SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
9. Alignment With OECD Transfer Pricing Guidelines 9.1 Alignment and Differences As an OECD member country, the Korean TP regime is highly synchronised and well aligned with the OECD Guidelines; there may be some minor local tweaks but, by and large, most of the regime is similar to that contained in the OECD Guidelines. This is because the Korean legis - lature and the MOEF closely monitor develop - ments at the OECD level and adopt them into the Korean TP regime in a timely manner. For example, the updated core transfer pricing con - cepts introduced in BEPS Actions 8–10 and 13 and transfer pricing guidance on financial trans - actions, as well as the Guidance on the Transfer Pricing Implications of the COVID-19 pandemic, were promptly incorporated into the Korean TP regime. 9.2 Arm’s Length Principle The LCITA defines the arm’s length price as “the price that is to be applied or determined to be applied by a resident, a domestic corpora- tion or a permanent establishment in Korea in its ordinary cross-border transactions with third parties” . Since the price applied in a related-party trans - action is judged to be high or low based on the arm’s length price, the Korean TP regime has duly adopted the arm’s length principle, and any deviation from this principle – eg, formulary apportionment – is not allowed under any cir - cumstances. As part of the arm’s length principle, the NTS needs to fully understand the key details of the international transaction, including the commer - cial or financial relations between the resident and the foreign related party, as well as impor -
tant terms and conditions. The NTS will then determine whether the transaction makes sense from a commercial standpoint (ie, commercial rationality) when compared with similar trans - actions between unrelated parties. If it is deter - mined that the transaction is not commercially rational and it is difficult to compute an arm’s length price, the NTS may consider such trans - action as if it had not occurred, or may apply an arm’s length method by recharacterising it as a new transaction in a rational manner. 9.3 Impact of the Base Erosion and Profit Shifting (BEPS) Project The major impact of the OECD BEPS project on the Korean TP regime was that the obligation to submit the CRIT on cross-border related-party transaction information was stipulated, and the regulations on intangible assets were sig - nificantly supplemented. Moreover, due to the BEPS project, the risk analysis framework and a safe harbour provision for low value-adding intra-group services have also been adopted into the Korean TP regime. The CRIT If a Korean taxpayer’s sales and cross-border related-party transactions exceed certain thresh - olds, the taxpayer is required to submit the CRIT, which consists of a local file, master file and CbC report. For detailed thresholds, please refer to 8.2 Transfer Pricing Documentation . Intangible Assets See 4.1 Notable Rules and 4.2 Hard-to-Value Intangibles . Risk Analysis Framework See 3.5 Comparability Adjustments .
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