SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
Low Value-Adding Intra-Group Services As introduced in Chapter 7 of the OECD Guide - lines, the safe harbour mark-up rate of 5% appli - cable to low value-adding intra-group services has been codified into Korean legislation, and taxpayers that meet a certain threshold require - ment are allowed to apply it without having to conduct a separate benchmarking study. The threshold requirement is as follows. If the cost plus the safe harbour rate of 5% exceeds the lesser of the following, a taxpayer is not allowed to invoke and apply the safe har - bour provision: • 5% of the taxpayer’s sales; or • 15% of the taxpayer’s operating expenses. The definition of low value-adding services, and examples, are clearly set out in the legislation. See 11.1 Transfer Pricing Safe Harbours for fur- ther information on low value-adding intra-group services. 9.4 Impact of BEPS 2.0 Notwithstanding the uncertain future for the suc - cessful implementation of Pillar Two due to the recent significant changes in both the executive and legislative branches of the US government, Korea is known to be the first country to codify the main elements of Pillar Two into its own inter - national tax regime – ie, the LCITA. In July 2023, as part of the tax law changes for 2024, exten - sive Pillar Two provisions incorporating OECD commentaries and administrative guidance on Pillar Two were proposed; these were officially enacted in December 2023. Particularly, as part of the 2024 tax law changes, the implementa - tion of the Undertaxed Payments Rule (UTPR) was officially postponed from 2023 to 2024 in order to align with other major countries, making
it effective for taxable years beginning on or after 1 January 2025. In January 2024, more specific and detailed regulation on Pillar Two was introduced by the MOEF as a part of the Presidential Enforcement Decrees of the LCITA, and such promulgation solidified the legal framework for the implemen - tation of Pillar Two. Pillar Two becomes effec - tive for the fiscal years beginning on or after 1 January 2024, with the first information return due within 18 months from the end of the first effective fiscal year – ie, 30 June 2026. On 22 March 2024, the Enforcement Decrees of the LCITA introduced 19 new forms and appendi - ces, including Form No 53: Global Minimum Tax Information Return, for the reporting of the global minimum tax. 9.5 Entities Bearing the Risk of Another Entity’s Operations In general, the Korean TP regime, just like the OECD Guidelines, does not contain clear regula - tions that restrict the form of business operations to particular types of entities (such as “entrepre- neur” and “limited-risk entity” ). Nevertheless, it is a very common practice to characterise an entity according to some conventional and wide - ly accepted TP categories, such as “entrepre- neur” , “entities performing and bearing routine functions and risks” and “limited-risk entities” . With regard to a limited-risk entity, the NTS may accept a guaranteed return by its parent company; however, since the OECD Guidelines’ Risk Analysis Framework was adopted into the Korean TP regime, the NTS’s attention has been more focused on whether there is any discrep - ancy between the entity purported to be bearing economically significant risks (ie, the contrac - tual arrangements) and the entity that is actu -
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