SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
• a resident business enters into a CCA with a foreign-related party, in order to jointly develop or acquire intangible assets; and • the resident’s actual share of costs is higher or lower than an arm’s length share. The NTS will then adjust the resident’s share of the costs, based on the arm’s length principle. The NTS is especially likely to wield this authority if there is a 20% or more difference between the benefit that is expected: • at the time of executing the CCA agreement; and • after the joint development. Methods of Measuring the Expected Benefit The expected benefit can be calculated by consid - ering one of the following as a proxy for the benefit received. • Costs saved. • An increase in any of the following items due to the use of intangible assets: (a) sales; (b) operating profit; or (c) usage, production or sales volume. The NTS’s Viewpoint on the CCA Despite the enactment of the CCA regime in the LCI - TA, in practice tax auditors have often challenged the validity of the CCA and typically deemed the payments made under the CCA as royalties to assess withhold- ing taxes in Korea. As intangibles and CCA-related provisions have been supplemented during recent years, it is expected that the NTS will acknowledge the existence and the importance of intangibles and shift its view and perception to better recognise the CCA in practice as well. 5. Adjustments 5.1 Upward Transfer Pricing Adjustments The Taxpayer’s Right to Make an Affirmative TP Adjustment Taxpayers can make “self-initiated” TP adjustments, both downward and upward, provided there is a legiti - mate reason for doing so, such as if there has been a
deviation from an arm’s length price. One noteworthy point is that this particular taxpayer’s right was previ - ously contained in the LCITA’s subordinating regula - tions but in 2019 was moved into the LCITA, demon - strating the importance of this taxpayer’s right. With respect to the documents that must be submit - ted when filing a refund claim based on TP adjust - ments, documentation evidencing the adjustment of taxable income of a foreign related party (ie, demon - strating the existence of double taxation) was newly added as a required submission pursuant to a provi - sion introduced on 23 December 2025. This change applies to claims filed on or after 1 January 2026. The amendment is intended to ensure that such claims are filed only in cases where double taxation has actu - ally arisen in the counterparty jurisdiction, thereby preventing the occurrence of double non-taxation in advance. Circumstances That Warrant an Affirmative TP Adjustment Taxpayers can make this type of adjustment by incor - porating it as part of the tax return or filing a sepa - rate amended return, if the actual transaction price applied is lower or higher than the arm’s length price in a cross-border related-party transaction. The deadline for the adjustment – which is consistent with the stat - ute of limitations – is five years for a downward adjust - ment and seven years for an upward adjustment. Another circumstance in which the adjustment can be made is when a mutual agreement procedure (MAP) or advance pricing agreement (APA) has been con - cluded. In this case, an adjustment can be made to harmonise the reported tax base and liability with the MAP or APA. Such an adjustment should be made by filing a return within three months of the notice of conclusion of the MAP or APA. 5.2 Secondary Transfer Pricing Adjustments The LCITA requires the submission of a Confirmation of Return of Transfer Pricing Adjustment to ensure that the additional income included in a corporate taxpay - er’s taxable income triggered by either a self-initiated taxpayer’s amended tax return or a tax assessment by taxing authorities has been returned by its foreign related party(ies) within a certain timeframe.
206 CHAMBERS.COM
Powered by FlippingBook