South Korea’s Ministry of Strategy and Finance released draft legislation that would amend existing provisions of Korean law—specifically, Article 11 of the law known in English as the “Law for the Coordination of International Tax Affairs” (LCITA) and Article 21-2 of the “Presidential Enforcement Decree of the LCITA” (PED of LCITA)—to implement certain OECD base erosion and profit shifting (BEPS) initiatives.
The draft legislation amends previously approved measures regarding the Master file and the Local file, as well as introducing rules for a country-by-country (CbC) report.
Transfer pricing reporting requirements
The draft legislation (released 28 July 2016) would provide new requirements regarding the CbC report and modify the existing transfer pricing documentation requirements. The draft legislation aims to bring the Korean regulations more in line with Action 13 of the BEPS project, as well as to address taxpayer concerns that were raised after the release of the initial Master file and Local file requirements.
Under the newly released draft legislation, the CbC report has been added to the scope of the “Combined Report of International Transactions” (CRIT). The CbC report would be required for any multinational entity (MNE) with consolidated sales of over one trillion KRW, and would be required to be submitted by the ultimate parent company of the MNE. If the parent company resides in a country that does not require a CbC report, or does not facilitate the exchange of the CbC report, it would be the obligation of the domestic entity to submit the CbC report. Once the draft legislation is approved, the CbC report would be required for fiscal years starting on or after 1 January 2016.
Local file exemptions
In consideration of the similarity of the advance pricing agreement (APA) application documents and the content of the Local file, the draft measures would exempt some MNEs from preparing the Local file. This exemption would apply for MNEs that have relevant transactions covered by an already completed APA and considered to be at an arm’s length price. This exemption would not extend to MNEs that have submitted, but not finalized, an APA.
Master file and Local file extensions
Under the previously provided proposals, the Master file and Local file would need to be submitted by the filing date of the corporate tax return. Under the proposed rules, the required filing deadline for fiscal year 2016 would now be within 12 months of the fiscal year-end, affording MNE additional time to prepare the Master file and Local file.
Details of the draft legislation are summarized as follows:
- Affected provisions: LCITA Article 11, PED of LCITA Article 21-2.
- Scope of application: Domestic and foreign corporations with permanent establishments in Korea, and conducting cross-border related-party transactions of an amount above a certain threshold and/or involving a certain amount of assets in value would be subject to the filing requirements.
- Required documents: A full report of cross-border related-party transactions, or the CRIT, would include: (1) a Master file, (2) a Local file, and (3) a CbC report.
- Contents of CbC report: The content required in the CbC report would be consistent with those outlined in Action 13 of the BEPS project, and would require items such as a list of entities as well as information on the allocation of income, taxes, etc.
- Due date: The reports would be due within 12 months of the fiscal year-end (i.e., for fiscal years ending 31 December, the deadline would be 31 December of the following year).