The Korean transfer pricing regime, governed by the Law for Coordination of International Tax Affairs (the "LCITA") and its Presidential Decree was amended to implement the new transfer pricing documentation requirements in line with Action 13 of the OECD BEPS project. On April 6 2016, the Korean Ministry of Strategy and Finance (the "MOSF") announced the final regulation on the local and master files as introduced by the OECD BEPS final report on Action 13 (the "BEPS Action 13 Report" or the "Report"), effective January 1, 2016. The local and master files are collectively referred to as the Combined Report of International Transaction Information (the "CRITI"). On April 14 2016, the MOSF also issued an administrative notice (the "Notice") setting forth the guidance on how and by whom the CRITI may be prepared and filed.
Combined Report of International Transaction Information (CRITI)
The regulation does not provide an exhaustive schedule of items to be included in the CRITI as that provided under Annex 1, the BEPS Action 13 Report although it is broadly consistent with the basic ideas of this new OECD initiative. The master file, according to the regulation, needs to be comprised of the followings as regards the entire corporate group comprised of all parties in special relationship with the taxpayer (e.g., multinational enterprise): corporate organization structure, global business overview, intangible assets, intercompany financing activities, financial and tax positions. According to the Notice, the ultimate parent company or head office should prepare the master file and provide it to the subsidiary or branch in Korea. The local file, on the other hand, needs to be comprised of the following items: the organization structure governing the relationship between the transacting (related) parties, the nature of the parties' respective business, the cross-border intercompany (transfer pricing) transaction(s) concerned, the information underlying the pricing mechanism of the concerned transaction(s) and the financial positions of the transacting parties.
Scope of the Master File
According to the Notice, the master file should be prepared to cover all of the affiliates which are part of consolidated financial statement prepared by the ultimate parent company under the International Financial Reporting Standards (IFRS). The Notice also provides that the master file may be prepared for each business group or subsidiary in the case where MNE's businesses are comprised of two or more business groups or different businesses are engaged by each subsidiary under control of a holding company.
Who must file the CRITI ?
The revised regulation requires the corporate taxpayers i.e., domestic corporations and Korea branches of foreign corporations file both the local and master files if all of the following conditions are satisfied:
- Annual aggregate volume of intercompany transaction(s) exceeds KRW 50 billion; and
- Annual revenue exceeds KRW 100 billion.
Where there are two or more taxpayers satisfying the above conditions, the regulation expressly permits the master file to be filed by any one of those taxpayers. It is recommended that, in such cases, either the parent company within a parent-subsidiary relationship or a taxpayer which is closer to the ultimate parent company submit the master file on the others' behalf.
When should the CRITI be filed ?
Korea requires that the CRITI which includes both the master and local files be submitted on an annual basis, at the time of filing the corporate income tax return starting with the tax year 2016 (that is, the first CRITI should be filed by 31 March 2017 for the tax year ended 31 December 2016).
What if the CRITI can't be filed on time ?
The filing date may be extended up to 1 year upon prior approval by the tax office having jurisdiction over the taxpayer. The extension request must be made at least 15 days prior to the due date. The extension will be allowed if it is not possible to be filed by the due date for certain unavoidable reasons i.e., where the fiscal year for the foreign related party has not ended or where it takes significant amount of time to collect and prepare the information for completion of the CRITI. Accordingly, it is expected that most of the taxpayers would apply for the extension of filing due date for the CRITI.
Is the CRITI possible to be filed in English?
The regulation requires that both the master and local files be prepared and filed in Korean. The master file may be submitted in English, in which case the Korean version of the master file should be submitted within a month from the filing date of the English version.
Penalties for non-compliance
The taxpayer shall be subject to a penalty up to KRW 30 million should there be either a failure to file the CRITI partially or entirely or a falsification of the information therein.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.