With the publication of the 2015 BEPS reports, the Korean National Tax Service (NTS) has taken increasingly aggressive Transfer Pricing (TP) positions in tax audits, which has led to greater uncertainty and double taxation of cross-border transactions. When the intended assessment of the NTS is inadequate and too extensive to justify, taxpayers often turn to the Mutual Agreement Procedure (MAP) to avoid double taxation. However, there are cases where TP problems get mixed up with other problems that cannot be addressed through MAP or that slows down the MAP process.
An example of this would be the increasingly common situation where the NTS considers a foreign company to be a Korean Permanent Establishment (PE) with significant profits attributable to it. In such a case, it is difficult to get the Korean Competent Authority (CA) to agree to reverse the decision of the NTS examiners to conclude that there is no PE.
As a result, a decision to go to MAP will generally result in both CAs accepting the existence of a PE, with the amount of income attributable to the PE being the subject of MAP negotiations. This can solve double taxation issues with corporate tax assessment, but the bigger problem is generally VAT assessment, which cannot be addressed through MAP. Generally, if a Korean PE is assumed to exist, the VAT assessment will far exceed the corporate income tax assessment and it can be extremely difficult to get a refund.
Accordingly, it is often more effective to seek a refund from a tax court or an appeal on PE or VAT issues, as well as issues that are not easily compromised when it comes to characterizing income for withholding tax purposes or other (zero-sum) issues . Each tax audit presents a unique mix of problems that are most easily resolved through MAP and those that require a domestic complaint. This requires careful strategic planning to maximize the chance of success and minimize the time it takes.
This article looks at both options and the ability to pursue both MAP and a domestic remedy at the same time.
Consensual process
The mutual agreement process is most commonly used to resolve double taxation issues when a tax assessment involves TP issues. Both Korean and overseas companies and residents can submit MAP applications to either the Minister of Economy and Finance or the Commissioner of the NTS if a tax assessment is accepted (based on the International Tax Coordination Act (LCITA) – which governs cross-border transactions) that were concluded in violation of relevant tax treaties.
The MAP application can be rejected in accordance with Article 42 (2) LCITA if one of the following conditions is met:
1) When a Korean or foreign court has given final judgment on the issues concerned; (except in cases expressly prescribed by the presidential decree of the LCITA, for example if a corresponding adjustment by the other contracting state is required);
2) If the applicant is not eligible to apply for MAP under the relevant tax treaty;
3) when the taxpayer intends to use MAP for tax evasion purposes; and
4) After three years from the date on which the taxpayer became aware of the assessment (generally the date on which the notification of the tax assessment was received).
The change in italics applies if a corresponding adjustment is necessary due to a court ruling that requires an adjustment to the market price. In such a case, the MAP will not be closed even if a final judgment has been issued by a Korean or foreign court.
Termination of the MAP
The taxpayer is free to withdraw the MAP application at any time during the MAP process. If the certification body cannot reach an agreement for the affected countries, the MAP will be terminated five years after the effective date in accordance with the LCITA, unless the certification body mutually agrees to extend the MAP discussions. In this case, the MAP will end eight years after the start date.
The outcome of MAP does not set a precedent for other cases with similar problems, nor does it legally bind the taxpayer to any other tax problem.
Deferment of tax payments under MAP
Article 49 of the LCITA provides that a MAP applicant can request deferred payment for assessed taxes (after receiving a pre-tax notice and before receiving a final tax notice) until the MAP is resolved. Once the deferral notice has been accepted, the tax will not be due until 30 days after the MAP close date. At this point in time, the taxpayer would have to pay the revised assessment plus interest for the entire deferral period.
However, applications for a tax deferral will only be accepted if the other contracting states involved allow similar deferrals (principle of reciprocity).
Domestic tax complaint
Within 30 days of receiving a pre-notification notice, taxpayers can appeal to the regional or district tax office that issued the notice under Article 81-15- (2) of the National Tax Basic Act (NTBA).
This process is known as the "Tax Adequacy Review" (RATI) and seldom results in a significant tax refund or adjustment, as the tax review team generally works closely with NTS supervisors, who are usually fully agreed beforehand Issuance of the preliminary assessment notice.
Once the RATI is complete, or should taxpayers decide not to proceed with the RATI, they can appeal to the Tax Tribunal (TT). The TT is an independent tax appeals board that reports to the Prime Minister's Office and has the power to reverse and refund tax assessments and direct the NTS to conduct a second review or examination of the issues concerned based on the specific guidelines of the TT. TT cases are assigned to one of five committees, each made up of four members (including two government officials and two outside experts). The government officials are generally from the NTS. Although the TT does not respond to the NTS, TT decisions are generally carefully coordinated with the NTS.
While taxpayers do not need to pay the tax assessment to pursue RATI, the tax assessment should be paid in full before filing a TT complaint (along with any interest and penalties due).
If the taxpayer decides to skip RATI and appeal directly to TT, the tax complaint should be submitted within 90 days of receiving the final tax assessment. TT decisions are typically made within six months to one year of submission. However, cases with significant assessments can be reviewed by all committee members, causing a delay.
If the outcome of the TT appeal is favorable to the taxpayer, the NTS cannot appeal the decision and it is final. If the judgment is unfavorable to the taxpayer, an appeal can be made within 90 days of receiving the final TT judgment.
Under current law, a taxpayer cannot circumvent the TT in favor of an immediate judicial appeal. According to Article 56 (2) of the NTBA, taxpayers must first appeal to the TT or NTS before a judicial appeal (and an appeal to the NTS is generally counterproductive).
A judicial appeal begins in the district court, and decisions can (and usually will) be challenged by the taxpayer or the NTS in the High Court and Supreme Court. Most appeals are decided by the Supreme Court, and the entire process (from TT to Supreme Court) typically takes three to five years. The judges at all three levels of the court are completely independent of the NTS and have made very independent decisions in the past that often favor taxpayers. This has resulted in the NTS complaining in recent years and reorganizing its internal process team.
Using MAP and a domestic tax complaint in line
Even if a domestic tax complaint is filed, the taxpayer can apply for MAP within three years of receiving the tax assessment notification.
Once the MAP begins, the statutory 90-day window for filing a TT complaint will be frozen until the MAP is finalized. In practice, however, it takes some time to submit and get started with MAP (usually more than 90 days). For this reason, it is best to file a MAP and a TT complaint at the same time immediately after receiving a tax assessment.
Generally, if the MAP is initiated while the TT complaint is in progress, the TT will suspend the review of the case until the MAP completes (although there are occasional instances where the TT has not been willing to wait for a since Long pending MAP has been completed This could result in the TT decision being taken before the MAP decision, in which case the Korean Competent Authority may refer to the outcome of the TT decision depending on the issues involved (although they may not are obliged to do so), and the taxpayer is free to appeal within 90 days of the decision issuing the TT decision, the 90 day window of which would remain frozen once the MAP started.
Figure 1 shows the tax complaint options available to taxpayers.
illustration 1
MAP statistics
Historically, a MAP in Korea has taken four to seven years to complete, which is longer than the three to five years generally required to initiate a domestic appeal by the TT to the Supreme Court. In recent years, however, the NTS has made efforts to increase the resources for MAP and Advance Pricing Agreement (APA) filings, and to increase the time for submitting meetings and consultations prior to filing. This has resulted in a reduction in the official time required to complete a MAP (from the date the MAP application was accepted to the date it was closed).
Average time from start to finish (months)
| TP cases | Other cases | |
| The cases started before January 1, 2016 | 55.05 | 80.82 |
| The cases started on January 1, 2016 | 20.81 | 20.96 |
| Source: OECD | ||
Due to the OECD oversight (peer review and monitoring process), the time required to complete MAP cases is likely to continue to improve.
Figure 2 shows the outcome of the recent Korean MAP cases with TP.
Figure 2: MAP results
Source: OECD
Taxpayers often combine MAP filing with bilateral APA to provide security for future years and unaudited past years (through a rollback). The same Korean CA team handles both MAP and bilateral APA filings. Combining the two can provide greater flexibility, efficiency, and consistency in solving MAP cases.
While taxpayers have historically preferred MAP for TP disputes and domestic remedies for PE, VAT, withholding tax and other disputes, an increasing number of TP cases have been observed being settled by TT and court. When examining the 74 TP appeal cases decided in the last five years, 44 cases resulted in a favorable decision for the taxpayer (approx. 60% profit rate).
Again, Korean tax law does not prohibit taxpayers from pursuing both MAP and a domestic tax complaint at the same time, so that strategic decisions can be made that maximize the chance of overall success.
When tax assessments address PE issues, administrative service charges or head office charges, withholding tax issues, or VAT, a domestic complaint can be more effective and less time consuming than a MAP filing.
When it comes to pure TP issues, MAP may prove more effective in eliminating double taxation and ensuring a rational outcome that is consistent with the OECD TP guidelines (although recent TP decisions by the Korean TT and the Courts were often favorable to taxpayers and resulted in refunds).
If a tax assessment has multiple issues that need to be appealed, it may be worth opting for a domestic complaint that covers all issues (including TP) or a two-pronged approach that involves both a TT complaint and a MAP will be submitted and the situation will be carefully monitored at both levels.
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Yun Heui Cho |
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partner Yun Heui Cho is a partner and senior litigator in the Yulchon Tax Litigation Group. He joined Yulchon in 2016 and previously served as a judge for over 20 years, including chair of the Seoul Central District Court, senior tax researcher and presiding judge of the Korean Supreme Court. Yun Heui has assisted numerous overseas and Korean multinational corporations in successful tax and legal proceedings in all major industries. |
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Yong Whan Choi |
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partner Yong Whan Choi is a partner primarily focused on international tax issues and currently co-leads Yulchon's international tax team. He sits on the Japanese team and assists numerous multinational corporations (especially ICT, semiconductor companies and mutual funds) on issues related to TP, permanent establishment, beneficial ownership and restructuring. Yong Whan has a long history of successfully representing clients in tax cases in tax courts and in Korean courts. He received his LLM in International Tax Studies from New York University and his PhD from Yonsei University. He also spent time in Japan where he was seconded to a large Japanese law firm. |
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Kyu Dong Kim |
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partner Kyu Dong Kim is a partner primarily focused on international tax issues and currently co-leads Yulchon's international tax team. He has extensive knowledge and experience of dealing with the challenging tax problems of multinational corporations, including cross-border transactions and Korean tax matters, with a particular focus on global technology companies and financial institutions. He also specializes in structuring overseas fund investments in Korea and investing in Korean funds overseas. Prior to joining Yulchon, Kyu Dong worked at PwC in London and Seoul. He is the director of the Korean branch of the International Fiscal Association and advises the government's committee on changes to tax law. |
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Jeremy Everett |
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partner Jeremy Everett is a partner in the Yulchon International Steering Group. He has lived in Korea for 26 years and has been advising foreign and Korean companies on incoming and outgoing tax matters since 1994. He has extensive experience helping a wide variety of industrial and financial services clients with tax audits and dispute resolution, mergers and acquisitions (M&A), tax planning and effective tax rate optimization. Jeremy previously headed two of the largest corporate tax departments in Korea. He was the first foreigner to serve as global tax director for a Korean conglomerate, Doosan Group, and formed and directed General Electric's tax team in Korea. |
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