On 31 December 2019, South Korea’s National Assembly has enacted tax reform bill for 2019 with a number of new measures added to the existing proposals including changes in transfer pricing measures. The new and amended tax measures are as follow:
- From 1 January 2020, an additional penalty of up to KRW200 million (US$170,000) (currently up to KRW100 million) may be imposed every 30 days after the first penalty assessment until the requested transfer pricing documents are submitted;
- The Tax Reform clarifies that royalty payments for patents rights registered outside of Korea that are used in local manufacturing activities in Korea will be considered to be Korean source royalty income. If Korean entity pays damages to any patent holder for the infringement of a patent registered outside of Korea, the payment will be subject to the Korean statutory withholding tax rate of 16.5%, including the 10% surtax;
- Provides an exemption for taxpayers who are required to file master/local files from submitting the statement of international transactions. If taxpayers fail to submit documents that confirm the arm’s-length pricing method by the statutory due date without reasonable cause, the Korean tax authority may apply an arm’s-length price based on information from taxpayers undertaking a comparable business ;
- Reduces the securities transaction tax rate from 0.5% to 0.45% for over-the-counter and unlisted security transactions;
- Increases maximum penalties for withholding tax to 50% of the unpaid or under paid withholding tax amount;
- If a transaction reduces the tax liability by an amount specified in the Presidential Decree of the LCITA (for example 50%), the burden of proof is placed on the taxpayer to prove that the transaction has a reasonable business purpose and no tax avoidance motive. If fails to meet the requirement results in the transaction being treated as an abusive transaction and subject to tax in accordance with the substance over form principle.
