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South Korea's National Assembly Approves Tax Amendments for 2020 Including Transfer Pricing and Income Treatment Changes

South Korea's National Assembly reportedly approved legislation for several tax amendments at the end of December 2019, with the Ministry of Economy and Finance currently finalizing the implementing decrees. Some of the key amendments are summarized as follows:

  • Changes are made in the transfer pricing rules to allow the tax authority to determine arm's length prices and make assessments based on their own comparable data in cases where documentation submitted by a taxpayer is incomplete (or not submitted);
  • Transfer pricing reporting requirements are simplified to reduce taxpayer burdens, including that taxpayers required to submit a Master and Local file are relieved from the requirement to submit the summary of cross-border related-party transactions and the report of transfer pricing methods used with their tax return;
  • The maximum penalty for failing to comply with transfer pricing documentation submission requirements is increased to KRW 300 million, and it is provided that the penalty may be imposed repeatedly for every 30 days a compliance failure continues;
  • New rules are provided that shift the burden of proof to a taxpayer that makes use of a step transaction that reduces its Korean tax liability below a threshold to be prescribed, in which case substance over form rules apply unless a reasonable business purpose and a lack of tax avoidance motive is proven by the taxpayer;
  • Changes are made in the treatment of patent rights so that royalty payments for patents used in South Korea are subject to royalty withholding whether or not the patents are registered in South Korea, such as patents for manufacturing methods, technology, information, etc. (previously the Supreme Court ruled under prior law that patent royalty payments were not taxable unless registered in South Korea);
  • Damages paid for infringement of patents registered outside are classified as other income where the patent rights are used for manufacture or sale of goods in Korea, with a special withholding tax rate of 15% introduced (16.5% including 10% local tax);
  • Clarification is provided for the inclusion of real property shares in the definition of real property for tax treaty purposes where provisions are provided for the taxation of gains from the alienation of shares deriving 50% or more of their value from property, which are taxable in the country in which the property is situated; and
  • Amendments are made to the Law for the Coordination of International Tax Affairs to provide that terms not defined under a tax treaty will be interpreted in accordance with the terms as under Korean law.

The tax law changes generally apply from 1 January 2020. Further details on amendments for 2020 will be published once available.

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