Transfer Pricing Alert EY Han Young newsletter March 2017
Transfer Pricing Current issue. South Korea, Singapore
South Korea Release of Korea s CbC Reporting Specification and Introduction of a Deemed Interest for Intercompany Loan Transactions Executive summary On February 7, 2017, South Korea s Ministry of Strategy and Finance newly released a proposal of detail summary and submission process with respect to Country-by-Country reporting and further introduced a deemed interest rate for intercompany loan transactions. Detailed discussion Country-by Country Reporting (CbCR) As Korea s Ministry of Strategy and Finance enacted transfer pricing documentation legislation in 2016, the government has implemented the submission of CbC reporting for multinational entities and on February 7, 2017 further revised Article 21-2 of the Presidential Enforcement Decree of the Law for the Coordination of International Tax Affairs to include the detail contents such as a MNE s division of income and tax among the related parties and a business description in CbC report. Under Article 21-2, the following points regarding the details of the submission of CbCR have been specified. 1. The parent company of multinational entities (MNEs) operating in Korea, which exceeded the total sales of KRW 1 trillion in the previous tax year, is required to submit CbCR. When the multinational corporation where the parent company resides in a country that does not require a CbCR or does not facilitate the exchange of the CbCR, MNE s Korean subsidiary or branch would be required to submit the CbCR. 2. CbCR should include the following by country: income of taxpayer and its foreign related parties, the pre-tax profits and losses, the national tax payment amount and capital stock. 3. Ultimate parent company located in Korea or a domestic entity or branch whose parent company resides in a foreign country must submit related information about required CbCR submitter within six months from the end of the fiscal year. According to the proposed enforcement decree, Korean CbCR format reflects the OECD guidelines and each category includes sales by country, income taxes, capital stock, number of employees, tangible assets, corporate name, taxpayer number, location and 3
South Korea major business activities. The scope of preparation will be announced in the future. Also, Reporting entity notification form needs to be submitted in advance to the tax authority before filing a CbC report and includes the following in the form: a taxpayer who will submit CbCR, name of the corporation, jurisdiction and country of submission. Deemed interest rate for related party loan transactions Korean Tax Authority has announced revised Enforcement Rules to the Law for the International Coordination of International Tax Affair (LCITA) regarding the interest rates for the loan transactions between taxpayers and foreign related parties. According to the revised Article 6-7, its purpose is to improve taxpayer s convenience and to suggest a method of determining interest rates and specific details are following. 1. In terms of the lending transaction, the arm s length interest rate assumed in Article 43 (2) of the Enforcement Rules to Corporate Tax Act is the interest rate of overdrawn account. Moreover, the interest rate for the rejection of unfair act and calculation has been clarified as 4.6%. 2. For borrowing transactions, the arms length interest rate will be applied to the 12-month maturity LIBOR interest rate plus additional interest rate 1.5%. In case of unable to apply LIBOR, the 12-month Libor rate for the US dollar has to be deemed. Conclusion In accordance with the revised Enforcement Rules to the Law for the International Coordination of International Tax Affair (LCITA), multinational corporations that have parent companies in Korea are required to submit CbCR in compliance with the provisions of the specific national report submission, content and procedures. In addition, the interest rate assumed as the arm s length rate in the loan transactions with related parties is the rate on the overdraft transaction. When it comes to the interest rate on the borrowing transaction, the additional interest rate (1.5%) on the 12-month maturity LIBOR has been applied. 4
Singapore Singapore tax authorities release 2017 Transfer Pricing Guidelines Executive summary On 12 January 2017, the Inland Revenue Authority of Singapore (IRAS) released revised transfer pricing guidelines (the 2017 TP Guidelines). Key features include more guidance on the arm s length principle and emphasis on risks, additional information requirements to be included in the transfer pricing documentation, changes to the Mutual Agreement Procedure (MAP) and Advanced Pricing Arrangement (APA) programs and the introduction of an indicative margin of safe harbor for related party loans. The 2017 TP Guidelines provide greater details relating to Actions 5, 13 and 14 minimum standards under the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project, which Singapore has committed to implement. Detailed discussion The IRAS has reiterated its adherence to the arm s length principle by clarifying that profits should be taxed where the real economic activities generating the profits are performed and where value is created in accordance with BEPS Actions 8-10. Additional information requirements for TP documentation The IRAS appears to be aligning the Singapore TP documentation with the OECD Master File and Local File requirements. Country-by-Country reporting (CbCR) The IRAS clarifies that where the taxpayer is the ultimate parent company of a Singapore multinational enterprise (MNE), CbCR filing may be required in addition to the TP documentation. Additional information to be included in TP Documentation The following information and documents are added to the list: The Group s existing unilateral APA (UAPA) and other tax rulings relating to the allocation of income among countries Copies of existing APAs and other tax rulings to which the IRAS is not a party Documents relating to the justification of the pricing and comparability adjustments performed by the taxpayer 5
Singapore Exemption from preparing TP documentation The exemption include but are not limited to the following: Application of indicative margin for related party loans Guarantee income and guarantee expense each not exceeding S$1 million (US $700,000) Further, strict pass-through costs should be included in aggregating the value for each category of related party transactions to determine whether these transactions exceed the relevant thresholds. APA and MAP programs Changes to the UAPA program In accordance with BEPS Action 5, there will be the automatic exchange of UAPA information by the IRAS with: Jurisdiction of residence of all related parties with whom the taxpayer enters into transactions that are covered by the UAPAs Jurisdictions of residence of the taxpayer s ultimate parent entity and the immediate parent entity The automatic exchange is subject to meeting certain conditions such as having in place tax treaties or an exchange of information instrument. The exchange of information for UAPAs will take place by December 2017 for UAPAs that are issued: On or after 1 January 2012 and still in effect on 1 January 2015 On or after 1 January 2015 but before 1 April 2017 For UAPAs issued on or after 1 April 2017, the exchange of information will take place within three months after the date of agreement. Clarification on the APA program roll-back period The number of prior years in which the APA can be rolled back for bilateral APAs or multilateral APAs is subject to the IRAS discretion and is decided on a case-by-case basis. Other changes to guidance on MAP and APA If taxpayers choose to unilaterally accept the outcome of a transfer pricing audit with a foreign tax authority, any unprejudiced negotiation between the IRAS and the foreign tax authority to eliminate double taxation arising from the audit could be challenging. Introduction of indicative margin for related party loans The IRAS has introduced the application of indicative margins for related party loans 6
Singapore obtained or provided on or after 1 January 2017. Taxpayers do not need to prepare TP documentation for related party loans below S$15 million (US $10.6 million) where the indicative margin is applied. The indicative margin applicable for the period between 1 January 2017 and 31 December 2017 is +250bps (2.50%). In the case of fixed rate loans, the IRAS has proposed the application of an appropriate swap rate as the base reference rate. For Singapore dollar fixed rate loans, the Singapore Government Securities yield can be considered for application as the base reference rate. Taxpayers should continue to adhere to the guidance, including maintenance of contemporaneous TP documentation in line with the additional information requirements and new emphasis on risks, and monitor future changes to the transfer pricing framework in Singapore. 7
Contacts Transfer Pricing Sang Min Ahn 02.3787.4602 Sang-min.ahn@kr.ey.com Sung Han Park 02.3787.6355 Won-bo.jung@kr.ey.com Dong Hoon Ha 02.3770.0936 Dong-hoon.ha@kr.ey.com Hoon Seok Chung Director (Singapore) +65.6718.1072 Hoonseok.chung@sg.ey.com Jae Seong Yun Director 02.3787.4265 Jae-seong.yun@kr.ey.com Ki Se Kim Director 02.3770.0918 Ki-se.kim@kr.ey.com Kyoung Bae Han Director (Vietnam,Ho Chi Minh ) +84 8 3824 5252 (ext. 8305) kyoung.bae.han@vn.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 02.3770.0934 Min-yong.kwon@kr.ey.com Dong Chul Kim 02.3770.0903 Dong-chul.kim@kr.ey.com Jae Cheol Kim 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 Kyung Tae Ko 02.3770.0921 Kyung-tae.ko@kr.ey.com Yeon Ki Ko 02.3787.4637 Yeonki.Ko@kr.ey.com Nam Wun Jang 02.3787.4539 Nam-Wun.Jang@kr.ey.com Financial Services Organization Jong Yeol Park 02.3770.0904 Jong-yeol.park@kr.ey.com Jeong Hun You 02.3770.0972 Jeong-hun.you@kr.ey.com Dong Sung Kim 02.3787.4238 Dong-sung.kim@kr.ey.com Transaction Tax Jin Hyun Seok 02.3770.0932 Jin-hyun.seok@kr.ey.com Human Capital Danielle Suh 02.3770.0902 Danielle.suh@kr.ey.com Min Ah Kim Executive Director 02.3770.1019 Min-ah.kim@kr.ey.com 8
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