Worldwide transfer pricing reference guide 2014

South Korea (Republic of Korea)
Taxing authority and tax law
Taxing authority: National Tax Service (NTS).
Tax law: The Law for Coordination of International Tax Affairs (LCITA).
Relevant regulations and rulings
• Presidential Enforcement Decree (PED)
• Ministerial Decree and Interpretations
OECD Guidelines treatment
The LCITA takes priority over the OECD Guidelines. The NTS recognizes the OECD Guidelines, but they have no legally binding effect.
Hence, if a taxpayer’s argument is based only on the OECD Guidelines and not on the LCITA, in practice, the NTS or regional tax offices
may not accept it.
Priorities/pricing methods
The Korean transfer pricing regulations prescribe the following transfer pricing methods: CUP, RPM, Cost Plus (CP), Profit Split (PSM),
TNMM, and other reasonable methods. Of the aforementioned transfer pricing methods, the taxpayer is to select the most reasonable
method based on the availability and reliability of data.
Transfer pricing penalties
There are two types of penalties associated with a transfer pricing adjustment: an underreporting penalty and an underpayment penalty.
• The underreporting penalty is approximately 10% of the additional taxes resulting from a transfer pricing adjustment
• The underpayment penalty, which is an interest payment in nature, is calculated as 0.03% of the additional taxes on a transfer pricing
adjustment per day (10.95% per annum) on the cumulative days. The counting of cumulative days of the underpayment starts from the
day after the statutory tax filing due date, which comes three months after the fiscal year end, and ends on the date that a payment for
the tax assessment is made
There are certain penalties for failing to comply with information/documentation requests issued by the NTS. A taxpayer must submit
information and documents within 60 days of the NTS’ request. A one-time extension of 60 days may be granted, if reasonable
circumstances specified in the LCITA exist. Failure to provide documentation requested by the NTS within the required due date, lead to a
penalty of up to KRW100 million.
See below for further details regarding contemporaneous transfer pricing documentation.
Penalty relief
Under Article 13 of the LCITA, if the taxpayer has prepared and maintained contemporaneous transfer pricing documentation for the
transfer pricing methods applied to the cross-border intercompany transactions reported in the corporate income tax return, and if such
documentation supports the reasonableness of the transfer pricing methods reported, the penalty for underreporting will be waived in
case a transfer pricing adjustment is made.
PED Article 23 of the LCITA provides guidelines on the contents of contemporaneous transfer pricing documentation. In general,
contemporaneous transfer pricing documentation should include information on the taxpayer’s business (including functions
performed and factors that can affect pricing for intercompany transactions with related parties), details on cross-border intercompany
transactions, an explanation of the transfer pricing method selected and reasons for not selecting other transfer pricing methods
prescribed in the regulations, and details on the comparable company or transaction data used. The guideline also stipulates that the
comparable data used should be representative and not selectively chosen to favor the taxpayer’s position (i.e., no “cherry-picking”).
In the case where a taxpayer applies a transfer pricing method different from that agreed in an APA or selected by tax auditors in a tax
audit, the taxpayer needs to justify the use of the different transfer pricing method.
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