Legislation in Korea amends both the transfer pricing and customs rules to allow taxpayers to arrange for the advance coordination of valuation for both transfer pricing and customs purposes.
Historically, there has been a disconnect between transfer pricing and customs valuations, and this has been a long-standing issue encountered by multinational enterprises undertaking cross-border trade transactions. Because adjustments proposed by tax or customs authorities may have no bearing on the other, there is a potential risk of domestic double taxation.
In recognition of taxpayer concerns, the Korean government has made various amendments to the Korea transfer pricing rules and the Korea customs law—changes that aim aimed at bridging the valuation issues.
In 2012, the Korean government amended both the international tax and customs laws to mandate that the tax and customs authorities respect an adjustment made by the other.
In 2015, a new legislation was enacted that allows for joint application of unilateral advance pricing arrangement (APA) and advance customs valuation arrangement (ACVA). These legislative amendments were undertaken to promote communication between two tax authorities and reduce the burden faced by the taxpayers.
The following table provides information and a comparison of the APA and ACVA provisions.
Customs Service (KCS)
||Article 6 of
the corporate tax law
of the customs law
|Prior to the
end of first fiscal year within APA period
years from filing date
year from filing date
||Five years, three-year
The joint APA-ACVA application is not available to all taxpayers, and certain conditions must be satisfied to qualify.
The main condition is the selection of transfer pricing and customs valuation methods. Newly enacted Article 6-3 paragraph 2 of the international tax law states that for joint filing to be accepted, the transfer pricing method and the customs valuation method must be reconcilable. Further guidance provided under Article 14-7 of a presidential enforcement decree lists acceptable transfer pricing and customs valuation methods for the joint filing (these are noted in the following table).
uncontrolled price method
value of identical or similar goods
Taxpayers will be required to explain the reason for selecting a method and why they consider that method to be most appropriate in testing the controlled transaction. Because the transactional net margin method is widely applied in practice, a close review of the current transfer pricing method may be required to satisfy the joint filing requirements.
This new joint filing option will be available for all application made on or after 1 January 2015.
This new advance valuation procedure is expected to allow the taxpayers to better manage their transfer pricing and customs valuation-related risks. Once approved, taxpayers will gain certainty on their cross-border pricing and will be able to eliminate potential domestic double tax risks. However, given the limited choices of transfer pricing and customs valuation methods that are currently acceptable under the coordination rules, a taxpayer seeking to pursue this new planning opportunity may need to modify its current transfer pricing and customs valuation positions for joint-filing purposes. KPMG is currently working with the two tax authorities to develop a hybrid methods that may be acceptable under both regimes.
Another issue to note relates to the treatment of roll-back (filed) tax filing. The Korean unilateral APA rule allows for up to three roll-back years to be covered in the APA. However, the ACVA does not have similar provisions on the treatment of filed import returns. The details on the treatment of filed years still must be reconciled, but based on a current understanding of the transfer pricing regulations, it appears that the roll-back of the APA may be possible.
For more information, contact a KPMG Global Transfer Pricing Services professional in Korea:
Tae Hyun (Pius) Park
+82 (2) 2112 6757