APA Process
Bilateral and Unilateral Agreements
Confidentiality
Legal Effects and Advantages
An advanced pricing agreement (APA) is an agreement between a taxpayer and the National Tax Service (NTS) which confirms that the latter has acknowledged in advance the transfer pricing method adopted by the corporate taxpayer.
Application
A taxpayer wishing to enter into an APA must submit an application to the NTS by the last day of the first taxable year in which the APA will apply. The NTS charges no application fee.
Period
A taxpayer may determine the length of the period of an APA when it submits the application.
Roll-back
In principle, an APA is applied prospectively. However, a retroactive application of the transfer pricing method provided for by the APA will be permitted through a mutual agreement procedure if a retroactive application is required by the taxpayer.
Annual review
Once the NTS approves an application, the taxpayer must submit an annual report to the Korean tax authorities, demonstrating that the tax return has been prepared in compliance with the approved APA. The report should be submitted within six months of the due date for filing a tax return for a taxable year to which the approved APA applies.
Change or withdrawal
A taxpayer may revise or withdraw an APA before it is approved. Similarly, the NTS may change the critical terms of an APA through mutual agreement with the competent authority of a relevant foreign country if a relevant taxpayer consents to such change. Further, the NTS may cancel an APA during its term if a critical change occurs.
Bilateral and Unilateral Agreements
A bilateral APA that is entered into through a mutual agreement procedure between the NTS and the competent authority of a relevant foreign country protects a taxpayer from both the NTS and the competent authority. A unilateral APA may be formed if negotiations between the NTS and the competent authority fail. This takes effect when the NTS gives a taxpayer notice of its approval within two years of the date of its application.
Any materials or information that the NTS obtains in the course of receiving and processing APA applications must remain confidential and cannot be used for any other purposes.
By having an APA, the taxpayer can prevent potential disputes over the appropriateness of the transfer pricing method used.
The NTS recently acknowledged that transfer pricing is one of the major tax issues in Korea and, therefore, tax audits will be enhanced with respect to transfer pricing. In order to relieve taxpayers from the burdens caused by such enhanced tax audits, the NTS plans to promote the APA procedure. Once a taxpayer has an APA with the NTS, such transactions conducted during a period covered by a relevant APA are exempt from a tax audit. By having an APA, a taxpayer may save legal fees and expenses for other professional advisory work, since legal or other professional advice need not be sought on its transfer pricing method during a tax audit. Moreover, at the time of entering into an APA the taxpayer is usually in a better position to persuade the NTS to adopt the favourable transfer pricing method for it.
For further information on this topic please contact Catherine Eun-gyoung Shin at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5228) or by email ([email protected]).