Transfer pricing in The Republic of Korea at a glance
|Are there specific transfer pricing regulations?||Yes|
|Submission deadline||CIT deadline|
|Submission deadline upon request||60 days|
|Annual update required||Yes|
|Official language requirements||Korean|
|Potential impact of penalties||EUR 73,000|
Korean tax law
Rules for transfer pricing in The Republic of Korea are based upon:
- The Law for Coordination of International Tax Affairs (LCITA)
- Presidential Enforcement Decree
- Ministerial Decree and Interpretations
Korea is an OECD member and therefore the LCITA takes priority over the OECD Transfer Pricing Guidelines (OECD Guidelines). However, the National Tax Services (NTS) recognizes the OECD Guidelines, but they have no legally binding effect. Hence, if a taxpayer’s argument is based only on the OECD Guidelines and not on the LCITA, in practice, the NTS or regional tax offices may not accept it.
Accepted methods are:
- The comparable uncontrolled price method
- The resale price method
- The cost plus method
- The profit split method
- The transactional net margin method
- Other reasonable, unspecified, methods
Priority of methods
Rules for transfer pricing in The Republic of Korea prescribe that a taxpayer should select the most reasonable method based on the availability and reliability of data.
Information that should be included in the documentation:
Documentation in The Republic of Korea consists of three forms:
- Declaration of Transfer Pricing Method: A form stating the transfer pricing method selected and the reason for the selection of the method for each related party transaction. There are different forms for tangible property transactions, intangible property transactions, service transactions and cost-sharing arrangements.
- Summary of International Transactions: A summary of cross-border transactions with foreign related parties.
- Summary of Income Statements of Overseas Affiliates: Summary income statements of foreign related parties having cross-border transactions with the Korean entity.
Rules for transfer pricing in The Republic of Korea prescribe that all documentation should be provided for in Korean. Sometimes English is accepted, however, only with approval of the tax authorities.
Requirements to prepare documentation annually
Taxpayers should provide the above-mentioned information at the time of filing the annual corporate income tax return.
Submission deadline upon request by tax authorities
Upon request of the tax authorities, a taxpayer must submit its documents and information requested by within 60 days of the request. A one-time extension of 60 days may be granted if reasonable circumstances specified in the LCITA exist. Contemporaneous transfer pricing documentation should be submitted to the NTS within 30 days of the request.
The NTS may also request that a taxpayer submit certain information (including transfer pricing documentation) during a tax audit. In that case, the taxpayer may be given a shorter notice to submit the information.
Advance Pricing Agreements
In The Republic of Korea it is possible to obtain unilateral, bilateral and multilateral Advance Pricing Agreements.
Korean legislation does not provide for a specific term for which an APA can be agreed upon, meaning that in principle an APA can be concluded for any period of time. Generally, however, APA’s are agreed upon for a five year period.
Rules for transfer pricing in The Republic of Korea provide two types of penalties associated with transfer pricing adjustments: an underreporting penalty and an underpayment penalty.
- The underreporting penalty is approximately 10% of the additional taxes resulting from a transfer pricing adjustment.
- The underpayment penalty, which is an interest payment in nature, is calculated as 0.03% of the additional taxes on a transfer pricing adjustment per day (10.95% per annum) on the cumulative days. The counting of cumulative days of the underpayment starts from the day after the statutory tax filing due date, which comes three months after the fiscal year end, and ends on the date that a payment for the tax assessment is made.
There are certain penalties for failing to comply with information/documentation requests issued by the NTS. For failure to provide documentation requested by the NTS within the required due date, there is a penalty of up to KRW100 million (approximately EUR 73,000).