Korea: Transfer pricing, customs valuations advance arrangements

Korea: Transfer pricing, customs valuations

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.

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Background

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.

APA / ACVA

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.

  APA

ACVA

Administrative

body



National Tax

Service (NTS)



Korea

Customs Service (KCS)

Regulation



Article 6 of

the corporate tax law

Article 37

of the customs law

Application

filing date



Prior to the

end of first fiscal year within APA period

Prior to

declaring value



Assessment period

Within two

years from filing date

Within one

year from filing date

Applicability

Five years, three-year

rollback period

Three years

APA

ACVA

Administrative

body



National Tax

Service (NTS)



Korea

Customs Service (KCS)



Regulation



Article 6 of

the corporate tax law



Article 37

of the customs law



Application

filing date

Prior to the

end of first fiscal year within APA period

Prior to

declaring value

Assessment period







Within two

years from filing date

Within one

year from filing date

Applicability



Five years, three-year

rollback period

Three years

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).

APA

ACVA

Comparable

uncontrolled price method

Transaction

value of identical or similar goods

Resale price

method

Deductive

value method

Cost plus

method

Computed

value method

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. 

KPMG observation

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

taehyunpark@kr.kpmg.com

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