South Korea

Market overview

Korea has one of the most advanced tax and transfer pricing regimes in the region, where many of the regulations addressed in the BEPS project have already been functioning in the market and enforced by the government. However, the importance of transfer pricing has only increased in the Korean market as a result of the BEPS discussions.

Korea is very active in implementing major BEPS recommendations, particularly Action 13 requiring local and master files, which has been effective since January 1 2016, with the first submissions due March 31 2017.

"The challenge here is the short deadline for filing tax returns, within three months of fiscal year end, and the requirement for documentation to be submitted in Korean. While taxpayers may request extensions, it's unclear what criteria will apply to grant an extension," said Henry An of Samil PwC.

"It's safe to say that many of the companies subject to the new documentation requirements have not prepared transfer pricing documentation contemporaneously in the past. Hence, there's a significant amount of transfer pricing documentation work being performed in the market with a strong sense of urgency," he added.

The Korean Ministry of Strategy and Finance is planning additional legislation both this year and in the future to adopt additional BEPS guidelines. "Major accounting firms have newly recruited more transfer pricing staff, expecting the increased work burden related to transfer pricing documentation preparation," said Shin Jong Kang, transfer pricing leader at Yoon & Yang.

The Korean tax authorities have continued to be aggressive in tax audits and disputes, and transfer pricing seems to be one of the largest issues affecting audits and disputes. "Advance pricing agreements (APAs) have been very popular in recent years as a means to avoid unreasonable tax assessments from increasingly aggressive tax auditors. This has led to complaints by field auditors in search of revenue sources and higher hurdles to obtain National Tax Service approval to proceed with unilateral APAs," said Jeremy Everett of Kim & Chang.

Transfer pricing is a major concern for taxpayers from both a corporate income tax perspective as well as customs perspective, as it is difficult to align TP policies with the differing rules and objectives of both. However, Kang suggested another option in Korea is to obtain advance customs valuation agreements (ACVA) which are the customs equivalent of APAs.


Tax authorities

National Tax Service
Sejong Government Complex II, 8-14, Noeul 6-ro
Sejong Special Self-Governing City, 30128
Tel: +82 44 204 2200
Email: service@mail.nts.go.kr
Website: www.nts.go.kr


Tax rates at a glance

(As of January 1 2016)

Corporate income tax rate 22% (a)(b)
Capital gains tax rate 22% (a)(b)(c)
Branch income tax rate 22% (a)(b)
Branch profits tax rate n.a. (d)
 
Withholding Tax
Dividends 0% (e)
Interest 14% (b)(e)
Royalties from patents, know-how, etc. 0 (e)
 
Net operating losses (years)
Carryback 1 (f)
Carryforward 10 (g)

  1. This is the maximum rate.
  2. Local income tax (formerly referred to as resident surtax) is also imposed at a rate of 10% of corporate income tax payable before offsetting tax credits and exemptions.
  3. Capital gains are included in ordinary taxable income for corporate tax purposes.
  4. This tax is imposed on income that is remitted or deemed to be remitted by a Korean branch of a foreign corporation. The branch profits tax may be payable if the foreign company is resident in a country with which Korea has entered into a tax treaty and if the treaty requires the imposition of a branch profits tax. For a list of these countries and the rates of the tax. The branch profits tax is imposed in addition to the income tax imposed on branches.
  5. For payments to domestic corporations and foreign corporations with a place of business in Korea. For withholding rates applicable to payments to foreign corporations that do not have a place of business in Korea.
  6. Only small and medium-sized enterprises are entitled to carry back losses.
  7. Except for small and medium-sized enterprises and certain other companies (for example, companies under court receivership), the annual deductibility limit for loss carryforwards is 80% of taxable income.

Source: EY 2016 Worldwide Corporate Tax Guide


Firm contact details

Deloitte Anjin
Samjong KPMG
Yulchon