Tax agency to help cut tax risks at foreign firms
The National Tax Service (NTS) said Thursday that it will help foreign companies in Korea reduce potential tax uncertainty regarding their cross-border transactions with parent firms.
From 2015, the NTS will allow foreign firms that earn less than 50 billion won ($46 million) a year in sales to focus on their businesses without undergoing a tax audit for up to five years if they sell their products at the “right prices,” Park Suk-hyun, director of the International Taxation Division, said in a briefing.
“Foreign companies may pay more to buy products from their parent firms to pay less to the Korean tax government. For example, an import carmaker may bring in a midsize sedan from Germany at 45 million won, higher than the global market price of 40 million won,” the director explained.
“If the carmaker sells the vehicle here at 50 million won, it is required to pay taxes on the income of 5 million won per car. But it is lower than the expected income tax of 10 million won if the vehicle was imported at the market price of 40 million won.”
Foreign companies could face heavy fines if found they purchased products at higher-than-market prices from their parent firms to pay less tax in Korea, according to the NTS.
If Seoul-based foreign companies report their prearranged transfer pricing band to the NTS ahead of their deals with foreign related parties, they will be free from a tax audit from three to five years, the NTS said in a statement.
To do this, the NTS has introduced the Advance Pricing Arrangement (APA) for which 76 percent of 9,212 foreign and foreign-invested companies can voluntarily apply. If foreigners own at least a 10 percent stake in a company, it is considered a foreign-invested firm.
APA is an arrangement signed between a taxpayer and the NTS on the application of transfer pricing methodology (TPM) in determining arm’s length prices in advance of future international deals with foreign related parties.
Once an APA is concluded, the taxpayer can use the approved TPM as the most appropriate method during the covered APA term as long as the taxpayer complies with critical regulations.
In general, tax audits are not suspended by a taxpayer’s APA request. But the NTS may suspend the audits over the transactions for the APA-covered period if the taxpayer appropriately requested an APA for the transaction at issue before pre-notice of tax audits.
Moreover, foreign firms will also be allowed to discuss with the NTS official in charge of a tax audit to make their complaints or difficulties heard, said the statement.
“Chiefs of foreign business lobbies such as the American Chamber of Commerce in Korea and the European Chamber of Commerce in Korea have called on the NTS to strengthen efforts to avoid any potential tax audit risks for foreign businesses here,” Park said.
