Transfer Pricing
Transfer Pricing
Cross-border transactions between related parties must be priced at arm's length. Without the supporting analysis prepared in advance, the price you used becomes an assessment later.
Selecting and testing the transfer pricing method
Documentation: master file, local file and country-by-country report
Advance pricing agreements and audit defence
What arm's length means
The price that would have been set had the same transaction taken place between independent enterprises — the arm's length price, so called because the parties deal at arm's length rather than hand in hand. If a Korean parent sells to its overseas subsidiary too cheaply, Korean profit falls and so does Korean tax. Where the authorities consider the price is not at arm's length, they recompute the income on an arm's length basis and assess accordingly.
The evidence is the work
An arm's length price is not a single correct figure but a range produced by a defensible method. Which method you choose, and how you select comparables, drives the outcome.
Comparable uncontrolled price
Compares the actual price in identical or similar transactions. The most direct method, and the hardest to find comparables for.
Resale price and cost plus
Works back from the resale price less a normal margin, or forward from cost plus a normal margin.
Transactional net margin method
Compares the net margin realised on the transaction with that of comparable companies. The method most used in practice.
Profit split
Divides the combined profit according to each party's contribution. Used where valuable intangibles are involved.
Documents you are required to file
Above certain thresholds, transfer pricing documentation must be filed by a set deadline. Filing late or not at all draws a penalty, and the absence of contemporaneous analysis weakens your position in an audit.
Master file
The group's business structure, intangibles, financing arrangements and financial position.
Local file
The Korean entity's related-party transactions and the analysis supporting the prices used.
Country-by-country report
Revenue and tax paid by jurisdiction across the group. Required of groups above the consolidated revenue threshold.
You can agree the method in advance
An advance pricing agreement (APA) settles the pricing method with the tax authority before the transactions occur. Price in line with the approved method and the transfer pricing risk is removed for the covered period. A bilateral APA, agreed with the counterpart country's authority as well, also prevents the same profit being taxed in both. It takes time and cost, so we recommend it where the transaction volume and exposure justify it.
Audits and double taxation
Transfer pricing is a standing feature of tax audits. During an audit we set out why the chosen method and comparables are appropriate and support it with evidence. Where an assessment in one country produces double taxation, the mutual agreement procedure (MAP) allows the two authorities to negotiate relief.
The revenue and transaction thresholds for documentation, and the filing deadlines, are set by legislation and may change. We confirm at the consultation stage whether you are within scope and what has to be prepared by when.