II. Future Prospect

1. Submission of Transfer Pricing Report

A. Exemption from duty to submit local file for Advance Pricing Agreement (“APA”)-approved transactions (Article 21(2) of the Enforcement Decree of the LCITA)

In light of the similarity between APA documents and the local file, Article 21(2) of the Enforcement Decree of the LCITA will be amended so that the duty to submit the local file will be exempted for APAapproved transactions. This amendment will be applicable to submissions made after January 1, 2017. 

B. Imposition of duty to submit a CbC Report in a predetermined format (Article 21(2) of the Enforcement Decree of the LCITA)

Companies which have the duty to submit a CbC Report in Korea will have to prepare the report in a predetermined format that includes the company name, the location of the company, the names of the company’s subsidiaries, the location of the company’s subsidiaries, etc. and submit it to the relevant tax office within 6 months from the end of the relevant tax year. In case the ultimate parent company is a Korean company, the Korean company should submit a CbC Report in the predetermined format, and where the ultimate parent company is a foreign company, a Korean subsidiary or branch of the foreign company should submit a CbC Report on behalf of that foreign company. 

2. Introduction of Deemed Interest Rate for Fund Transaction Made between Korean Resident and Its Foreign Related Party

With respect to fund transactions made between a Korean resident and its foreign related party, the taxpayer can choose to apply the deemed interest rate considering the benchmark interest rate, the procurement interest rate, etc. The specific deemed interest rate will be determined under the Enforcement Decree (Article 6(7) of the Enforcement Decree of the LCITA).

3. Improvement of Penalty Provisions

A. Adjustment of the method to impose penalties for non-compliance of the duty to submit materials (Article 51(1) of the Enforcement Decree of the LCITA) 

Under the current LCITA, where a person fails to submit or falsely submits all or some of the specification of international trades, fine in the amount of KRW 10 million is imposed, and where a person fails to submit or falsely submits all or some of the CRIT, fine in the amount of KRW 30 million is imposed. However, in order to rationally improve the existing penalty system, the Korean government will amend the current penalty provisions to impose fine in the amount of KRW 5 million per foreign related party in the case of the specification of international trades and impose fine in the amount of KRW 10 million per case with respect to the CRIT.

B. Expansion of the scope of materials subject to exemption from penalties (Article 51(6) of the Enforcement Decree of the LCITA) 

“Where a person fails to submit some of the specification of international trades or the CRIT or some items are erroneous by minor mistake” will be included as one of the reasons for exemption from penalties under the LCITA. Accordingly, it is expected that unnecessary friction between the taxpayer and the Korean tax authority will be significantly reduced.

4. Expansion of the Application of Scope of Taxation per Source of Income

It is expected that the application scope of “taxation per source of income” will be expanded (Article 100-18(9) of the Enforcement Decree of the STTCL). Where a Korean private equity fund (“PEF”) pays income arising from the transfer of the shares in which it invests to a foreign pension or fund, such income is classified not as dividend income but as capital gains from the share transfer in accordance with “taxation per source of income”. Under the current STTCL, “direct investment by the Korean PEF” was required in order for taxation per source of income to apply. However, in order to promote taxation equality between Korean and foreign PEFs, the Korean government will also recognize “where the Korean PEF makes investment through an investment purpose company (SPC)” as the case to which taxation per source of income is applicable.