Korea Transfer Pricing Policy
Korea transfer pricing policy – Key Transfer Pricing rules in Korea, documentation obligations, and compliance expectations under the National Tax Service (NTS).
Please click on each section to expand further:
Introduction to Transfer Pricing in Korea
Korea follows OECD Transfer Pricing guidelines and enforces the arm’s-length principle across all related-party transactions. The country’s Transfer Pricing regime applies to both cross-border dealings and specific domestic transactions between associated enterprises. The Korean tax authority (National Tax Service – NTS) maintains a highly structured compliance framework that requires companies to prepare contemporaneous Transfer Pricing documentation, submit annual related-party transaction reports, and provide additional disclosures under the Local File, Master File, and Country-by-Country Reporting requirements. Failure to comply can lead to pricing adjustments, heavy financial penalties, surcharge interest, and increased scrutiny from the NTS, especially for industries flagged as high-risk or showing profit-shifting indicators.
Korea adopts internationally aligned Transfer Pricing fundamentals to ensure fair pricing between related parties. Key elements include:
Use of the arm’s-length principle for all controlled transactions.
Requirement to evaluate functions, assets, and risks (FAR analysis) when determining pricing.
Consideration of comparable uncontrolled transactions to validate Transfer Pricing outcomes.
Mandatory preparation of Local File, Master File, and Country-by-Country Report (CbCR) when thresholds are met.
Adjustment mechanisms applied when Transfer Pricing results differ from market-based arm’s-length outcomes.
Annual disclosure of related-party transactions through standardized NTS reporting forms.
Korea’s Transfer Pricing policy focuses on transparency, consistency, and enforcement. Core policy features include:
Application of OECD-aligned methods such as CUP, Resale Price, Cost-Plus, TNMM, and Profit Split.
Enforcement of strict contemporaneous documentation rules, requiring taxpayers to justify their Transfer Pricing positions annually.
Use of risk-based audits targeting industries with high Transfer Pricing exposure, including electronics, automotive, pharmaceuticals, and digital services.
Implementation of secondary adjustments (e.g., deemed dividends) when Transfer Pricing corrections affect cash flows.
Requirement for multinationals to disclose ownership structure, intercompany arrangements, and global value chain information.
Penalties for missing or late documentation, including significant fines and denial of deductions for non-arm’s-length pricing.
Korea’s Transfer Pricing rules are closely aligned with international tax standards, particularly the OECD framework. Key points:
Adoption of OECD Transfer Pricing Guidelines as the foundation for Korean legislation.
Mandatory BEPS Action 13 compliance, including Local File, Master File, and CbCR requirements.
Cooperation with international tax authorities through information exchange agreements to combat profit shifting.
Alignment with global anti-avoidance initiatives, including updates tied to Pillar Two and minimum tax requirements.
Encouragement of Advance Pricing Agreements (APAs) to promote long-term certainty and reduce disputes.
Use of Mutual Agreement Procedures (MAP) to resolve cross-border Transfer Pricing conflicts with treaty partners.
Documentation & Regulatory Requirements
Korea has implemented extensive BEPS-compliant Transfer Pricing rules to enhance transparency and prevent profit shifting.
Key regulatory requirements include:
Mandatory adherence to OECD BEPS Action 13 standards for documentation and reporting.
Requirement for multinational groups to prepare Local File, Master File, and CbCR when applicable thresholds are met.
Reinforced disclosure obligations for related-party service fees, royalties, financing arrangements, and cost-sharing transactions.
Use of economic substance tests to ensure that intercompany arrangements reflect actual value creation.
Enhanced audit capabilities for the National Tax Service (NTS), supported by cross-border cooperation with foreign tax authorities.
Penalties for incomplete or inaccurate documentation, including monetary fines and adjustments based on deemed arm’s-length pricing.
Korea requires CbCR from multinational groups with significant global revenues.
Key compliance elements include:
Filing obligation for multinational entities with global consolidated revenue exceeding KRW 1 trillion in the prior fiscal year.
CbCR must be submitted within 12 months of the fiscal year-end.
Reports must disclose revenue, profit, headcount, taxes paid, tangible assets, and business activities for each jurisdiction.
The Korean entity must also submit a notification filing to disclose the reporting entity within the group.
CbCR data is used for risk assessment and audit selection, not direct Transfer Pricing adjustments.
Failure to file or late filing can trigger substantial penalties and increased audit risk.
Korea enforces one of the most detailed Transfer Pricing compliance regimes in Asia.
Compliance obligations include:
Preparation of contemporaneous Transfer Pricing documentation supporting all related-party transactions.
Submission of the Annual Report on International Transactions (ARIT) detailing cross-border intercompany dealings.
Maintenance of benchmarking studies, functional analyses, and comparability assessments for each significant transaction category.
Requirement to justify chosen Transfer Pricing methods, especially when applying TNMM or Profit Split.
Application of secondary tax adjustments, such as deemed dividends, when Transfer Pricing corrections result in additional taxable income.
Strict penalties for non-compliance, including surcharge taxes, disallowed deductions, and interest on underreported amounts.
Korea is one of the earliest adopters of the OECD Pillar Two Global Minimum Tax framework.
Key impacts include:
Implementation of the 15% global minimum tax applicable to large multinational groups operating in Korea.
Requirement to calculate top-up taxes for entities paying effective tax rates below the minimum threshold.
Need for enhanced data collection, including entity-level financial and tax information for Pillar Two reporting.
Increased importance of Transfer Pricing accuracy, as misaligned profit allocation may affect minimum tax calculations.
Potential introduction of Qualified Domestic Minimum Top-up Tax (QDMTT) to retain taxing rights within Korea.
Heightened documentation expectations as tax authorities integrate Pillar Two outcomes into risk assessments.
Transfer Pricing Methods
The Comparable Uncontrolled Price (CUP) method is preferred in Korea when reliable external or internal comparables exist.
Key application principles include:
Used when identical or highly comparable transactions can be identified in the Korean or global market.
Requires adjustments for factors such as contract terms, volume, credit risk, and market conditions.
Often applied for commodity transactions, licensing arrangements, and financing transactions.
Accepted by the National Tax Service (NTS) as the most accurate measure of arm’s-length pricing when high-quality data is available.
Can produce challenges when limited domestic comparables exist or when companies operate in niche industries.
This method is applied primarily for distribution and resale-based business models.
Key considerations include:
Used when a Korean distributor purchases goods from an overseas affiliate and resells them without substantial value-adding activities.
Requires determination of an appropriate gross margin, benchmarked against independent distributors in Korea or comparable markets.
Suitable for routine distribution, wholesale operations, and trading companies.
Korean tax authorities closely review cases where distributors report unusually low gross margins, triggering potential adjustments.
Appropriate for manufacturing, assembly, and service-based related-party transactions.
Key application points:
Determines arm’s-length pricing by adding an appropriate markup to the cost base incurred by the Korean entity.
Widely used for contract manufacturing, shared services, engineering support, and back-office functions.
Markups must be benchmarked using comparable Korean or regional companies performing similar functions and risk profiles.
Korean authorities expect consistent cost allocation, including clear documentation of direct and indirect cost categories.
The Transactional Net Margin Method (TNMM) is the most commonly applied method in Korea, especially when detailed comparables are scarce.
Key principles include:
Applies a net profit margin indicator (e.g., OP/Revenue, OP/Cost, OP/Assets) tested against independent comparables.
Suitable for routine manufacturers, distributors, and service providers with predictable functions and low risk.
Preferred when CUP, Resale Minus, or Cost Plus are not feasible due to lack of comparable data.
Korea’s tax authority scrutinizes comparable selection, requiring strong justification for regional or non-Korean comparables.
TNMM is often used in APA negotiations due to its stability and predictability.
Applied for integrated global operations where both parties contribute unique intangibles.
Key features include:
- Commonly used for R&D collaborations, technology development, digital services, and joint IP ownership among related parties.
- Allocation of profits is based on relative contributions, including assets, risks, and functions performed by each entity.
- Korea accepts both contribution analysis and residual profit split, depending on the transaction profile.
- Useful when transactions are highly interdependent and cannot be evaluated separately.
- Documentation must clearly justify allocation keys such as R&D spend, employee headcount, asset valuation, or cost drivers.
Analytical & Compliance Support
Ensures related-party transactions are benchmarked against independent Korean or regional comparables.
Requires evaluation of functions, assets, risks (FAR) to determine appropriate comparable companies.
Korean NTS expects use of domestic comparables first, with foreign comparables allowed only when justified.
Adjustments applied for working capital, market differences, accounting policies, and risk profiles.
Used to determine arm’s-length margins under TNMM, Cost Plus, Resale Minus, or CUP.
Critical component of annual Local File and Master File compliance under Korean tax law.
Comparability studies are reviewed during tax audits, especially when margins deviate from industry ranges.
Requires consistent use of Korean databases (KISLINE, NICE) or OECD-aligned regional sources when local data is insufficient.
Examines the Functions performed, Assets used, and Risks assumed by each related entity in the transaction.
Determines whether the Korean entity is a routine distributor, contract manufacturer, or full-risk operator.
Identifies ownership and contribution of intangibles, including technology, trademarks, and know-how.
Allocates risk categories such as market risk, inventory risk, credit risk, and foreign exchange risk.
Highlights operational substance to support method selection (e.g., TNMM vs. Profit Split).
FAR findings must align with actual business operations, not just contractual terms.
Forms the basis for selecting the tested party and determining the most appropriate TP method.
Required to be updated annually as part of Korea’s Local File and compliance documentation.
Trends, Challenges & Real-World Impacts
Increased scrutiny from the National Tax Service (NTS) on low-margin distributors and contract manufacturers.
Difficulty in finding reliable local comparables, leading to disputes over margin levels.
Complex documentation expectations under Master File, Local File, and CbCR requirements.
Frequent challenges around intangibles ownership, especially for multinational groups with centralized R&D.
High audit focus on intragroup service charges and whether benefits are demonstrable.
Pressure on taxpayers to justify royalty rates, especially in technology-driven industries.
Transfer Pricing adjustments often accompanied by secondary tax liabilities (e.g., deemed dividends).
Increased importance of demonstrating substance over form, especially regarding risk allocation.
Growing adoption of TNMM for distributors and manufacturers due to data availability.
Rising use of Profit Split Method for groups with integrated global value chains.
Strong movement toward alignment with OECD guidance, including DEMPE for intangibles.
Increased reliance on industry-specific benchmarks (pharma, electronics, automotive).
More taxpayers conducting proactive annual TP reviews to avoid post-audit adjustments.
Integration of BEPS Pillar Two considerations into Transfer Pricing planning.
More Korean subsidiaries requesting APAs to secure long-term certainty.
NTS continues expanding its risk-based TP audit selection system, targeting high-risk sectors.
Recent court cases emphasize the need for robust economic analysis and documentary evidence.
Korea publishing updated interpretations of OECD guidelines, especially around intangibles.
Strengthening of regulations applicable to intragroup financial transactions.
Increased cooperation with foreign tax authorities under Joint Audits and information exchange.
Growing reporting expectations for global service fee allocations.
Global supply chain shifts (China → ASEAN) causing TP changes for Korean distribution hubs.
FX volatility impacting arm’s-length pricing for cross-border transactions.
Semiconductor, battery, and EV sectors facing heightened TP scrutiny due to government incentives.
Multinationals restructuring operations to prepare for Pillar Two minimum tax rules.
Rising interest rates affecting intragroup financing rates and compliance.
Increased digitalization leading NTS to use data analytics to detect TP anomalies.
Use Cases by Business Size & Industry
Startups often rely on foreign parent companies for technology, funding, and strategic support, making Transfer Pricing documentation essential to justify these cross-border charges.
Early-stage companies face scrutiny on royalty payments for IP use, especially when revenues are low but royalty rates remain high.
The National Tax Service (NTS) examines whether service fees from parents provide real, measurable benefits to the Korean entity.
Startups operating as low-risk distributors or R&D support centers must demonstrate arm’s-length margins based on industry benchmarks.
Loss-making startups must justify why losses are economically reasonable, especially when performing routine functions.
Startups expanding into the global market must align entity functions, risks, and assets with the chosen Transfer Pricing method from the outset.
Proper Transfer Pricing planning helps startups avoid future tax adjustments that could impact funding rounds or investor confidence.
SMEs with related-party import or export relationships must document arm’s-length pricing for goods, services, and financial transactions.
Korean SMEs frequently face audits around management service fees, requiring evidence of benefit tests and cost allocation logic.
Entities serving as manufacturing or assembly hubs must support profit levels through reliable local or regional comparables.
SMEs engaging in intragroup loans must apply correct interest rates aligned with Korean and OECD expectations.
Transfer Pricing disputes for SMEs commonly arise around cost-sharing arrangements, especially in tech, automotive, and electronics industries.
Growing cross-border activity by Korean SMEs increases the need for compliant Local File, Master File, and CbCR reporting where applicable.
SMEs benefit from Advance Pricing Agreements (APAs) to reduce uncertainty and avoid long, costly audits.
Dispute Resolution & Advance Agreements
Korea offers both unilateral and bilateral APAs, allowing taxpayers to secure certainty on Transfer Pricing methods before transactions occur.
APAs help companies reduce exposure to tax reassessments, penalties, and prolonged post-audit disputes with the National Tax Service (NTS).
The Korean APA process requires detailed disclosures on functions, risks, assets, assumptions, and financial projections.
Korea strongly encourages bilateral APAs with treaty partners to eliminate double taxation for multinational companies.
APAs are especially useful for businesses with recurring intercompany transactions such as manufacturing, distribution, or licensed IP use.
Once approved, APA terms typically apply for 3–5 years, with an option to renew subject to updated economic analyses.
APAs significantly improve compliance readiness by aligning methodology with OECD guidelines and Korea’s tax regulations.
Korea emphasizes proactive compliance, encouraging taxpayers to maintain rigorous Transfer Pricing documentation and defensible economic analyses.
The NTS frequently audits intercompany transactions, making robust Local File, Master File, and CbCR compliance essential.
Companies can request pre-filing consultations with the NTS to clarify Transfer Pricing issues before formal disputes arise.
Korea’s Mutual Agreement Procedure (MAP) helps eliminate double taxation in cross-border disputes with treaty partners.
Businesses can mitigate risk through consistent benchmarking, updated comparables, and proper characterization of the Korean entity.
Maintaining evidence of actual services received, benefit tests, and accurate cost allocations is crucial for avoiding adjustments.
Taxpayers who invest early in documentation and method selection face significantly lower audit risk and reduced financial exposure.
Clear, Competitive Packages Tailored for Your Transfer Pricing Needs
Basic Transfer Pricing Benchmarking
Standard Transfer Pricing Study
Premium Transfer Pricing Study
Experienced Transfer Pricing Advisors at Your Service
OECD Transfer Pricing-Country-Profile Korea
This is general information only and not professional advice. Consult a professional before acting.