Post by An Lee on Feb 26, 2009 5:34:43 GMT 4
South Korea: Penalty relief for taxpayers maintaining contemporaneous documentation
On September 1 2008, the ministry of strategy and finance announced various proposed amendments to tax laws which include provisions to provide penalty relief to taxpayers maintaining contemporaneous transfer pricing documentation.
At the moment, a transfer pricing adjustment will generally result in additional corporate tax of 25%, an underreporting penalty of 10% of the additional corporate tax, and an underpayment penalty of 10.95% a year. The additional tax and penalties will also be subject to a 10% resident surtax. Moreover, if the amount of the transfer pricing adjustment is not repatriated back to Korea, it will also subject to a secondary adjustment which generally treats the amount of the transfer pricing adjustment as a deemed dividend which is then subject to withholding tax based on relevant tax treaty (if applicable).
The underreporting penalty can be waived if a taxpayer pursues competent authority procedures and can demonstrate that it was not negligent according to article 13 of the law for the coordination of international tax affairs (LCITA), and article 23(1) presidential enforcement decree under the LCITA. The decree provides the following requirements:
* The taxpayer provided the documents showing the selection procedure of the most reasonable method to determine the arm's length price at the time it reported the taxable income and tax due;
* The taxpayer in fact applied the selected method; and
* The taxpayer prepared and maintained the necessary documentation regarding the arm's length price method described above.
The proposed penalty waiver provision stipulates that the underreporting penalty may also be waived if a taxpayer's transfer pricing documentation is prepared and maintained at the time of filing of the corporate income tax return, and the transfer pricing method is recognised as having been reasonably selected and applied. While the specific details of the provision will need to be clarified through corresponding revisions to the LCITA PED, the penalty relief provisions should encourage taxpayers to prepare transfer pricing documentation on a contemporaneous basis.
Assuming that the proposed amendments are ratified by the general assembly, the penalty waiver provision will be effective on transfer pricing adjustments occurring on or after January 1 2009.
Henry An (henryan@samil.com) and David Jin-Young Lee (jylee@samil.com), Seoul
On September 1 2008, the ministry of strategy and finance announced various proposed amendments to tax laws which include provisions to provide penalty relief to taxpayers maintaining contemporaneous transfer pricing documentation.
At the moment, a transfer pricing adjustment will generally result in additional corporate tax of 25%, an underreporting penalty of 10% of the additional corporate tax, and an underpayment penalty of 10.95% a year. The additional tax and penalties will also be subject to a 10% resident surtax. Moreover, if the amount of the transfer pricing adjustment is not repatriated back to Korea, it will also subject to a secondary adjustment which generally treats the amount of the transfer pricing adjustment as a deemed dividend which is then subject to withholding tax based on relevant tax treaty (if applicable).
The underreporting penalty can be waived if a taxpayer pursues competent authority procedures and can demonstrate that it was not negligent according to article 13 of the law for the coordination of international tax affairs (LCITA), and article 23(1) presidential enforcement decree under the LCITA. The decree provides the following requirements:
* The taxpayer provided the documents showing the selection procedure of the most reasonable method to determine the arm's length price at the time it reported the taxable income and tax due;
* The taxpayer in fact applied the selected method; and
* The taxpayer prepared and maintained the necessary documentation regarding the arm's length price method described above.
The proposed penalty waiver provision stipulates that the underreporting penalty may also be waived if a taxpayer's transfer pricing documentation is prepared and maintained at the time of filing of the corporate income tax return, and the transfer pricing method is recognised as having been reasonably selected and applied. While the specific details of the provision will need to be clarified through corresponding revisions to the LCITA PED, the penalty relief provisions should encourage taxpayers to prepare transfer pricing documentation on a contemporaneous basis.
Assuming that the proposed amendments are ratified by the general assembly, the penalty waiver provision will be effective on transfer pricing adjustments occurring on or after January 1 2009.
Henry An (henryan@samil.com) and David Jin-Young Lee (jylee@samil.com), Seoul