SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
Lee & Co Hanjin Building 63 Namdaemun-ro Jung-gu
Seoul 04532 South Korea
Tel: +82 2 6386 6271 Fax: +82 2 772 4001 Email: steve.kim@leeko.com Web: www.leeko.com
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations The Korean transfer pricing (TP) regulatory regime is set out in the Law for the Co-ordination of Interna - tional Tax Affairs (LCITA), and the enforcement and interpretative regulations, namely the Presidential Enforcement Decree of the LCITA and the Ordinance of the Ministry of Economy and Finance (MOEF) of the LCITA. In addition to the TP legislation, the commissioner of the National Tax Service (NTS) may issue administra - tive orders and rulings to ensure consistent application of the laws. These do not constitute binding authority in Korea. Instead, the courts have final authority in interpreting the tax laws, including those governing the TP regulatory regime. 1.2 Current Regime and Recent Changes Since its inception in 1990, the Korean TP regime under the LCITA has undergone continuous develop - ment, keeping pace with similar developments that have taken place in other OECD countries. Broadly, there were five major milestones, as follows. The Origins of the Korean TP Regulatory Regime The need for a TP regulatory regime first emerged against the backdrop of Korea’s rapid economic growth in the 1980s and the ensuing increase in the volume of cross-border transactions by multinational businesses. The first TP regulations were introduced in 1988.
Initially, these TP regulations were contained within a provision of the Presidential Enforcement Decree of the Corporate Income Tax Law (CITA), under an article relating to the denial of unfair transactions. This article regulated unfair transactions among related parties (at that time, applicable to both domestic and cross- border related-party transactions). Subsequently, the TP regulatory regime was made more robust when, in 1990, the Ministry of Finance and the NTS introduced standalone TP rules and regulations, to assist with interpretation of the above-mentioned CITA provision. The Emergence of a Separate Statute Regulating TP and International Taxation In the 1990s, there were significant changes to the US TP regime – ie, Section 482 and its subordinating regulations – as well as to the OECD Transfer Pric - ing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Guidelines”). To align Korea’s tax law and practices with international norms in anticipation of joining the OECD, the LCITA – a sep - arate statute governing TP and international taxation – was introduced in January 1996. The then-existing TP regulations under the CITA were relocated to the LCITA to reflect these international changes, with the LCITA and its regulations adopting the main contents of the OECD Guidelines. The Korean TP Regime Overhauled In the 2000s, the cross-border transactions of mul - tinationals became increasingly complex, and it became apparent that Korea’s TP regime lacked the sophistication and detail to keep pace with modern developments. As a result, disputes between taxpay -
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