Korea: Master file and local file; “full” transfer pricing reporting
Rules requiring master file and local file reporting—“full” transfer pricing reporting—are advancing in Korea. 5 January 2016
Korea’s parliament on 2 December 2015 approved legislation (released as draft legislation by the Ministry of Strategy and Finance of Korea in August 2015) to implement the OECD’s base erosion and profit shifting (BEPS) recommendations.
The rules require all Korean domestic corporations and all foreign corporations with a domestic place of business in Korea that are engaged in certain cross-border related-party transactions to file both master file and local file reports. The filing dates for the master and local files are related to the date for filing tax returns (i.e., for fiscal or tax years ending 31 December, the deadline would be 31 March of the following year).
Amendments being considered
Amendments to Korea’s tax law (known in English as the “Law for the Coordination of International Tax Affairs” or LCITA) were announced on 23 December 2015. The revisions include reporting specifications for LCITA Article 11 and reflect revisions for consideration during the legislation period 24 December 2015 to 15 January 2016, and for the meeting of vice ministers (scheduled for 21 January 2016) and the Cabinet meeting (scheduled for 26 January 2016).
Under the revisions, all domestic corporations and foreign corporations with net sales from the domestic place of business in Korea greater than 100 billion KRW (approximately U.S. $85 million) and that conduct cross-border related-party transactions of a value greater than 50 billion KRW (approximately U.S. $42.5 million) are subject to the “full” transfer pricing reporting requirements—i.e., must submit both master and local files. It is anticipated that about 570 companies would be affected by this requirement.
Transfer pricing reporting details
The “full” transfer pricing report is composed of the master file and the local file.
A “full” transfer pricing report submission is required of all domestic corporations and foreign corporations with permanent establishments in Korea having net sales greater than 100 billion KRW (U.S. $85 million) by the entity in Korea and that conduct cross-border related-party transactions exceeding 50 billion KRW (U.S. $42.5 million) per year.
- Master file—The parent company of the local file-submitting entities under same business group must submit the master file. If the parent company is not located in Korea, the foreign parent company must submit the master file.
- Local file—All entities located in Korea subject to the “full” transfer pricing report must file local files.
The contents of the “full” transfer pricing report are summarized as follows:
- Master file—(1) a description of the legal ownership structure of the multinational entity (MNE) group; (2) the geographic locations of subsidiaries and offices; (3) details of the top five goods or services that compose 5% of MNE’s group sales; and (4) information on significant business restructures, share purchases, company divestitures, etc.
- Local file—(1) detailed descriptions of the local company’s business and business strategies; (2) explanations and background of the principal related-party transactions; and (3) a list of related-party transactions with transactional types, related risks, relationships of the entities, etc.
The submission method, language, and renewal rules are summarized as follows:
- Submission method—Both the master and local files may be submitted electronically.
- Language—The local file is to be submitted in the Korean language only. The master file may be submitted in English and/or Korean (provided that the Korean version is submitted within one month after the submission of English version).
- Renewal—Both the local and master file may be renewed annually, while certain parts (to be specified in the enforcement rule of the LCITA) could only be updated every three years.
