SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations The Korean transfer pricing (TP) regulatory regime is set out in the Law for the Co-ordi - nation of International Tax Affairs (LCITA), and the enforcement and interpretative regulations, namely the Presidential Enforcement Decree of the LCITA and the Ordinance of the Ministry of Economy and Finance (MOEF) of the LCITA. In addition to the TP legislation, the commis - sioner of the National Tax Service (NTS) may issue administrative orders and rulings to ensure consistent application of the laws. These do not constitute binding authority in Korea. Instead, the courts have final authority in interpreting the tax laws, including those governing the TP regu - latory regime. 1.2 Current Regime and Recent Changes Since its inception in 1990, the Korean TP regime under the LCITA has undergone con - tinuous development, keeping pace with simi - lar developments that have taken place in other OECD countries. Broadly, there were five major milestones, which are as follows. The Origins of the Korean TP Regulatory Regime The need for a TP regulatory regime first emerged against the backdrop of Korea’s rapid economic growth in the 1980s, and the ensuing increase in the volume of cross-border transactions by multinational businesses. The first TP regula - tions were introduced in 1988. Initially, these TP regulations were contained within a provision of the Presidential Enforce - ment Decree of the Corporate Income Tax Law (CITA), under an article relating to the denial of unfair transactions. This article regulated unfair
transactions among related parties (at that time, applicable to both domestic and cross-border related-party transactions). Subsequently, the TP regulatory regime was made more robust when, in 1990, the Ministry of Finance and the NTS introduced standalone TP rules and regula - tions, to assist with interpretation of the above- mentioned CITA provision. The Emergence of a Separate Statute Regulating TP and International Taxation In the 1990s, there were significant changes to the US TP regime – ie, Section 482 and its sub - ordinating regulations – as well as to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Guidelines” ). To align Korea’s tax law and prac - tices with international norms in anticipation of joining the OECD, the LCITA – a separate statute governing TP and international taxation – was introduced in January 1996. The then-existing TP regulations under the CITA were relocated to the LCITA to reflect these international changes, with the LCITA and its regulations adopting the main contents of the OECD Guidelines. The Korean TP Regime Overhauled In the 2000s, the cross-border transactions of multinationals became increasingly complex, and it became apparent that Korea’s TP regime lacked the sophistication and detail to keep pace with modern developments. As a result, disputes between taxpayers and tax authorities increased significantly during this period. To address this issue, the Korean government overhauled the TP regime in 2010. The new regime gave the NTS the right to adjust income and tax liability based on the arm’s length principle, abolished the pref - erential application of the traditional transaction methods, and introduced more sophisticated TP methods that entailed features such as inte -
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