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Korea Issues Guidance on APA Applications

The Korean National Tax Service (NTS) recently issued guidance on the general procedures and requirements for applying for an advance pricing agreement (APA). The basic steps and requirements are summarized as follows.

Pre-Filing Meeting

A pre-filing meeting is held to discuss the background of the request, past tax returns covered by the APA, the taxpayer's eligibility, the transactions to be covered and the proposed transfer pricing method.

APA Application

The APA Application is made by submitting the prescribed form (Form no. 3) to the International Cooperation Office Division of the NTS by the end of the first taxable year to be covered. The form includes the applicable period and transactions covered, the parties involved and the transfer pricing method.

The following documentation must be submitted along with the application form:

  • An overview of the involved parties' business profile, organization and investment relationship;
  • The involved parties' financial statements for the past three years, a copy of tax returns, a copy of the transaction contract and any other relevant documents;
  • Documentation detailing the following:
    • The methods used to evaluate comparability and the adjustment of differences in factors determining comparability;
    • Where the financial statements of comparable companies are used, the difference in the accounting principle and the method for adjusting such differences;
    • Where financial or cost data segmented by transaction item is used, the segmentation standards;
    • Where two or more comparables are used, the arm's length range and the method for its calculation;
    • An explanation of the conditions or assumptions that form a premise for the transfer pricing method; and
    • Any other relevant documents supporting the proposed transfer pricing method

Additional documentation may be required, such as when a taxpayer requests a mutual agreement procedure.

The entire review process can take up to two years for unilateral APAs and longer in the case of bilateral APAs.

APA Compliance

Once the APA is reviewed, finalized and entered into, the taxpayer must submit an annual status report. An APA may be canceled or withdrawn if the taxpayer fails to file the annual report, or when other conditions of the APA are not complied with, or critical assumptions are not realized or have changed. In the event that assumptions have changed or the approved transfer pricing method can no longer be applied, the taxpayer may request a modification of the APA.

Simplified APA Program

Although not covered in the recent guidance, from 2015 Korea also provides a simplified APA program for foreign small and medium sized enterprises in the manufacturing, wholesale/retail, and service industries with annual sales not exceeding KRW 50 billion (~USD 45.7 million). The program applies only for unilateral APAs.

The basic procedure is the same but the application documentation requirements are simplified, and the process is to be completed in one year.

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