SOUTH KOREA Law and Practice Contributed by: Steve M Kim, Philje Cho, Gijin Hong and Kyu Bin Kang, Lee & Ko
Moreover, there has been no prominent case in which the location saving concept was disputed. 11.3 Unique Transfer Pricing Rules or Practices There are no unique TP rules that significantly deviate from international norms or conventions derived from the OECD Guidelines. When a taxpayer conducts a financial transac - tion with a foreign related party, the arm’s length interest rate can be calculated in two ways, as follows: • by considering comparability factors such as the amount of the debt, maturity of the debt, existence of a guarantee, creditworthiness of the debtor and other factors; or • by using the “safe harbour” interest rate pre - scribed in the LCITA. 11.4 Financial Transactions Intercompany Loan Transactions In the latter case, the regulations stipulate that the interest rate for an overdraft – which is 4.6% – is deemed as a safe harbour rate when a Korean taxpayer lends funds to its foreign related parties. Conversely, if a Korean taxpayer borrows funds from its foreign related parties, Risk Free Rates (RFR) for respective currencies, which are enumerated in the subordinating regu - lation of the LCITA (such as SOFR for US dollars and KOFR for South Korean won), plus 150 basis points is deemed a safe harbour rate. Where a certain currency is not enumerated in the regula - tion, SOFR will be used as the base rate pursu - ant to the regulation. As referred to in 9.1 Alignment and Differenc - es , starting in 2022, key points from the OECD Transfer Pricing Guidance on Financial Transac - tions have been codified into the subordinating
regulations of the LCITA, and the updated regu - lations supplement the aforementioned high- level regulations on intercompany loan pricing, with more detailed methodologies set out below: • utilisation of financial derivative instruments such as credit default swaps by taking into account the comparability factors listed above; and • utilisation of economic modelling by add - ing a number of premiums related to various aspects of a loan – such as, default risk, liquidity risk, expected inflation and maturity – to a risk-free interest rate. 12. Co-Ordination With Customs Valuation 12.1 Co-Ordination Requirements Between Transfer Pricing and Customs Valuation In the Korean TP regime, there is some co-ordi - nation between transfer pricing and customs valuation, as follows. When there is an upward adjustment on a duti - able value by the Korea Customs Service (KCS) for customs purposes, the taxpayer is entitled to file a downward amended return for TP pur - poses, within three months of receiving the cus - toms duty assessment letter. However, there is an important precondition: such a claim for downward adjustment will only be accepted when the recalculation of customs value by the KCS is consistent with the relevant arm’s length TP methods under the Korean TP regime. When a taxpayer applies for a unilateral APA to cover the method of calculating the arm’s length price, it can simultaneously apply for an advance customs valuation arrangement,
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