Korea: Agreement with India, suspending tax collection during pending MAP

Korea and India agree to suspend tax collection

Representatives of the governments of South Korea and India on 9 December 2015 signed a “memorandum of understanding” (MoU) for the suspension of the collection of taxes, for up to five years, when there is a mutual agreement procedure (MAP) pending.

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In Korea, the collection of taxes is suspended for entities that have applied for a MAP until the conclusion of the MAP, under Korean transfer pricing regulations. The MoU will relieve the burden of double taxation for Korean taxpayers doing business in India while the MAP is being processed. In addition, it is expected that transfer pricing dispute cases could be considered under the MAP treatment pursuant to revised procedures of an income tax treaty between Korea and India.

Memorandum of Understanding

The recent meeting of the tax officials, headed by the Commissioner of Korea’s National Tax Service and Revenue Secretary of India, was held to discuss the subsequent issues related to the revised income tax treaty. The revised treaty was formally signed in May 2015. Currently, ratification of the treaty by both countries is pending, The treaty would enter into force 30 days after the ratified documents are exchanged. Both governments expect that this would be at a date sometime early next year. 

The first MAP meeting between Korea and India is expected to be held in the first half of 2016. With that meeting, the MoU will be effective.

Practical implications

Prior to the MoU, if a Korean company was subject to a transfer pricing adjustment in India and applied for a MAP, the company had to pay the amount of taxes assessed in advance of conclusion of the MAP and could only apply for a refund of taxes that might be refundable (because of the cancelled transfer pricing adjustment) at the conclusion of the MAP. 

With the MoU, a Korean company will not have to pay taxes for a period of up to five years during the pendency of the MAP. 

Until now, the court system in India has been the only available option for Korean companies seeking resolution of transfer pricing audits and adjustments in India. In addition, due to the lack of regulation in India that would allow for collection of taxes to be suspended during the progress of the MAP proceedings, the effectiveness of the MAP process was diluted because of the additional burden imposed on taxpayers and the required advance payment of taxes before the conclusion of the MAP. 

With the new MoU, Korean companies will have greater certainty as to their tax payment obligations, and will be relieved of the financial burden regarding the payment of assessed taxes in India during the pendency of MAP. In general, this may be viewed as a step towards ease of doing business in India for Korean companies because it will address issues of “economic” double taxation and will promote cross-border trade and investment.


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

Gil-Won Kang | +82 221 120 907 | gilwonkang@kr.kpmg.com

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