SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
3.2 Unspecified Methods The last category in 3.1 Transfer Pricing Methods , “other reasonable methods”, should be applied only when none of the first five TP methods can reasonably be applied to derive an arm’s length price. In this situ - ation, other reasonable methods can be considered if their application can be deemed reasonable in the light of the customary practice and the substance of CUP, RPM and CPM are categorised as “traditional transaction methods”. By contrast, PSM and TNMM are categorised as “transactional profit methods”. Previously, the traditional transaction methods were applied first, taking priority over the transactional prof - it methods. However, the LCITA was revised at the end of 2010, abolishing this prioritisation, and since that time taxpayers have been free to select the most rea - sonable method among the five TP methods available. Nonetheless, as described previously, “other reason - able methods” can be applied only when none of the five specified TP methods can be reasonably applied – so, in that respect only, there is a limited hierarchy of methods. 3.4 Ranges and Statistical Measures It is possible for the NTS or taxpayers to adjust the tax base based on the arm’s length range, where the price applied to the cross-border related-party transaction is lower or higher than the arm’s length price. More specifically, the NTS cites the concept of “interquar - tile range” as an example of a reasonable method of the transaction in question. 3.3 Hierarchy of Methods calculating the arm’s length range. 3.5 Comparability Adjustments Comparability Adjustments per the LCITA When calculating the arm’s length price, if there is some factor that makes it difficult to compare directly between the related-party transaction and compa - rable third-party transactions, an adjustment can be made to take this factor into account. Such factors include: • types and characteristics of goods or services;
(c) one party borrows at least 50% of the funds from the other party; or (d) one party depends on the intellectual property right provided by the other party for at least 50% of its business activities. • Both parties have a common interest through an investment in capital, trade in goods or services, granting of a loan, or similar financial provision, and a third party has the power to substantially determine the business policies of both transacting parties by any of the following means: (a) a third party owns, directly or indirectly, at least 50% of the voting shares of one party and has the power to substantially determine the busi - ness policies of the other party; (b) a third party has the power to substantially de - termine the business policies of both parties; or (c) one party is an affiliated company of a group within the context of competition law in Korea and another affiliated company of the same group owns, directly or indirectly, at least 50% of the voting shares of the other party. When assessing whether one party has the power to substantially determine the business policy of the oth - er, the following factors should be considered under a general facts and circumstances analysis: • the amount of borrowings; • the level of dependency of one party on the other; • the control of the board and management; and • other similar factors. 3. Methods and Method Selection and Application 3.1 Transfer Pricing Methods Article 8 of the LCITA lists six methods of calculating the arm’s length price, as follows: • comparable uncontrolled price method (CUP); • resale price method (RPM); • cost-plus method (CPM); • transactional net margin method (TNMM); • profit split method (PSM); and • other reasonable methods.
• functions of business activities; • risks associated with transactions;
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