SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
The Comprehensive Report of International Transactions If a taxpayer is required to submit the CRIT (the threshold is explained in 8.2 Transfer Pricing Docu- mentation ) – consisting of a master file, local file and CbC report – the submission must be made within 12 months from the end of each fiscal year. If all or part of the report is not submitted or is false, a fine of KRW30 million is imposed for each such report. Additionally, for non-compliant taxpayers, the NTS may request the submission of missing reports with 30 days’ notice, and failure to comply within such timeframe can trig - ger interest, which could add up to KRW200 million. Given the foregoing burden of penalties for non-com - pliant taxpayers, starting from 2022, taxpayers will be able to benefit from reduced penalties if taxpayers vol - untarily take a pre-emptive measure (ie, submission of missing reports or rectifying false information) and the rate of reduction varies from 30% to 90% depending on how soon such measure is taken. Request for the Submission of a TP Report During a Tax Audit and Contemporaneous TP Documentation The NTS may request certain information relating to the basis of the arm’s length price calculation for TP purposes – ie, TP documentation – when a taxpayer is audited. If so, the taxpayer must submit it within 60 days of the request. If any part of the requested data is not submitted or is false, a fine of KRW30 million to KRW70 million may be imposed, depending on the level of non-submission. As with the CRIT, the NTS can request the submission of missing reports with a 30-day notice period, where failure to comply within such timeframe can trigger interest, which could add up to KRW200 million. If the NTS recognises that TP documentation is completed and maintained contemporaneously with a corporate tax return, and if the NTS also consid - ers that the TP method has been carefully selected and applied in a reasonable manner (which some - times could be quite subjective and contentious), a taxpayer can receive a 10% under-reporting penalty exemption, if at some point that taxpayer is audited and additional tax is assessed based on TP. When
contemporaneous TP documentation is requested by the NTS, a taxpayer must submit it within 30 days. In order to avoid penalties arising from the NTS’s request for TP-related information, it is very impor - tant to comply with the submission deadline, and it is essential to include a reasonable explanation of the TP method applied by the taxpayer. This expla - nation should be supported by documentation and corroborating data. Moreover, the format of the TP documentation, and the database used for bench - marking, should be in line with local practice and the NTS’s expectations, to ensure that it is considered to be substantial and persuasive. 8.2 Transfer Pricing Documentation Threshold Requirements Taxpayers with sales of KRW100 billion or more and KRW50 billion or more in cross-border transactions with their related parties in a given year are required to submit a master file and a local file to the Korean tax authorities via its online portal annually. Foreign parent companies with sales of KRW1 trillion on a consoli - dated basis in the immediately preceding year should submit a CbC report, provided that: • there is no CbC report submission requirement in their home country; and • their home country has not executed a CbC report exchange treaty with Korea. Submission Deadline The CRIT – consisting of the local file, master file and CbC report – should be submitted within 12 months from the end of each fiscal year. Contemporaneous TP Documentation For those taxpayers not subject to the CRIT, there is still merit in having TP documentation ready, as the NTS may request it in the course of a tax audit; if so, it should be submitted within 60 days of the request. Besides, by virtue of preparing contemporaneous TP documentation, taxpayers could potentially benefit from the 10% under-reporting penalty exemption in the event that additional tax is assessed based on TP considerations.
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