Korea: Arm’s length interest rate on late-paid trade receivables; use of APA application information

Transfer pricing-related decisions of the Tax Tribunal

Transfer pricing-related decisions of the Tax Tribunal

The KPMG member firm in Korea prepared a report on two recent transfer pricing-related decisions of the Tax Tribunal:

  • Arm’s length interest rate on late-paid trade receivables: The taxpayer applied the three-month LIBOR rate to compute interest on late-paid trade receivables from an overseas affiliated company during 2015-2017. The in-field tax auditors notified the taxpayer that the three-month LIBOR rate does not correspond to the arm's length interest rate prescribed by the Adjustment for International Taxes Act and required the taxpayer to make transfer pricing adjustments in the following manner: for 2015 and 2016, to adjust by the weighted average borrowing rate of the taxpayer; and for 2017, to adjust by the safe harbor interest rate, which is 4.6% according to Article 43, Paragraph 2 of the Enforcement Rule of The Corporate Tax Act. The Tax Tribunal held that the in-field tax auditors transfer pricing adjustments were not erroneous.
  • APA application information cannot be used for transfer pricing adjustments: The taxpayer and its overseas subsidiary filed an application for an advance pricing agreement (APA) with the Korean tax authority and the tax authority of the country where the overseas subsidiary was located. While the tax authorities were in the process of negotiations for conclusion of the APA, the Korean in-field tax auditors made transfer pricing adjustments based on the APA application information. The Tax Tribunal held that the use of the taxpayer’s APA application information to propose transfer pricing adjustments violates the Enforcement Decree of the National Tax Act as well as the “principle of good faith.”

Read a September 2022 report [PDF 241 KB] prepared by the KPMG member firm in Korea


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