SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
of a guarantee, creditworthiness of the debtor and other factors; or • by using the “safe harbour” interest rate prescribed in the LCITA. In the latter case, the regulations stipulate that the interest rate for an overdraft – which is 4.6% – is deemed a safe harbour rate when a Korean taxpayer lends funds to its foreign related parties. Conversely, if a Korean taxpayer borrows funds from its foreign related parties, Risk Free Rates (RFR) for respective currencies, which are enumerated in the subordinat - ing regulation of the LCITA (such as SOFR for US dollars and KOFR for South Korean won), plus 150 basis points is deemed a safe harbour rate. Where a certain currency is not enumerated in the regulation, SOFR will be used as the base rate pursuant to the regulation. As referred to in 9.1 Alignment and Differences , start- ing in 2022, key points from the OECD Transfer Pricing Guidance on Financial Transactions have been codi - fied into the subordinating regulations of the LCITA, and the updated regulations supplement the afore - mentioned high-level regulations on intercompany loan pricing, with more detailed methodologies set out below: • utilisation of financial derivative instruments such as credit default swaps by taking into account the comparability factors listed above; and • utilisation of economic modelling by adding a num - ber of premiums related to various aspects of a loan – such as default risk, liquidity risk, expected inflation and maturity – to a risk-free interest rate. 12. Co-Ordination With Customs Valuation 12.1 Co-Ordination Requirements Between Transfer Pricing and Customs Valuation In the Korean TP regime, there is some co-ordination between TP and customs valuation, as follows. When there is an upward adjustment on a dutiable value by the Korea Customs Service (KCS) for cus - toms purposes, the taxpayer is entitled to file a down -
ward amended return for TP purposes, within three months of receiving the customs duty assessment letter. However, there is an important precondition: such a claim for downward adjustment will only be accepted when the recalculation of customs value by the KCS is consistent with the relevant arm’s length TP methods under the Korean TP regime. When a taxpayer applies for a unilateral APA to cover the method of calculating the arm’s length price, it can simultaneously apply for an advance customs valua - tion arrangement, in order to obtain a pre-alignment between the arm’s length price and the dutiable value. Upon receipt of the application, the NTS and the KCS will co-operate on the method of calculating the arm’s length price and dutiable value, and on the range of the pre-adjusted price. 13. Controversy Process 13.1 Options and Requirements in Transfer The NTS is legally required to establish a TP Review Committee (TPRC) within each regional tax office to review proposed TP adjustments prior to the comple - tion of a tax audit. The TPRC is designed to ensure that taxpayers are treated fairly and consistently with regard to TP assessments. The TPRC is responsible for reviewing proposed adjustments that are: • in excess of KRW30 billion; or • disputed by a taxpayer. Review of Accuracy of Tax Imposition (RATI) Once a tax audit has been completed, the tax audi - tor will provide a notice to the taxpayer of its findings and the proposed amount of additional tax that will be assessed. This notice is known as a Pre-Tax Assess - ment Notice (PTAN). Time limits are important, since the taxpayer has 30 days to appeal to an administra - tive body within the NTS to review the legal basis of the proposed tax assessment. This process is referred to as a request for a RATI. Once filed, the tax auditor’s right to issue a formal Tax Assessment Notice (TAN), which crystalises the Pricing Controversies TP Review Committee
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