?? Navagating Korea's Compliance Landscapte: #4. International Transaction Reporting

Staying compliant with international transaction reporting obligations is a critical aspect of doing business in Korea for foreign-invested companies (FDIs). With stringent regulations and potential penalties for non-compliance, understanding these requirements can help you avoid unnecessary complications while building a strong operational foundation in Korea.

In this newsletter, we outline the essential reporting requirements and strategies for FDIs to stay on the right side of Korean tax authorities.

?? Key Reporting Obligations for International Transactions

1. Report on Transfer Pricing Method

• Who Must File: Companies engaging in international transactions with overseas related parties.
• Exemptions:

Total transaction value in a fiscal year:

Goods ≤ KRW 50 billion

Services or intangible assets ≤ KRW 10 billion

Per related party transaction value:

Goods ≤ KRW 10 billion

Services or intangible assets ≤ KRW 2 billion

• Filing Notes:

Clearly document the applied transfer pricing method and its rationale.

Maintain supporting documentation at the time of filing and be prepared to submit it upon request by tax authorities.

• Filing Deadline: Within six months of the fiscal year-end.

2. Statement of International Transactions

• Who Must File: Taxpayers engaging in international transactions with overseas related parties.
• Details Required:

Comprehensive records of all transactions with foreign affiliates.

Specific schedules for any service fees or guarantees.

• Filing Deadline: Within six months of the fiscal year-end.

3. Summary of Income Statement of the Overseas Related Party

• Who Must File: Taxpayers transacting with foreign related parties under specified thresholds.
• Exemptions:

Annual transaction values:

Goods ≤ KRW 10 billion

Services or intangible assets ≤ KRW 2 billion

Submission of overseas subsidiary reports and financial statements exempted.

• Filing Notes: Ensure the data reflects the latest fiscal year-end for the related party.
• Filing Deadline: Within six months of the fiscal year-end.

4. Integrated Reports on International Transactions

• Who Must File:

Master and Local Files:

Companies with annual revenue > KRW 1 trillion, and international transactions > KRW 500 billion.

Country-by-Country Report:

Parent companies with consolidated revenue > KRW 1 trillion.

• Filing Deadline: Within 12 months of the fiscal year-end.
• Content:

Master File: Organizational structure, business details, intangible assets, and financing activities.

Local File: Local operations and transactional details.

Country-by-Country Report: Income allocation and pre-tax profits by jurisdiction.

5. Additional Details for Country-by-Country Reports (CbCR)

• Who Must File:

Entity obligated to submit:

When the controlling shareholder is a final parent company in a foreign country and:

1) Under the local laws of the foreign country, the parent company is not obligated to submit the CbCR.

2) The exchange of CbCR is not possible due to the absence of a tax treaty between Korea and the foreign country.

• Filing Deadline: Within 12 months from the last day of the month in which the business year ends.
• Notification Form Obligation (Most companies fall in this category):

Taxpayers with foreign controlling shareholders and domestic affiliates of a multinational corporation are required to submit the notification form if:

The multinational corporation is obligated to submit CbCR under its local laws.

If not obligated under local laws, the consolidated sales exceed EUR 750 million.

Due Date for Submission: Within 6 months of the business year-end.

Failure to Submit: The CbCR should be submitted within 12 months of the business year-end.

?? Tip: Ensure timely preparation of all necessary documentation to avoid last-minute issues and penalties.

?? Penalties for Non-Compliance

Failure to comply with international transaction reporting obligations may result in penalties, including:

• Up to KRW 100 million for failing to submit required documents or submitting false information.
• Incremental fines for not correcting errors after notification, with potential additional fines up to KRW 200 million.
• Specific penalties:

Master/Local Files or Country-by-Country Report: Up to KRW 30 million per report.

Statement of International Transactions: KRW 5 million per overseas related party.

?? Note: Penalties may be reduced for timely corrections or valid reasons for delays.

??? Strategies for Compliance

1. Document Early: Start preparing required reports and backup documentation as early as possible to avoid last-minute issues.
2. Audit Transactions Regularly: Ensure all intercompany transactions are properly recorded and supported.
3. Engage Experts: Work with compliance specialists to streamline reporting and avoid potential missteps.