Important South Korean Tax Reporting Requirements Coming Due

The Korean tax authorities have adopted the requirement to comply with the country-by-country (CbC) reporting in line with the recommendations by the Organization for Economic Co-operation and Development (OECD) following the implementation of the new transfer pricing rules requiring multinational companies in Korea to submit local files and master files on their cross-border transactions, which is effective for the fiscal year starting on or after January 1, 2016.

With the adoption of this CbC reporting requirement under the Korean tax law, a Korean taxpayer of a multinational group whose consolidated revenue exceeds the threshold prescribed by the relevant Presidential Enforcement Decree is required to file the CbC reports within twelve months from the fiscal year-end. The CbC reports must include information on a multinational group’s revenue in each country, profit or loss before income tax, amount of tax payment, etc.

With regard to this, the Korean taxpayers (i.e., a Korean ultimate parent company, a taxpayer whose ultimate controlling shareholder is established in a foreign country) are required to submit the application for the information concerning the CbC reporting obligator to the Korean tax authority within six months from the fiscal year-end (e.g., by June 30, 2023, for the taxpayers having the fiscal year ended December 31, 2022).

Other key points of the government’s guidance include:

a. CbC reporting obligator

The Korean ultimate parent company

In the case where the ultimate parent company is a domestic company or a resident of Korea, the CbC reporting obligator is the domestic parent company preparing the consolidated financial statements of a multinational group whose consolidated revenue exceeds KRW 1 trillion during the preceding fiscal year.

The Korean affiliate of foreign ultimate controlling shareholder

In the case where the ultimate parent company is a foreign (non-Korean) company or a non-resident of Korea, the CbC reporting obligator is a Korean affiliated company of a multinational group whose consolidated revenue in the preceding fiscal year exceeds the threshold below.

- If there is an obligation to submit a CbC report under the laws and regulations of the country where the foreign ultimate controlling shareholder is established: the threshold prescribed by the laws and regulations

- If there is no obligation to submit a CbC report under the laws and regulations of the country where the foreign ultimate controlling shareholder is established: EUR 750 million (or equivalent)

The Korean affiliate that has submitted ‘the application for the information concerning the CbC reporting obligator’ may not submit a CbC report to Korean tax authorities if any of the following conditions are met:

(1) There is an obligation to submit a CbC report under the laws and regulations of the country where the ultimate parent company is established and that CbC report is exchanged in accordance with the tax treaty with Korea; or,

(2) Other Korean affiliates submit CbC report on behalf of the Korean affiliate; or,

(3) The foreign ultimate company delegates the obligation of submitting CbC report to an affiliate in a third country and that CbC report is exchanged in accordance with the tax treaty with Korea.

b. Covered scope of entities

A CbC reporting obligator is required to prepare and submit a CbC report for affiliate companies that belong to a multinational group as below.

- Companies included in the consolidated financial statements of the multinational group

- Companies that are subordinate to the ultimate parent company of the multinational group, but excluded from the consolidated financial statements for the reason of size or importance

- Permanent establishments of the companies of the multinational group which prepare separate financial statements.

 

l Transfer pricing documentation requirements

Under the Korean International Tax Coordination Law (“ITCL”), a taxpayer (excluding a taxpayer required to submit a Master File and Local File) that conducts cross-border transactions with overseas foreign related parties (“OSRP”) shall submit the following documents to Korean tax authorities, within six months from the end of the fiscal year (e.g., by June 30, 2023, for the taxpayers having the fiscal year ended December 31, 2022).

a. Schedules of international transactions (with OSRP) [Form No. 16]

b. Report on the method of the arm’s length price determination [Form No.18, 19, 20]

c. Summary Profit and Loss statement of OSRP [Form No.17]

 

l Guidance on overseas financial account reporting

Under the ITCL, if Korean resident individuals or domestic companies have financial accounts opened with overseas financial institutions and the total value of such accounts exceeds KRW 500 million on any last day of each month of the relevant year, such Korean residents and domestic companies are required to file a report on their overseas financial accounts with the Korean tax authorities from June 1 to June 30 of the following year.

For the purpose of reporting on overseas financial accounts, each of the following persons shall be deemed to hold the relevant foreign financial account:

- Where the actual holder of a foreign financial account is different from the nominal account holder, such as an account not under a real name: The nominal holder and the actual holder

- Where a foreign financial account is an account in joint names: Each joint holder

In the case where Korean resident individuals or domestic companies who are required to report their overseas financial accounts fail to report their financial accounts by the reporting deadline or underreport the relevant amount, an administrative fine shall be imposed as follows:

Non-reported or underreported amount (A)	Fine
Up to KRW 2 billion	(A) X 10%
Over KRW 2 billion up to KRW 5 billion	KRW 200,000,000 + [(A) – KRW 2 billion] x 15%
Over KRW 5 billion	KRW 650,000,000 + [(A) – KRW 5 billion] x 20% with the maximum cap of KRW 2 billion

In addition, if the non-reported or underreported amount exceeds KRW 5 billion, the Korean resident individuals or domestic companies that violated reporting requirements can be subject to imprisonment of up to 2 years or a fine equivalent to the amount between 13/100 and 20/100 of the amount of breach of an obligation to report.