Transfer Pricing
Country Summary
South Korea

This document summarizes the transfer pricing requirements and regulations in South Korea. South Korea, a member of the OECD, has made significant changes to its international tax and transfer pricing regulations following the publication of BEPS actions by the OECD in 2015. These changes introduced the Consolidated Reports on International Transaction Information (CRIT), which includes the Country-by-Country Report (CbCR), master file, and local file.


South Korea’s Transfer Pricing Regulations

South Korea is a member of the OECD, and it has updated its transfer pricing regulations significantly, aligning with OECD guidelines and the BEPS Action 13 recommendations. The key aspects of South Korea’s transfer pricing regulations are as follows:

Laws & Regulations

References to OECD/EU/Local Rules: South Korea’s Law for the Coordination of International Tax Affairs (LCITA) closely aligns with OECD principles. It underwent major revisions in 2006, introducing the substance-over-form principle and emphasizing the arm’s length principle for related party transactions.

Definition of Related Party: Related parties are determined based on ownership percentages, control of business policies, and shared interests between companies. Indirect ownership is also considered.

Nature of Transfer Pricing Documentation: South Korea prioritizes its Law for the Coordination of International Tax Affairs (LCITA) over OECD Guidelines, though the OECD Guidelines are recognized. Arguments based solely on OECD Guidelines without reference to LCITA may not be accepted.

Tax Havens & Blacklists: South Korea was included on the European Union’s blacklist in 2017.

Advance Pricing Agreement (APA): South Korea offers unilateral, bilateral, and multilateral APAs for a specified period. A simplified APA program is available for small and medium-sized foreign companies.

Audit Practice: Corporations involved in cross-border related party transactions are at a high risk of transfer pricing audits, especially in cases of management service fees, consistent losses, industries with widespread tax evasion, transactions with affiliates in tax havens, and changes in transfer pricing policy.

Transfer Pricing Documentation

Level of Documentation: South Korea has introduced CRIT, which includes a Master File, Local File, and CbCR, aligned with BEPS Action 13. The requirements depend on the size of transactions and total sales during a taxable year.

Industry Analysis: Industry analysis is essential for understanding the level of profitability common in the relevant industry.

Company Analysis: This includes describing the management structure, business strategy, involvement in business restructurings, and intangibles transfers.

Functional Analysis: This assesses significant activities, responsibilities, assets used, and risks borne in related party transactions, consistent with OECD Guidelines.

Choice of Transfer Pricing Method: South Korea follows the 2010 OECD Transfer Pricing Guidelines for various methods, including the comparable uncontrolled price method, resale price method, cost plus method, and others.

Economic Analysis – Benchmark Study: South Korea uses its local database, KIS-Line, for business and financial information. It may accept foreign comparables but subject to scrutiny.

Inter-company (IC) Legal Agreement: Legal agreements hold a lower ranking as the OECD’s 2017 Guidelines emphasize the “conduct of parties.”

Financial Statements: CbCR reporting follows specific rules, and foreign ultimate parent companies are responsible for filing the CbCR report.

Production Process for TP Relevant Returns, Documents, Forms and Financials: The language of submission varies for different documents. The Local File is submitted in Korean, the Master File can be in English and Korean, and the CbCR requires both English and Korean.

Notification Requirement: A taxpayer in an MNE group must submit a notice to indicate the entity filing the CbCR report within six months of its fiscal year-end.

Record Keeping: There’s no specific requirement for record keeping period, but a statute of limitation of 5 years applies.

Penalties and Interest Charges: Penalties for transfer pricing violations are substantial and may include penalty tax, residential surtax, and fines for failing to comply with reporting requirements.

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