The formal introduction of transfer pricing regulations into South Korean legislation began in 1989 and became effective in 1996. Since then, a few regulations and circulars regarding TP have been introduced. This resulted in the rise of TP’s importance for the National Tax Service and led to increased TP audits in the country.
Currently, the transfer pricing rules in South Korea are governed by the Adjustment of International Taxes Act (AITA), formerly known as the Law for the Coordination of International Tax Affairs (LCITA). The South Korean TP rules largely follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines).
Arm’s Length Principle
The Arm’s Length Principle (ALP) in South Korea, described under Article 2 Point 5, and Article 6 of the AITA refers to the price that a resident, domestic company, or business would use in a regular transaction with someone who is not a foreign related party. Certain international transactions between a South Korean company and a foreign related party a company or business, having a link to the South Korean company, common ownership) are made obligatory by the law that transfer prices between each other must be in line with arm’s length price. When the transfer price in such a transaction is too high or too low than the arm’s length price, the South Korean entity shall be required to comply with proper taxation.
Related Party Definition
In the context of South Korean law, a foreign-related party refers to a nonresident or foreign corporation that has a special relationship with a South Korean resident, domestic corporation, or domestic business. Related parties’ definition is based on criteria like ownership, control, and economic influence. A special relationship exists when one entity owns at least 50% of another’s voting shares (parent-subsidiary relationship) or when two entities share common ownership of 50% or more (brother-sister relationship). Additionally, a special relationship is established if a party exerts effective control over another’s business policies through equity ownership, transactions, or financial dependence. The law considers direct and indirect ownership, meaning control can extend through multiple layers of corporate structure. Korean branches and their foreign head offices are not classified as related parties, but the same transfer pricing rules apply to their transactions. These broad definitions ensure that South Korea’s transfer pricing framework captures various corporate structures and prevents tax avoidance through complex business arrangements.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in South Korea are:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Transactional net margin method
- Profit split method
The arm’s length price should be calculated using the most appropriate method based on factors like the type of goods or services, how the transaction works, and the economic situation. These factors are similar to what would be used in a regular transaction with someone who is not a foreign-related party. In addition, Korean law allows for the usage of another method, different from the five listed methods based on the nature and characteristics of the transaction.
Comparability Analysis
In particular, the AITA underlines the significance of a “high comparability” among transactions involving related parties compared with transactions involving unrelated parties in the ALP determination. Comparability analysis takes account of considerations relevant to the categories and nature of goods or services traded, the roles of agents in the transaction, their risk profiles, assets dedicated to the transaction, contract provisions, economic conditions, and business strategies. These factors are used to determine whether and to what degree differences in the related and unrelated party transactions have a significant impact on the price or profit, and if it is possible to correct them. The Korean law does not have a preference between internal/external comparables, rather the emphasis lies on electing the best comparables.
Documentation Requirements
Transfer pricing documentation requirements in South Korea are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Korean tax authorities.
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
In South Korea, taxpayers engaged in international transactions with foreign related parties must submit a Master File and Local File within six months after the end of the taxable period. They report in detail about global and local transfer pricing rules used to meet the arm’s length principle. However, domestic and international businesses with permanent establishments in Korea are exempted if their total transaction value is below KRW 50 billion or net sales are below KRW 100 billion. Both the local file and the master file must be submitted in Korean,
In the event of an unpreventable situation leading to a delay in submitting the necessary documents, the taxpayer is entitled to an extension of up to one year. The tax authority may also require supplementary data concerning the transfer price approach and if, for lack of a proper reason, the taxpayer does not provide them on time, the authority is entitled to calculate the arm’s length price using available data.
Country-by-Country Reporting
In South Korea, Country-by-Country (CbC) reporting is mandatory for multinational enterprise (MNE) groups with consolidated revenue exceeding KRW 1 trillion (approximately USD 722 million) in the prior fiscal year.
The ultimate parent entity (UPE) is to file the CbC report within 12 months of the end of the fiscal year. If the UPE is in a jurisdiction that is not a signatory to the CbC Multilateral Competent Authority Agreement or does not have an agreement for tax information exchange, the report should be submitted by the Korean branch or subsidiary to Korean authorities.
The reports must be made both in English and Korean, and a waiver for submission within one year may be granted in exceptional cases. South Korea automatically exchanges CbC reports with treaty jurisdictions in a bid to enhance global tax transparency.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
South Korea offers an APA program, enabling taxpayers to receive advance approval of their transfer pricing methods from the National Tax Service (NTS). This helps ensure certainty and minimize the risk of future disputes.
APAs can be either bilateral or unilateral. A Bilateral APA (BAPA) involves negotiations between the tax authorities of both countries in a tax treaty, ensuring complete protection from double taxation. However, this process takes longer since both countries must agree. A Unilateral APA (UAPA) is made directly between the taxpayer and the Korean tax authority without involving another country.
South Korea’s Mutual Agreement Procedure (MAP) is designed to help taxpayers resolve international tax disputes related to tax treaties. Taxpayers can request MAP assistance for transfer pricing issues, treaty interpretation, and double taxation cases. Requests must be submitted within three years from the date the taxpayer becomes aware of the issue. MAP can still be requested even if administrative remedies, such as Tax Tribunal decisions, have been pursued, but it is not available if a final court decision has been made.
For cases resolved through MAP, clear timelines exist for tax adjustments or refunds when a MAP agreement results in additional tax. Even if the process exceeds the statute of limitations, South Korea allows an additional year for implementation. If a MAP case remains unresolved for five years, it is closed unless both tax authorities agree to extend discussions, with a maximum limit of eight years.
South Korea does not currently include MAP arbitration in its tax treaties. Although 49 out of 85 tax treaties contain provisions for corresponding adjustments on transfer pricing cases, adjustments are generally granted based on competent authority agreements. There are no fees for MAP requests, and tax collection may be deferred if the other country involved also permits it.
Approach to Transfer Pricing Audits
In South Korea, the tax authority – the National Tax Service (NTS) can request transfer pricing information under the AITA, article 16. Further detailed procedural guidelines are outlined in the AITA Enforcement Decree. As stipulated in the rules, if a taxpayer needs additional time to submit the requested data, they are eligible to do so and must hereby apply by using the designated form.
Penalties
Failure to comply with transfer pricing documentation requirements can lead to penalties of up to 100 million won for not submitting the required documents or for providing incorrect information. Nevertheless, taxpayers will be exempt from these penalties if they have used for the support of transfer pricing methods reasonable justification.
If a taxpayer fails to submit the requested information after the initial penalty, tax authorities may issue another demand, giving 30 days to comply; further non-compliance or late submission can result in an additional penalty of up to 200 million won.
Taxation at a Glance
In South Korea, taxes are divided into national and local taxes. National taxes include internal taxes (on goods, services, and income), customs duties (on imports and exports), and earmarked taxes (for specific government programs). Local taxes are imposed by regional and local governments, such as province taxes and city or county taxes, which fund local services and infrastructure. Together, these taxes support both national and local government functions.
The official name of the South Korean tax authority is the National Tax Service.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 9% to 24% |
VAT | 10% |
Withholding tax on dividends to non-residents | 20% |
Withholding tax on interest to non-residents | 0/14/20 % |
Withholding tax on royalties to non-residents | 20 % |
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