Korea: Tax reform proposals include transfer pricing documentation and Pillar Two measures
New requirement to maintain transfer pricing-related documents domestically and global minimum tax rule (BEPS 2.0 Pillar Two)
Transfer pricing documentation and Pillar Two measures
The Ministry of Economy and Finance on 21 July 2022 announced tax reform proposals for 2022—proposals that include a new requirement to maintain transfer pricing-related documents domestically and that would introduce a global minimum tax rule (BEPS 2.0 Pillar Two).
The steps for the government’s tax reform proposals include various administrative and ministerial proceedings before the text is ultimately submitted to the National Assembly on 2 September 2022.
New requirement to maintain transfer pricing-related documents domestically
Under the tax reform proposals, there would be a requirement for taxpayers to keep and retain transfer pricing-related documents in a domestic location with a purpose to prevent any tax avoidance by hiding relevant documents in a foreign location. The expected legislation would also introduce a measure that a taxpayer would be required to submit the documents to the tax authority if it requests transfer pricing-related documents (e.g., an organizational chart, work-allocation table, copies involving asset sale and purchase agreements). The amendment is proposed to be effective and to apply to transactions that occur after 1 January 2023.
Introduction of global minimum tax rule (BEPS 2.0 Pillar Two)
The 2022 tax reform proposals would introduce domestic legislation including the Pillar Two Model Rules. The tax reform proposals (that are in line with the OECD’s Pillar Two Model Rules) indicate that the effective date of the rules would be 1 January 2024. The Ministry of Economy and Finance indicated that technical details of the Model Rules and Commentary and discussion results (such as a safe harbor rule, etc.) of the inclusive framework, participated by 141 countries, are planned to be included in the enforcement decree and enforcement regulation in the coming year.
The 2022 tax reform proposals would adopt the OECD Model Rules including the following:
- Income Inclusion Rule (IIR): If a multinational company is subject to an effective tax rate (ETR) lower than the Korean minimum tax rate (15%) in a specific jurisdiction, the company would be required to pay the difference between the tax calculated at the lower ETR and the tax calculated at the 15% minimum tax rate.
- Undertaxed Payments Rule (UTPR): The draft would include “supplementary rules for income inclusion” which is known as the UTPR in the OECD Model Rules.
- Exclusion of international shipping income: International shipping income and related qualifying international shipping incidental income would be excluded from the Global Anti-Base Erosion (GloBE) income and loss calculation.
- De minimis exclusion: When the jurisdiction meets the de minimis threshold (that is, when the average GloBE revenue and GloBE income or loss in the jurisdiction are below €10 million and €1 million, respectively), the ETR would not need to be calculated for that jurisdiction
Read an August 2022 report [PDF 376 KB] prepared by the KPMG member firm in South Korea
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