BEPS and transfer pricing in Korea

In recent years, transfer pricing issues and cases have risen in frequency and in scope, attracting global attention, and the efforts of Korean tax authorities (KNTS) to meet those demands. A series of amendments have been made to strengthen the transfer pricing regulation including the most recent adoption of OECD BEPS Action Plan 13. The Korean transfer pricing landscape is experiencing a momentum increase in efforts to address the various transfer pricing issues which can affect Multinational Corporations (MNCs) during audits, general compliance regulations, Advance Pricing Agreements (APAs), and dispute resolution mechanisms, eg Mutual Agreement Procedure (MAP).

As of December 2015, Korea has enacted legislation to enforce BEPS Action Plan 13. Specifically, the legislation requires qualified Korean domestic corporations and foreign corporations with a domestic place, that are of business engaged in cross-border related party transactions to submit the Master File and Local File reports.

The filing of the MF and LF is required if:

• The annual amount of cross-border related party transactions exceeds KRW 50 billion ($42. 5 million); and

• The annual sales revenue exceeds KRW 100 billion ($85 million).

There is also an intention to implement CbCR at the beginning of the fiscal year 2017. There has not been a formal announcement, but there is movement within KNTS to make preparations for this implementation through the new division. The threshold has not yet been determined. It may follow the BEPS guideline of an annual consolidated revenue of €750 million.

In addition, Korea's Ministry of Strategy and Finance (MoSF) announced the introduction of Master File and Local File templates that were designed for use by taxpayers. But if MNCs have their own templates for the Master File and Local File, these templates will be accepted if they meet all the Master File and Local File requirements. Once the template is used, submitted, and accepted by the KNTS, it can be renewed annually, with the exception of certain parts such as economic analysis

The Korean regulations require the Master File and/or Local File for fiscal years beginning on or after January 1st 2016. The submission of the Master File and/or Local Files must be done by the time of tax filing, electronically. Submission of the MF may be in English, but within one months' time, a Korean version must also be submitted.

Failure to submit proper documentation or evidence as requested by KNTS can result in penalties. There is a 30 million KRW penalty for failure to submit the Master Filer and/or Local File. In addition documents that KNTS requests must be submitted within 60 days. Otherwise, the taxpayer may be subject to a non-compliance penalty of up to 100 million KRW.

In Korea, the submission of Master File and/or Local File is by the annual tax filing date which is three months from the end of the fiscal year. In other countries, the submission deadline may, or may not be the same as Korea. Generally, the filing date of other countries is much later than Korea. This could cause potential problems as Korean entities coordinate in getting their Master File and/or Local File must be filed by the deadline of the tax filing.

However, according to the official announcement by the MoSF, in certain cases taxpayers may request that the MoSF consider an extension of their submission of the Master File and/or Local File.

These may include cases where the filing dates of foreign affiliates for the Master File and/or Local File are different from the local entity or where it practically takes a prolonged amount of time to prepare the Master File and/or Local File due to the coverage of the global business. The extent and possibility of when the KNTS would allow the extension of these cases is vague and uncertain.

There are also some issues that may arise surrounding the adoption of the CbCR. Although Korea has not yet implemented the CbCR standards, certain countries, such as the UK require CbCR. In this case, even if the Korean entity does not have to prepare the CbCR in Korea, if the entity also operates in the UK, it will need to prepare the CbCR for UK submission.

If Korea joins other countries for the Automatic Exchange of Information (AEOI), with the implementation of CbCR standards, Korea is going to be required to provide CbCR information to other countries. For this reason, the local implementation of CbCR in Korea is going to be carefully considered along with the issue of AEOI.

With respect to AEOI, KNTS may join this year. As of now, a separate division within KNTS has been formed for the purpose of AEOI and CbCR related tasks (Master File and/or Local Files are not going to be subject to AEOI).

In Korea, APA has become the preferred tool for MNCs to limit their transfer pricing risks, reducing risk for double taxation in their overseas related party transactions.

Due to the increasing number of APA and MAP requests, KNTS has created an additional unit called the MAP division to support the increase in demand. Before the new division, Competent Authorities (CA) faced many challenges in juggling the varying taxation issues, meetings with other CA's, global conferences, in addition to the numerous APA cases. This left many cases unresolved, or extended processing time. After the creation of the MAP division, in addition to the previously existing APA division, KNTS is now able to provide more timely solutions to APA concerns. The new MAP team covers the regions in North America, Europe, and Australia. The APA team will focus mostly on the Asia pacific regions. It is expected that more cases will be accepted and settled moving forward.

But with the new BEPS initiative there is a potential area of controversy with companies filing for APAs. APA companies must submit an annual report. With the implementation of the LF requirement, certain APA companies will be required to prepare both the APA annual report and LF.

While in the LF, these APA companies can briefly describe the APA terms and conditions, it certainly increases the burden of compliance for the APA companies.

Under the existing APA programme, the in-depth review of KNTS is necessary to examine the transactional and functional profile of transaction parties, and application of the most appropriate transfer pricing method. This can cause the APA evaluation process to be prolonged to more than two years. Consequently, this can add to the burdens on the taxpayer with incremental time and cost. Thus, the existing APA programme has become a tool utilised by mostly large MNCs. In response, the simplified APA programme was created to help streamline the process for small- and medium-sized enterprises (SMEs).

The simplified APA programme was launched in January 2015 and has been made available to SMEs in manufacturing, wholesale/retail, and service industries. It will gradually be made available to the remaining industries. Those SMEs with an annual sales of 50 billion KRW or less (approximately $46 million) qualify for the programme. With the simplified APA, it is predicted that proceedings will be concluded within one year.

The results of the simplified APA would be exemption from the KNTS tax audit on the covered transaction for the evaluation period which is the covered period of APA. In addition, the MNC would be able to resolve the issue of uncertain tax risk for the covered period.

During audits, challenges from the KNTS can arise with respect to the selection of comparable companies in the Local File: ASPAC vs. local Korean comparable set. For instance, in the luxury goods and automotive industries, it is difficult to find local independent companies engaged in the similar business activities as the tested party. Consequently, it is generally the case that the Korean third parties selected as comparable companies lack comparability. However, the KNTS does not generally want to compromise on the use of an ASPAC comp set instead of a Korean comp set. As such, KNTS will usually give preference to the local comp set over the ASPAC comp set, even in the case where the ASPAC comp set could be considered more comparable.

In order to prepare for this issue, it is best to carefully prepare the LF in accordance with the local regulation and practice. If the LF for the Korea-based company is prepared by the foreign affiliate/parent company, a local review of the LF is highly advised especially because of the recent audit trend in which somewhat aggressive approaches have been taken by local tax auditors. Examples of recent issues include royalty and subsequent withholding tax issues.

Gil Won Kang Partner KPMG in South Korea GFC 27th Floor, 737 Yeoksam Dong, Gangnam-gu, Seoul 135-984 +82 2 2112 0907 gilwonkang@kr.kpmg.com Gil Won is the global transfer pricing services leader of KPMG Korea. He has an excellent reputation within the profession and has close relationships with the Korean tax authorities. Before joining KPMG, Gil Won led the outbound transfer pricing practice at Kim & Chang, Korea's largest law firm and helped establish its Chinese tax practice. He concluded the first Korean-Chinese APA and the first APA related to intra-group service transactions in Korea. Gil Won was a member of the competent authority team in Korea's National Tax Service and handled various negotiations with G8 nations. He continues to hold seminars for the Korean government and Korean multinational companies on transfer pricing issues. During 2013, Gil Won was selected as one of the World's Leading Transfer Pricing Advisers by Euromoney's Guide and his transfer pricing team was also ranked as a Tier 1 of the transfer pricing advisory group in Korea by the International Tax Review in 2013.

Seung Mok (William) Baek Partner KPMG in South Korea GFC 27th Floor, 737 Yeoksam Dong, Gangnam-gu, Seoul 135-984 Tel: +82 2 2112 0982 sbaek@kr.kpmg.com Seung Mok is a global transfer pricing services partner of KPMG Korea. He has an excellent reputation within the clients based on his in-depth knowledge and various field experience in tax consulting, focusing on international tax and transfer pricing matters. Seung Mok has been working in KPMG since 2002 and specialised in Transfer Pricing documentation/planning, tax audit defences, Appeal, APA/MAP and Designing & implementation of tax optimised transfer pricing systems for multinational clients mostly investing in China, Vietnam, Mexico, EU and US. He is a member of Korea CPA/CTA and takes care of KPMG's key multinational clients. Recently he has held numerous seminars for Korean multinational companies on transfer pricing matters, including BEPS action plans, and providing clients with various TP services based on their trust in his experience.

Sang Hoon Kim Partner KPMG in South Korea GFC 27th Floor, 737 Yeoksam Dong, Gangnam-gu, Seoul 135-984 Tel: +82 2 2112 7939 skim32@kr.kpmg.com Sang-Hoon is a transfer pricing partner. With over 20 years of work experience at the NTS, Sang-Hoon handled the MAP and APA approvals with various countries. Sang-Hoon managed international investigation, analyses on foreign companies, and funds-related projects. Sang-Hoon conducted management of revenue during his time in District Tax Offices of the NTS. As a tax examiner, he was also involved in various tax audits involving transfer pricing, beneficial interest, permanent establishments, thin capitalisation, and offshore tax evasion issues.