Korea: Transfer pricing-related amendments in tax legislation
Korea: Transfer pricing-related amendments
Transfer pricing-related measures are included in tax legislation approved by the National Assembly in December 2020, and implementing measures that are scheduled to be finalized in February 2021.
Among the transfer pricing amendments are the following items:
- The definition of a foreign related party has been expanded to take into consideration family affiliation for purposes of calculating third-party ownership. In addition, shares directly or indirectly owned by relatives of a third party are to be included in third-party ownership calculation. For these purposes, “related party” is defined as a party to a transaction who directly or indirectly owns 50% or more of voting shares of the other party to the transaction, or a third party who directly or indirectly owns 50% or more of voting shares of both parties to a transaction. This is effective for business years beginning on or after 1 January 2021.
- There is an extension of the retroactive application period for advance pricing agreements (APAs). These are effective for APAs submitted on or after 1 January 2021.
- For bilateral APAs, the extension is increased to seven years (from five years).
- For unilateral APAs, the extension is increased to five years (from three years).
Concerning mutual agreement procedure (MAP) measures:
- Under the prior tax law, if a final court decision is rendered, a MAP cannot be initiated, and a MAP in progress is automatically terminated. According to the amendment, even if a final court decision is rendered, to the extent the tax authorities of the other contracting state need to make a corresponding tax adjustment regarding the related party in that country, a MAP can be initiated and a MAP in progress is not automatically terminated. This is effective for a MAP initiated or a MAP for which final court decision is rendered on or after 1 January 2021.
- Under the prior tax law, even if a mutual agreement is reached through a MAP, a tax appeal for the relevant issue can separately progress. According to the amendment, in order for a mutual agreement to be reached, the taxpayer who has applied for the MAP must accept the mutual agreement and withdraw any tax appeal regarding the relevant issue.
- Under the amendment, a taxpayer can apply for arbitration by an arbitration committee if the matter is not resolved after initiating a MAP and during the period specified in the applicable treaty. However, in order to enforce the amendment, the revision of the tax treaty may be required.
Read a February 2021 report [PDF 936 KB] prepared by the KPMG member firm in Korea
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