SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
10. Relevance of the United Nations Practical Manual on Transfer Pricing 10.1 Impact of UN Practical Manual on Transfer Pricing As Korea’s economy opened up rapidly in the 1990s, the need to participate in a wide range of international co-operation systems emerged. Accordingly, Korea joined the OECD in December 1996. In July 1995, the OECD Guidelines were issued, and at the end of 1995, when Korea was pursuing OECD membership, it proactively reflected the OECD Guide - lines through domestic legislation. Subsequent revi - sions to the OECD Guidelines – in 2010, 2017 and 2022 – have mostly been reflected in the Korean TP regime. As an OECD member country, Korea has based its TP regime on the OECD Guidelines, and, except with respect to the definition of related parties, Korea has generally not adopted the principles from the UN Practical Manual on Transfer Pricing. 11. Safe Harbours or Other Unique Rules 11.1 Transfer Pricing Safe Harbours There are two main types of transactions where TP safe harbour rules may apply: • low value-adding intra-group service transactions; and • intercompany loan transactions. Low Value-Adding Intra-Group Services If an intercompany service transaction within a mul - tinational group is of a supportive and “back office” nature, rather than relating to the core business activities of the taxpayer, this is deemed to be a “low value-adding intra-group service”. In this case, a 5% mark-up can be applied, without the need to conduct a separate benchmarking analysis. In order for an intra-group service to be deemed a low value-adding service, a unique and valuable intangible asset should not be used or created, and the service
provider should not bear, manage or control any sig - nificant risk in the course of rendering the service. The legislation provides the following as examples of services that do not constitute low value-adding intra- group services: • research and development; • exploration, extraction and processing of natural resources; • manufacturing; • sales and marketing; and • finance, insurance and reinsurance. 11.2 Rules on Savings Arising From Operating in the Jurisdiction Under the Korean TP regime, the concept of savings arising from operating in Korea (eg, location savings) is not specifically addressed. However, as Korea fol - lows the OECD Guidelines, it would be difficult for the NTS or taxpayers to argue for the existence of such savings, and it is highly likely that such savings could be seen as part of a local market feature, which does not warrant any comparability adjustments, provided that reliable local market comparables can be identi - fied. Moreover, there has been no prominent case in which the location saving concept was disputed. 11.3 Unique Transfer Pricing Rules or Practices There are no unique TP rules that significantly deviate from international norms or conventions derived from the OECD Guidelines. One notable administrative practice in Korea is that the NTS generally accepts only Korean comparable companies identified through a domestic database, commonly referred to as “Value Search”, when conducting benchmarking analyses for TP purposes. When a taxpayer conducts a financial transaction with a foreign related party, the arm’s length interest rate can be calculated in two ways, as follows: • by considering comparability factors such as the amount of the debt, maturity of the debt, existence 11.4 Financial Transactions Intercompany Loan Transactions
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