SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
Risk Analysis Framework From the OECD Guidelines In addition, it is noteworthy that the risk analy - sis framework first introduced in Chapter 1 of the OECD Guidelines released in July 2017 was codified into the LCITA in 2019. The purpose of this framework is to identify and assess eco - nomically significant risks assumed by taxpay - ers and their foreign related parties by virtue of accurately delineating controlled transactions. By incorporating this into Korean domestic law, taxpayers now have more practical and detailed guidance on the comparability adjustments. 4. Intangibles 4.1 Notable Rules Definition of Intangibles in the Context of TP and Applicable TP Methods The LCITA and its subordinating regulations provide a definition and examples of intangible assets, as well as stipulating factors to be con - sidered when executing transactions involving intangibles with foreign related parties. CUP and PSM are given priority as the most appropriate TP methods for calculating the arm’s length price for such transactions. If these priority methods are difficult to apply, other reasonable methods – such as the “discounted cash flow” method – can be used. The Concept of Economic Ownership When calculating the arm’s length price for a transaction involving intangible assets between a resident taxpayer and foreign related parties, regardless of who legally owns the intangible assets, the allocation of excess profits created from the intangibles should be commensurate with the respective value contribution and the level of DEMPE (development, enhancement, maintenance, protection and exploitation) per -
action methods were applied first, taking priority over the transactional profit methods. However, the LCITA was revised at the end of 2010, abolishing this prioritisation, and since that time taxpayers have been free to select the most reasonable method among the five TP methods available. However, as described previously, “other reason- able methods” can be applied only when none of the five specified TP methods can be reasonably applied. So, in that respect only, there is a limited hierarchy of methods. 3.4 Ranges and Statistical Measures It is possible for the NTS or taxpayers to adjust the tax base based on the arm’s length range, where the price applied to the cross-border related-party transaction is lower or higher than the arm’s length price. More specifically, the NTS cites the concept of “interquartile range” as an example of a reasonable method of calculating the arm’s length range. 3.5 Comparability Adjustments Comparability Adjustments per the LCITA When calculating the arm’s length price, if there is some factor that makes it difficult to compare directly between the related-party transaction and comparable third-party transactions, an adjustment can be made to take this factor into account. Such factors include: • types and characteristics of goods or ser - vices;
• functions of business activities; • risks associated with transactions; • assets used; • contractual terms and conditions; • economic conditions; and • business strategies.
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