SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
4.2 Hard-to-Value Intangibles Classification of Hard-to-Value Intangibles (HTVI) Intangible assets that satisfy all the following require - ments are classified as HTVI: • when there is no comparable transaction between third parties at the time of the transaction involving intangible assets; and • when the intangible assets are under development, and when they are expected to take a long time to be used commercially or there is a high degree of uncertainty about the economic benefits expected from the intangible assets at the time of the trans - action (this could be due to the level of innovation involved or other similar unforeseen factors). Ex Post Outcomes: Presumptive Evidence In situations involving the transfer of HTVI or rights in HTVI, an outcome where the actual price exceeds 120% of the price agreed upon by related parties prior to the transaction can create a rebuttable presump - tion. Specifically, the NTS will be entitled to presume and able to claim that the price agreed in advance did not appropriately take into account reasonably fore - seeable developments. Therefore, the presumption will be that the transfer price is unreliable. Taxpayers can rebut this presumption by producing evidence showing that: • they appropriately took into account the relevant factors when reaching their pricing arrangement; and • the difference in the actual outcome was due to unforeseeable developments. 4.3 Cost Sharing/Cost Contribution Arrangements A cost contribution arrangement (CCA) regime was initially codified into the LCITA in 2006, and since then there have been several revisions to the provision. The NTS’s Authority to Re-Determine the Arm’s Length Deduction The NTS has the authority to re-determine the tax base and tax liability of a resident company if:
• assets used; • contractual terms and conditions; • economic conditions; and • business strategies. Risk Analysis Framework From the OECD Guidelines
In addition, it is noteworthy that the risk analysis framework first introduced in Chapter 1 of the OECD Guidelines released in July 2017 was codified into the LCITA in 2019. The purpose of this framework is to identify and assess economically significant risks assumed by taxpayers and their foreign related parties by virtue of accurately delineating controlled transac - tions. By incorporating this into Korean domestic law, taxpayers now have more practical and detailed guid - ance on the comparability adjustments. 4. Intangibles 4.1 Notable Rules Definition of Intangibles in the Context of TP and Applicable TP Methods The LCITA and its subordinating regulations pro - vide a definition and examples of intangible assets, as well as stipulating factors to be considered when executing transactions involving intangibles with for - eign related parties. CUP and PSM are given priority as the most appropriate TP methods for calculating the arm’s length price for such transactions. If these priority methods are difficult to apply, other reason - able methods – such as the “discounted cash flow” method – can be used. The Concept of Economic Ownership When calculating the arm’s length price for a trans - action involving intangible assets between a resident taxpayer and foreign related parties, regardless of who legally owns the intangible assets, the allocation of excess profits created from the intangibles should be commensurate with the respective value contribution and the level of DEMPE (development, enhancement, maintenance, protection and exploitation) performed by each entity in the value chain. The focus is on the practical use and maintenance of the intangible asset – that is, economic ownership rather than legal own - ership. This is consistent with the OECD Guidelines.
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