מחירי העברה: קוריאה- מאי 2011

Changes in Korean transfer pricing Rules

South Korea’s National Tax Service (NTS) has recently published a number of amendments to the existing transfer pricing policies. The changes include:

• The selection of the most appropriate transfer pricing methods;
• The selection of Profit Level Indicators (PLI);
• Substantially higher fines.

Most appropriate method
Prior to the amendments, the taxpayer had to apply the traditional transactional methods (Comparable Uncontrolled Price method, Resale Price method and Cost plus method) first. If the taxpayer could not apply the traditional methods, it could apply the transactional profit methods (Profit Split Method or Transactional Net Margin Method (TNMM)).

Under the new rule, prioritisation has been abolished. The taxpayer can apply the most appropriate method out of the five mentioned above. Other (reasonable) methods can also be applied if the taxpayer can demonstrate that the traditional and transactional methods are not the most appropriate methods.

It should be noted that each method has its own characteristics, strengths and weaknesses.

Each method requires a different level of comparability with respect to the following five comparability factors mentioned in the OECD Transfer Pricing Guidelines:

• The characteristics of the property or services transferred;
• The functions performed taking into account the assets used and risks assumed;
• The contractual terms;
• The economic circumstances of the parties;
• The business strategies pursued by the parties.

The published amendments by the NTS clarify how these comparability factors should be dealt with.

Profit Level Indicators
When applying the TNMM, it is important to select a reliable PLI to examine the net profit margin between the taxpayer being tested and comparable companies.

The new rule states that the following PLI’s can be applied:

• Net profit margin (operating profit/turnover);
• Net cost plus margin (operating profit/total expenses);
• Return on operating assets (operating profit/assets);
• Berry ratio (gross profit/operating expenses);
• Other appropriate PLI.

Under the OECD Transfer Pricing Guidelines, other possible PLIs should only be used where reliable comparable information is available to support the application. This should also be the case in South Korea.

Penalty protection
The Korean tax authority can request taxpayers to submit transfer pricing documentation. The taxpayer should provide the authority with the information within sixty days of the request.

Prior to the amendments, the maximum penalty for not complying with the documentation submission requirement was KRW 30 000 000. The amendment states that this amount, which was determined in 1995, was too low. Under the new rule, a failure to provide the authorities with the necessary documentation within sixty days may result in a fine of up to KRW 100 000 000.

The amount of the fine is substantial, and taxpayers should consider ensuring that proper transfer pricing documentation is in place.

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