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Feb 21, 2008

Transfer Pricing Reform In Korea

A U.S. NASDAQ listed company requested information concerning a specific transfer price scheme, amongst other issues, in Korea. The company has recently decided to enter the Korean market after having successfully entered the Japanese and other Asian markets.

For obvious reasons, I can’t answer the question here, but a brief description of recent amendments to the law may be of interest to those that have considered global transfer price issues.

The transfer pricing rules underwent a major change a couple of the years back. In 2006, the Law for the Coordination of International Tax Affairs (LCITA) and a Presidential Enforcement Decree were amended.

The Law and Decree were amended in order to codify the “substance over form” rule, encourage investment overseas by Korean companies, improve the application of the “arm’s length principle,” to discourage treaty shopping, and to clarify the numerous ambiguities that have developed, since the enactment of the original law in January 1, 2006.

The most notable changes are:

1. Substance over Form
The first major change was the codification of the substance over form rule. It seemed that before the change the National Tax Service employed the substance over form rule for the interpretation of international transactions and treaties. This amendment codifies this changed practice.

2. Berry-ratio Method
The amendment recognizes the Berry-ratio method as having the same priority as the transactional-net-margin method and the profit split method..

3. Cost Contribution Arrangement (CCA)
Cost contributions, according to the law, must reflect the expect benefit. The amended law, however, allows adjustments to cost contributions when the CCA is held to be in violation of the arm’s length principle.

4. Rollback of Unilateral APAs.
Rollbacks are now available for unilateral and bilateral advance price agreements for the length of the statutory corporate tax amendment period of three years.

5. Offset of Transfer Prices

Non-arm’s length transfer prices can be offset if the transactions occur in the same taxable years, are performed in the same overseas office, or there is an advance agreement.

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SeanHayes@ipglegal.com