Transfer Pricing AlertEY Han Young newsletterMarch 2016

2Transfer Pricing Alert March 2016

Transfer PricingCurrent issue.R e p u b l i c o f K o re a. J ap an

9Transfer Pricing Alert March 2016

TP Current Issues

Republic of Korea

The previous TP Alert (August 2015) covered, among the various 2015 tax reform bills announced by the Korean government on 6 August 2015, the amendment to the Law for the International Coordination of International Tax Affair (“LCITA”) establishing Article 11 regarding submission requirements of the International Re-lated Party Transaction Integrated Report. (Related link: http://www.ey.com/KR/ko/Services/Tax/Transfer-Pricing-and-Operating-Model-Effectiveness/TP-Alert , August 2015 “2015 Amendments of the Korean transfer pricing documentation rules following BEPS Action Plan 13”).

Furthermore, the December 2015 TP Alert covered the amendments to the Presi-dential Enforcement Decree (“PED”) of the LCITA providing guidance specifying ap-plicable entities, filing method and process of the International Related Party Trans-action Integrated Report. (Related link: http://www.ey.com/KR/ko/Services/Tax/Transfer-Pricing-and-Operating-Model-Effectiveness/TP-Alert , December 2015 “2015 Amendment of the LCITA and PED: Details of requirements on submission of MNE’s foreign transactions”).

On 15 February Korea’s Ministry of Strategy and Finance (“MOSF”) announced Min-isterial Regulations to follow up the amendments to the LCITA and its PED. Since the practical applications of the law are stipulated in Ministerial Regulations, this amendment will be of interest to anybody who is part of the finance department in a multinational enterprise.

2015 Amendments to the Ministerial Regulation of the LCITA:Specific regulations regarding the submission of “International Related Party Transaction Integrated Report” by multinational enterprises

10Transfer Pricing Alert March 2016

TP Current Issues

Republic of Korea

S ub m issio n criteria o f th e Internatio nal R elated Party Transactio n Integrated R ep o rt: PED Article 21-2, which was put into legislation last month, requires enti-ties with annual revenue of more than 100 billion KRW and entities that have for-eign related party transaction amount of more than 50 billion KRW to submit the International Related Party Transaction Integrated Report. The new amendment to the Ministerial Regulations specifies that the related party transactions should include transaction of goods, services, and loan transactions. The new submission criteria will be applicable to the fiscal year beginning on or after 1 January 2016.

Definition of foreign related party for the master file: According to the newly established PED Article 21-2, paragraph 2, subparagraph 2, International Related Party Transaction Integrated Report constitutes of the master file and the local file. The new Ministerial Regulation requires the master file to include information on entities under consolidation for accounting purposes, instead of entities defined as foreign related parties per LCITA. In addition, the amendment makes it clear that in cases where there are two or more entities under consolidation required to submit the master file, the controlling entity (i.e. ultimate parent company) may submit the master file.

Master file and Local file templates: According to the newly established PED Ar-ticle 21-2, paragraph 2, subparagraph 2, International Related Party Transaction Integrated Report constitutes of the master file and the local file. The new amend-ments to the Ministerial Regulations provide templates of the master file and local file.

The new proposed Ministerial Regulations were subject to be implemented on 26 February, and after further consultation and Ministry of Government Legislation review, the results will be announced and the new regulations will be put into place this month.

Main points of the amendment

11Transfer Pricing Alert March 2016

TP Current Issues

Japan

Japan is an influential party in the Organisation for Economic Co-operation and Development (“OECD”)’s Base Erosion and Profit Shifting (“BEPS”) project and has made significant input into the final reports that were released 5 October 2015. The Japanese Ministry of Finance official, Masatsugu Asakawa, has been the chair of the OECD’s Committee on Fiscal Affairs, which is responsible for the OECD Transfer Pricing Guidelines. Japan is therefore expected to adopt many of the BEPS recommendations. Accordingly, Japan’s 2016 tax reform includes the OECD’s three-tiered recommendations for transfer pricing documentation under Action 13 (country-by-country report (“CbCR”), master file, and local file).

In light of Japan’s 2016 tax reform, the following are key considerations for non-Japanese headquartered companies including subsidiaries of Korean-based com-p an i e s .

Cb CR : Companies not submitting in a country with a double tax convention with Ja-pan will need to submit a CbCR for fiscal years beginning on or after 1 April 2016. Multinational companies (“MNC”s) with less than JPY100 billion group revenue for the preceding fiscal year need not submit. The deadline to submit the CbCR is one year following the fiscal year-end of the parent company. Therefore, for a company with a March fiscal year-end, the first fiscal year to be submitted is 31 March 2017 and the deadline to submit is 31 March 2018. Items to be reported are as described in the BEPS Action 13 final report. Penalties will be imposed for failure to submit, though these penalties have yet to be determined. The reporting language is Eng-l i s h.

Master file: Companies with less than JPY100 billion group revenue for the preced-ing fiscal year need not submit. The deadline to submit the master file is one year following the fiscal year-end of the parent company. Therefore, for March year-end companies, the first fiscal year to be submitted is 31 March 2017 and the deadline to submit is 31 March 2018. Items to be reported are as described in Annex II to Chapter 5 of BEPS Action 13 Report. Penalties will be imposed for failure to submit,

Key Considerations

12Transfer Pricing Alert March 2016

TP Current Issues

Japan

though these penalties have yet to be determined. The language for the master file i s J ap an e s e o r E n g l i s h.

Local file: In the past, because there was no statutory deadline for producing trans-fer pricing documentation, taxpayers could take as much time as they needed to conduct economic analyses. In general, current practice is to create the transfer pricing documentation after the comparables financial information for the relevant fiscal year becomes available (usually September/October). For December year-end companies, this is roughly six months after the submission of the tax return.

Due to the tax reform, MNCs will need to produce the local file on a contempora-neous basis. The deadline is the due date of the tax return (which is two months after the end of the fiscal year, unless the taxpayer is granted an extension to three months). Given the significance of the departure from the current position in the Japanese transfer pricing documentation regulations, the Japanese Government has provided an additional year for companies to prepare. Therefore, for December year-end companies, the first local file needs to be prepared for the fiscal year end-ing 31 December 2018 and the deadline to prepare is 28 February 2019 (unless an extension is obtained, in such case the deadline to prepare is 31 March 2019). The first local file must be prepared for fiscal years beginning on or after 1 April 2017. The local file must be stored for a period of seven years, starting from the day after the filing due date of the final tax return.

As mentioned, an entity will need to prepare the local file by the filing date of the final tax return, which is within 2 months following the fiscal year-end (or 3 months with an extension). This is a very short deadline compared to other countries; for example, the period to prepare the tax return in the US is 9.5 months (with an ex-tension) and 9 months in the UK. The local file is not automatically submitted with the tax return; however, it should be provided when requested by the tax authorities during a tax audit. The deadline for submission of the transfer pricing documenta-tion is 45 days after the request. This deadline is important because after 45 days have elapsed, the tax authorities may use presumptive taxation and may make in-quiries of and inspect third parties conducting the same/similar business (secret

Contemporaneous Documentation Requirement For Local File

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TP Current Issues

Japan

comparables).

The tax reform states that an entity is not required to prepare contemporaneous documentation for transactions if the total amount of the transactions with a for-eign related party (applied per foreign entity) does not exceed JPY5 billion within the preceding fiscal year (or if there is no preceding fiscal year, the current year). There is also a threshold set out specifically for intangible transactions, which is JPY300 million (also applied per foreign entity). However, although exempted from the contemporaneous documentation obligation, an entity must provide documen-tation within 60 days if requested. So practically, there is little to distinguish the treatment of transactions that are lower than the relevant threshold; the differ-ences being whether documentation must be produced contemporaneously and whether submission must be made within 45 days or 60 days.

In order to prepare themselves against the shortened period for preparation of documentation, non-Japanese headquartered companies including subsidiaries of Korean-based companies are recommended a transfer pricing planning study in ad-vance. Also, companies should internally manage the deadlines of the transfer pric-ing documentation under Action 13 (CbCR, master file, and local file).

14Transfer Pricing Alert March 2016

Contacts

Transfer Pricing

Sang Min Ahn Partner 02. 3787. 4602 Sang- min. ahn@ kr. ey. com

Sung Han Park Partner 02.3787.6355 Won- bo. jung@ kr. ey. com

Dong Hoon Ha Partner 02. 3770. 0936 Dong- hoon. ha@ kr. ey. com

Hoon Seok Chung Director 02. 3770. 0924 Hoonseok. chung@ kr. ey.com

Kyoung Bae Han Director 02. 3770. 0970 Kyoung- bae. han@ kr. ey. com

Jae Seong Yun Director 02. 3787. 4265 Jae- seong. yun@ kr. ey. com

Ki Se Kim Senior Manager 02. 3770. 0918 Ki- se. kim@ kr. ey. com

Transfer Pricing-Financial Services Organization(FSO)

Stella Kim Director 02. 3770. 0980 Stella. kim@ kr. ey. com

Business Tax Service

Min Yong Kwon Partner 02. 3770. 0934 Min- yong. kwon@ kr. ey. com

Dong Chul Kim Partner 02. 3770. 0903 Dong- chul. kim@ kr. ey. com

Jae Cheol Kim Partner 02. 3770. 0961 Jae- cheol. kim@ kr. ey. com

Young Ro Bae Executive Director 02.3770.0936 sunghan.park@kr. ey. com

Song Min Oh Executive Director 02. 3770. 0983 Song- min. oh@ kr. ey. com

International Tax Service

Jaewon Lee Partner 02. 3787. 4601 Jaewon. lee@ kr. ey. com

Kyung Tae Ko Partner 02. 3770. 0921 Kyung- tae. ko@ kr. ey. com

Yeon Ki Ko Partner 02. 3787. 4637 Yeonki. Ko@ kr. ey. com

Nam Wun Jang Partner 02. 3787. 4539 Nam- Wun. Jang@ kr. ey. com

Financial Services Organization

Jong Yeol Park Partner 02. 3770. 0904 Jong- yeol. park@ kr. ey. com

Jeong Hun You Partner 02. 3770. 0972 Jeong- hun. you@ kr. ey. com

Dong Sung Kim Partner 02. 3787. 4238 Dong- sung. kim@ kr. ey. com

Transaction Tax

Jin Hyun Seok Partner 02. 3770. 0932 Jin- hyun. seok@ kr. ey. com

Human Capital

Danielle Suh Partner 02. 3770. 0902 Danielle. suh@ kr. ey. com

Min Ah Kim Executive Director 02. 3770. 1019 Min- ah. kim@ kr. ey. com

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