SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
(b) operating profit; or (c) usage, production or sales volume. The NTS’s Viewpoint on the CCA Despite the enactment of the CCA regime in the LCITA, in practice, tax auditors have often challenged the validity of the CCA and typically deemed the payments made under the CCA as royalties to assess withholding taxes in Korea. As intangibles and CCA-related provisions have been supplemented during recent years, it is expected that the NTS will acknowledge the existence and the importance of intangibles and shift its view and perception to better recognise the CCA in practice as well. 5. Adjustments 5.1 Upward Transfer Pricing Adjustments The Taxpayer’s Right to Make an Affirmative TP Adjustment Taxpayers can make “self-initiated” TP adjust - ments, both downward and upward, provided there is a legitimate reason for doing so, such as if there has been a deviation from an arm’s length price. One noteworthy point is that this particular taxpayer’s right was previously contained in the LCITA’s subordinating regulations, but in 2019 was moved into the LCITA, demonstrating the importance of this taxpayer’s right. Circumstances That Warrant an Affirmative TP Adjustment Taxpayers can make this type of adjustment by incorporating it as part of the tax return or filing a separate amended return, if the actual trans - action price applied is lower or higher than the arm’s length price in a cross-border related-par - ty transaction. The deadline for the adjustment – which is consistent with the statute of limitations
– is five years for a downward adjustment and seven years for an upward adjustment. Another circumstance in which the adjustment can be made is when a mutual agreement proce - dure (MAP) or advance pricing agreement (APA) has been concluded. In this case, an adjust - ment can be made to harmonise the reported tax base and liability with the MAP or APA. Such an adjustment should be made by filing a return within three months of the notice of conclusion of the MAP or APA. 5.2 Secondary Transfer Pricing Adjustments The LCITA requires the submission of a Confir - mation of Return of Transfer Pricing Adjustment to ensure that the additional income included in a corporate taxpayer’s taxable income triggered by either a self-initiated taxpayer’s amended tax return or a tax assessment by taxing authorities has been returned by its foreign related party(ies) within a certain timeframe. In the case of filing an amended tax return, the confirmation must be submitted within 90 days from the filing date. In the case of a tax assess - ment by the Korean tax authorities as a result of a tax audit, the taxpayer receives a Notice of Temporary Secondary Adjustment (NTSA), which indicates that the transfer pricing adjust - ment amount is temporarily reserved until it is confirmed whether the adjusted income will be repatriated. The taxpayer then has 90 days from the date of receipt of the NTSA to submit the Confirmation of Return of Transfer Pricing Adjustment. If the taxpayer fails to submit such confirmation within 90 days, a secondary adjust - ment will occur upon the reversal of the tempo - rarily reserved amount, treating the amount as either a deemed dividend to its foreign related
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