(Overview of Transfer Price system In Korea)

A.    Overview

Transfer Pricing system is that tax authorities may, where the relevant price in an international trade excluding the trade the income of which originates from a domestic source as provided the Income Tax Act or the Corporation Tax Act when a party to the trade is a domestic place of business, in which either party to the trade is a foreign related party, falls short or in excess of the arm's length price, determine or rectify the tax base and tax amount of the resident (including a domestic corporation and a domestic place of business on the basis of the arm's length price).

B. Scope of Application

(1) Liable Parties of application

The domestics corporation, residents, domestics corporations of non-resident, foreign corporation where are doing a business with the foreign related party are liable to this act.

(2) Terms & Conditions of application

   ❶ The trading parties are unilaterally the one who have a special related party

   ❷ the trading have to do with international transaction

         ❸ the trading terms are lower or higher than the arm's length price compared with the market price.

(3) Pre-requisition (Criteria of Application)

Transfer pricing system is applied where the trading with foreign related party is executed by lower or higher than arm's length price, regardless of tax evasion. Therefore it's not necessary of pre-requisition whether the foreign related party is achieved the taxable income.

- It's not pre-requisition of tax evasion.

- It's not pre-requisition of the realization of income

1.      Application Limit of taxation of transfer pricing

This Act is applied over the other taxes and regulations which is stipulated by National Tax Act and Local Tax Act. That is, the international trading may not be applied the regulation of the denial of wrongful calculation form the Income tax Act and Corporate Income Tax however the following cases are applied the regulation of the denial of wrongful calculation.

❶ in case of transfer of assets without the consideration or the exemption of debt

❷ Asset acquisitions or investment in kind which is no raised the revenues or bourn the operation cost of the assets.

❸ Bourn the contributions on behalf of related parties

❹ other capital transaction, i.e. unfair merger, unequal capital increase, unequal capital retirement and other capital transaction which is recognized by the manipulated the company's profit with related parties.

2.      Disposition of Income & Tax Reconciliation from the taxable income adjustment

3.      Disposition of Income & Tax Reconciliation from the taxable income adjustment are limitedly applied only local company however this act is limitedly applied if the amount of inclusion in gross income from the taxable income adjustment is not ascertained to return at the local company. This is, Disposition of Income & Tax Reconciliation from the taxable income adjustment is not applied to individual resident, non-resident or local entity of foreign company. And also in case of local company, if the amount of inclusion in gross income from the taxable income adjustment by arm's length price or by arm's length cost allocation is proved to return at the local company, this act will not be applied.

(1)   If foreign special party is a shareholder of local company

The amount which is not returning to local entity among the amount of inclusion in gross income is classified by the dividend income of foreign special party and in this case the dividend income has to withhold the local income tax. If local company does not submit the Restoration Certificate of Transfer income amount included the actual returned amount and the relevant interest within 90 days after the local company receives the Disposition Notice of Temporary reserves, Tax Authorities will issue the Change Notice of Transfer Income amount within 15 days after the days of expiration. Tax Authorities will be considered the notice day as a payment date of dividend and local company have to return the withholding tax by 10th of next month.

(2)   Foreign entity, as a special party, invested to local company

The amount which is not returning to local entity among the amount of inclusion in gross income is classified by the disposition of income of internal reserves which is increased of investment of foreign special party and in this case the income is not liable to pay the withholding tax.

(3)   In case of other special related party

The amount which is not returning to local entity among the amount of inclusion in gross income is classified by the dividend income of foreign special party and in this case the dividend income has to withhold the local income tax.