Ask a Lawyer is a regular column written by attorneys at Yoon & Yang LLC on various legal aspects of the Korean life or business. The content provided here is general legal information, not legal advice on a specific situation. — Ed.
Q. As a management at the multinational enterprise in Korea, I have frequently come across the new term, “Base Erosion and Profit Sharing (BEPS)” project in newspapers. What should I prepare for this?
A. The most discussed international taxation issue of late is legislative countermeasures that many countries have been taking to prevent multinational enterprises’ Base Erosion and Profit Sharing.
The BEPS prevention project is composed of 15 action plans. What multinational enterprises should pay attention to is “Action 13: Transfer Pricing Documentation.” Action 13 reinforces the obligation to submit documents related to transfer pricing by enhancing consistency, substance, and transparency of information disclosure in order to (i) allow accurate analyses of transfer pricing and (ii) prevent affiliates of multinational enterprises from avoiding taxes through transaction price manipulations among each other.
In the past, taxpayers in Korea who engaged in international related party transaction were only required to submit the Schedule on International Transactions by the due date for filing the corporate income tax returns.
However, the Korean government recently amended the Adjustment of International Taxes Act and the subordinate Enforcement Decree to adopt Action Plan 13, which requires taxpayers who engage in international related party transactions to submit the Combined Report of International Transactions, composed of the Master File, Local File and Country-by-Country Report. This amendment also enables tax authorities to require taxpayers to submit relevant data on transfer pricing methods necessary for tax adjustment based on arm’s length prices, and provides for penalty clauses that impose a fine of not more than 100 million won on taxpayers who (i) fail to submit the CROIT or (ii) fail to comply with the request for submission of materials on transfer pricing methods, etc.
Therefore, Korean companies with overseas subsidiaries need to familiarize themselves with the AITA and relevant laws governing the jurisdiction where such subsidiaries are located. At the same time, foreign corporations with Korean subsidiaries need to learn relevant laws of their own countries and the AITA. This would mean that both Korean and foreign companies need to find out whether they have the obligation to submit the CROIT in both countries and, where applicable, must prepare and submit the CROIT to tax authorities of the relevant countries.
Such obligation of the companies makes it easier for tax authorities to find multinational enterprises’ sources of taxes. In other words, it would expose official data concerning sales, costs and tax burdens of multinational enterprises. Naturally, tax authorities would enhance tax investigations on multinational enterprises with a focus on this issue. To the contrary, it would be more difficult for multinational enterprises to find ways of saving taxes through the use of subsidiaries in low tax rate countries.
Many countries including Korea have already established laws to require submission of the CROIT and other countries are expected to follow. Since the requirement for submitting the CROIT has become an irreversible trend, it is high time for multinational enterprises to sufficiently learn the new system to find new methods of maximizing their profits.
By Jeon Wan-kyu
Attorney and partner of law firm Yoon & Yang LLC