SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
9. Alignment With OECD Guidelines 9.1 Alignment and Differences As an OECD member country, the Korean TP regime is highly synchronised and well aligned with the OECD Guidelines; there may be some minor local tweaks but, by and large, most of the regime is similar to that contained in the OECD Guidelines. This is because the Korean legislature and the MOEF closely monitor developments at the OECD level and adopt them into the Korean TP regime in a timely manner. For example, the updated core TP concepts introduced in BEPS Actions 8–10 and 13 and TP guidance on financial transactions, as well as the Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic, were promptly incorporated into the Korean TP regime. 9.2 Arm’s Length Principle The LCITA defines the arm’s length price as “the price that is to be applied or determined to be applied by a resident, a domestic corporation or a permanent establishment in Korea in its ordinary cross-border transactions with third parties”. Since the price applied in a related-party transac - tion is judged to be high or low based on the arm’s length price, the Korean TP regime has duly adopted the arm’s length principle, and any deviation from this principle – eg, formulary apportionment – is not allowed under any circumstances. As part of the arm’s length principle, the NTS needs to fully understand the key details of the international transaction, including the commercial or financial rela - tions between the resident and the foreign related par - ty, as well as important terms and conditions. The NTS will then determine whether the transaction makes sense from a commercial standpoint (ie, commercial rationality) when compared with similar transactions between unrelated parties. If it is determined that the transaction is not commercially rational and it is dif - ficult to compute an arm’s length price, the NTS may consider such transaction as if it had not occurred, or may apply an arm’s length method by recharacterising it as a new transaction in a rational manner.
9.3 Impact of the Base Erosion and Profit Shifting (BEPS) Project The major impact of the OECD BEPS project on the Korean TP regime was that the obligation to submit the CRIT on cross-border related-party transaction information was stipulated, and the regulations on intangible assets were significantly supplemented. Moreover, due to the BEPS project, the risk analysis framework and a safe harbour provision for low value- adding intra-group services have also been adopted into the Korean TP regime. The CRIT If a Korean taxpayer’s sales and cross-border related- party transactions exceed certain thresholds, the tax - payer is required to submit the CRIT, which consists of a local file, master file and CbC report. For detailed thresholds, please refer to 8.2 Transfer Pricing Docu- mentation . Intangible Assets See 4.1 Notable Rules and 4.2 Hard-to-Value Intan- gibles . Risk Analysis Framework See 3.5 Comparability Adjustments . Low Value-Adding Intra-Group Services As introduced in Chapter 7 of the OECD Guidelines, the safe harbour mark-up rate of 5% applicable to low value-adding intra-group services has been codi - fied into Korean legislation, and taxpayers that meet a certain threshold requirement are allowed to apply it without having to conduct a separate benchmarking study. The threshold requirement is as follows. If the cost plus the safe harbour rate of 5% exceeds the lesser of the following, a taxpayer is not allowed to invoke and apply the safe harbour provision: • 5% of the taxpayer’s sales; or • 15% of the taxpayer’s operating expenses. The definition of low value-adding services, and examples, are clearly set out in the legislation. See 11.1 Transfer Pricing Safe Harbours for further infor - mation on low value-adding intra-group services.
211 CHAMBERS.COM
Powered by FlippingBook