On December 24, 2015, the Ministry of Strategy and Finance (MOSF) released proposed amendments to the Enforcement Decrees to the Law for the Coordination of International Tax Affairs (ED-LCITA), which sets forth detailed procedures regarding the transfer pricing documentation reporting requirements newly implemented in the LCITA by National Assembly vote on December 2. The proposed amendments provide detailed guidance on the scope of taxpayers subject to reporting, requirements of the report, submission procedures and other detailed requirements of the reporting process.
Taxpayers Subject to Transfer Pricing Report Submission Requirements
The draft legislation requires the submission of transfer pricing reports by domestic corporations and foreign corporations with permanent establishment (PE) in Korea with revenue of KRW 100 billion or more and cross-border transactions with affiliates of KRW 50 billion or more in the relevant tax year.
Any domestic corporations or foreign corporations with PE in Korea are required to submit transfer pricing documentation when filing corporate income tax returns for fiscal years beginning on January 1, 2016 onwards. For failure to fully comply with the filing requirements, taxpayers will be subject to a penalty of KRW 30 million.
Transfer Pricing Reporting Requirements
The transfer pricing documentation requirements generally follow the Action 13 (Guidance on Implementation of Transfer Pricing Documentation and Country-by-Country Reporting) of the OECD/G20 Base Erosion and Profit Shifting Project, consisting of: (i) a master file containing standardized information relevant for all multinational group members; and (ii) a local file referring specifically to material transactions of the local taxpayer. The necessary requirements of the local file include information such as the business structure and organization of the local taxpayer, pricing involved in transactions with affiliates and financial statements. As for the master file, the latest proposal requires information such as the business structure, overall overview of company operations, intangible assets, funding activities, financial transactions and financial/tax reports.
The draft legislation requires the transfer pricing documentation to be submitted to the tax office in the relevant jurisdiction of the taxpayer in paper or electronic form in the Korean language. However, the master file may be submitted in the English language on the condition that a Korean translation of the documentation will be filed within one month.
The proposed legislation is aimed at preventing tax avoidance by gathering the relevant tax information pertaining to multinational corporations in an effective manner. In that regard, we anticipate that the tax authorities will take a proactive approach to collecting information on corporate restructuring or tax haven structures for tax avoidance purposes.
In addition, the information collected from the transfer pricing documentation is expected to be utilized in the government-to-government exchange of tax information aimed at preventing the shift of profits to low or no tax jurisdictions by multinational corporations, a primary objective of the reforms announced in the final package of measures for the OECD/G20 BEPS Project in November 2014.