).

The form “Statement on Selection of Most Appropriate Transfer Pricing Method” requires basic information about the foreign related party (e.g., company name, business registration number, establishment date, address, business type, relationship) and a description of the transfer pricing method selected as the most appropriate method (e.g., transaction type, selected transfer pricing method, reason for selection).

The form “Summary of Income Statement of Foreign Related Party” requires basic information about the foreign related party (e.g., company name, business registration number, establishment date, address, business type, relationship) and a summary of the profit & loss statement (e.g., sales, cost of goods sold, operating expense, operating profit, net income before tax).

All tax return forms are required to be prepared in Korean.

3. What is the deadline for meeting this documentation/filing requirement?

The deadline for filing the above transfer pricing related forms is the same as the corporate tax return filing due date (e.g., 31st March for the calendar year taxpayer).

4. Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

The submission of the Statement on Selection of Most Appropriate Transfer Pricing Method and Summary of Income Statement of Foreign Related party is not necessary where the amount of international transactions during the pertinent business year falls under any of the following conditions: (a) where the total amount of tangible goods transactions is less than KRW 5bn and the total amount of transactions of services is less than KRW 500m; or (b) where the total amount of tangible goods transactions for each foreign related party is less than KRW 1bn and the total amount of services transactions for each foreign related party is less than KRW 200m.

Please note that there is no threshold for filing the Statement on International Transactions and thus, all taxpayers having the international transactions with overseas related parties should submit it by the due date with the corporate income tax returns.

5. What is the penalty for failing to meet this requirement on time?

The maximum penalty for failure to comply with above requirement is KRW 100m.

6. Any other relevant aspect not addressed above?

Not applicable.