In November 2020, the National Tax Service (“NTS”) released the ‘2019 APA Annual Report.’ Since the APA programme was introduced in the Law for the Coordination of International Tax Affairs (the “LCITA”) in 1996, many multinational enterprises have been managing their transfer pricing risks by entering into APAs with the NTS. The 2019 APA Annual Report - the 13th edition since 2007 - contains APA information including procedures from application to close, relationship with tax audits, statistical data, etc. The NTS concluded its first APA with the US in May 1997. The NTS has received a total of 726 APA requests and has completed 508 cases as of the end of 2019.
An informal pre-filing meeting is held between a taxpayer and the NTS prior to a formal APA proposal, giving the taxpayer a general idea of the programme, such as eligibility requirements. The taxpayer may request a pre-filing meeting on an anonymous basis. The NTS encourages the taxpayer to seek a pre-filing meeting because this helps to facilitate evaluation of the APA request. There is no fee for an application for an APA. The taxpayer should submit an application form by the day before the commencement of the first taxable year during the term subject to application for the APA. Taxpayers usually apply for 5-year APA. If taxpayers would like to have a rollback, they may apply for a rollback of up to 5 years in the case of bilateral APA (“BAPA’), or up to 3 years in the case of unilateral APA (“UAPA”).
Before the approval of the APA, the taxpayer may modify or withdraw the application. Taxpayers are given the opportunity to participate in the process of APA evaluation, either directly or through their representatives. If the APA is approved, the taxpayer must observe the approved methodologies. If the taxpayer files a tax return in accordance with the conditions in the approved APA during the APA covered period, the tax return is deemed to be filed according to the arm’s length principle. The taxpayer may request renewal of an APA before an original APA term expires.
If an APA is approved, the taxpayer must submit four copies of annual reports within six months from the following day of corporate tax return period for the covered tax years.
An ongoing tax audit is not suspended by submitting an APA. However, if the taxpayer submitted an APA before receiving a tax audit notice, the tax audit on the international transactions covered by the APA can be suspended. In the meantime, if the taxpayer fails to submit necessary documentation to proceed with the APA, the APA application is deemed to be invalid, and the tax audit is no longer suspended.
1. Cases filed and concluded
(As of December 31, 2019, cumulative)
|
Year |
Total |
||
|
Received |
Concluded |
Ongoing |
|
|
∼ 2014 |
456 |
298 |
158 |
|
2015 |
43 |
42 |
159 |
|
2016 |
53 |
39 |
173 |
|
2017 |
45 |
39 |
179 |
|
2018 |
70 |
45 |
204 |
|
2019 |
59 |
45 |
218 |
|
Total |
726 |
508 |
218 |
2. Time for conclusion
The average time for an APA to proceed from receipt of application to conclusion is 21 months for a UAPA and 31 months for a BAPA, based on the figures of the first APA conclusion in 1997 through to the most recent conclusion in 2019. The BAPAs generally take longer because they involve mutual agreement procedures with other countries. The average time to conclude APAs concluded in 2019 is as follows:
|
Item |
Average Time |
Time Taken |
|||
|
Total |
∼ 2 yrs |
2∼3 yrs |
3 yrs ∼ |
||
|
UAPA |
22 months |
5 |
5 |
|
|
|
BAPA |
35 months |
40 |
16 |
5 |
19 |
3. Transfer Pricing Methods
|
Method |
Concluded in 2019 |
Cumulative |
|
Comparable Uncontrolled Price Method |
1 |
9 |
|
Resale Price Method |
1 |
8 |
|
Cost Plus Method |
|
8 |
|
Profit Split Method |
2 |
11 |
|
Others |
3 |
19 |
|
Transactional Net Margin Method |
38 |
453 |
|
Total |
45 |
508 |
Among 453 cases employing the Transactional Net Margin Method, 244 cases used an ‘operating margin’ as a profit level indicator. The next most-used profit level indicator was ‘Berry Ratio’, accounting for 116 cases.
Min Jae Lee
minjae.lee@bdo.kr
Kwang Tae Oh
kwangtae.oh@bdo.kr