Korea: Law to implement BEPS-related transfer pricing requirements

Korea: Implementing BEPS-related transfer pricing rules

South Korea’s Ministry of Strategy and Finance released drafted legislation that would amend existing provisions of Korean law—specifically, Articles 11 and 12 of the law known in English as the “Law for the Coordination of International Tax Affairs” or LCITA—to implement certain OECD base erosion and profit shifting (BEPS) initiatives for transfer pricing documentation. The draft legislation would require taxpayers, subject to the Korean transfer pricing rules, to submit both a master file and a local file containing information on related-party transactions.

Related content

Country-by-country (CbC) reporting is not included in the current draft of the Korean legislation at this moment; however, this could change depending, in part, on the actions of other OECD member nations.

The new legislation in Korea, if enacted, would be effective 1 January 2016. Assuming the legislation is enacted, preparation of the transfer pricing documentation would be mandatory—rather than optional—for subject taxpayers. Procedures and other guidance would be expected to be provided by the government in the near future. 

Transfer pricing reporting requirements

The draft legislation (released 6 August 2015) would provide new requirements regarding transfer pricing documentation. According to the draft, a transfer pricing report would have to be submitted by all taxpayers that enter into cross-border related-party transactions.

The draft legislation generally follows Action 13 (Re-examine transfer pricing documentation) of the BEPS project. OECD guidance published in September 2014—Guidance on transfer pricing documentation and country-by-country reporting—introduced a three-tiered standardized approach to transfer pricing documentation:

  • A master file of standardized information relevant for all multinational enterprise (MNE) group members
  • A local file referring specifically to “material transactions” of the local taxpayer
  • A country-by-country report (CbC report) containing certain information relating to the global allocation of the MNE group’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group

Accordingly, the draft legislation in Korea would require taxpayers to submit a master file and a local file. As noted above, a CbC report is not required in the current iteration of the draft legislation. 

Details of draft legislation

Details of the draft legislation are as follows:

  • Affected provisions: LCITA Article 11…①, Article 12…①, enforcement ordinance Article 19…①
  • Scope of application: Domestic and foreign corporations with permanent establishments in Korea, and conducting cross-border related-party transactions of an amount above a certain threshold and/or involving a certain amount of assets in value would be subject to the filing requirements. The OECD report recommends exempting from the general filing requirement those MNE groups with annual consolidated group revenue in the immediately preceding fiscal year of less than €750 million or a near equivalent amount in domestic currency. More details on these criteria are expected to be released by the Korean authorities in the near future.
  • Required documents: A full report of cross-border related-party transactions would include: (1) a master file, and (2) a local file. Current law in Korea requires taxpayers to file only a schedule of international transactions (that briefly describes the related-party transactions) with the taxpayer’s corporate tax filings. In instances when the taxpayer prepares timely transfer pricing documentation, the new law would allow additional time with respect to complying with the master file and local file rules.
  • Contents of master file: The master file would include: (1) a description of the legal ownership structure of the MNE group; (2) the geographic locations of subsidiaries and offices; (3) details of the top five goods or services that compose 5% of MNE’s group sales; and (4) information on significant business restructures, share purchases, company divestitures, etc.
  • Contents of local file: The local file would require: (1) detailed descriptions of local company’s business and business strategies; (2) explanations and background of the principal related-party transactions; and (3) a list of related-party transactions with transactional types, related risks, relationships of the entities, etc.
  • Due date: The reports would be due by the date for the filing of the tax returns (i.e., for fiscal years ending 31 December, the deadline would be 31 March of the following year).
  • Penalties: The penalty for a failure to file would be a maximum of KRW 10,000,000 (approximately U.S. $8,400).

KPMG observation

Although CbC reporting is currently not part of the draft legislation, tax professionals anticipate that CbC could be eventually adopted in Korea once other countries or foreign tax authorities implement CbC reporting. Certain trading partner countries—such as Singapore, Japan, China, and India—where many Korean MNEs conduct business operations, have already adopted or are expected to adopt required CbC reporting. Thus, many Korean MNEs will already need to prepare CbC reports in advance, not only to prepare for submissions to the relevant foreign tax authorities but potentially to the Korean tax authority.

 

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Korea:

 

Gil Won Kang | 82-2-2112-0907 | gilwonkang@kr.kpmg.com

Seung Mok (William) Baek | 82-2112-0982 | sbaek@kr.kpmg.com

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