Transfer pricing documentation: Who must file what, and when?

For multinational companies operating in Korea, transfer pricing documentation is an important part of tax compliance. But which companies are required to prepare and submit these reports? What information needs to be included, and when are the filing deadlines?

In this article, we take a closer look at Korea's transfer pricing documentation requirements, including the filing thresholds, deadlines, and potential consequences of non-compliance.
 

Transfer pricing documentation requirements

Companies engaging in transactions with foreign related parties must be able to demonstrate that their transactions comply with the arm's length principle. Under Article 16 of Korea's Law for the Coordination of International Tax Affairs (LCITA), qualifying companies are required to submit three types of documentation: the Master File, Local File, and Country-by-Country Report (CbCR).

These reports follow the three-tiered documentation framework introduced under Action 13 of the OECD's Base Erosion and Profit Shifting (BEPS) project and are commonly referred to as BEPS documentation. Transfer pricing documentation helps companies establish appropriate pricing policies and assess whether their intercompany transactions comply with the arm's length principle. The Local File, in particular, focuses on transactions conducted during the relevant fiscal year.
 

The three reports at a glance

All three reports are due within 12 months from the end of the month in which the fiscal year ends. For example, a company with a December year-end must file by the end of December of the following year. The reasons for selecting the arm’s length pricing method discussed in the previous article, and the basis for applying it, are included in the Local File.
 

The CbCR and the CbCR notification

The CbCR shows a multinational group’s income, taxes paid, number of employees, and assets by country. Separately, the following companies must submit a CbCR notification, which identifies the entity that will file the CbCR, within six months from the end of the month in which the fiscal year ends:

• Where the ultimate parent is a Korean company: the Korean parent of a group with prior-year consolidated sales above KRW 1 trillion
• Where the ultimate parent is a foreign company: a Korean affiliate of a group whose prior-year consolidated sales exceed the applicable threshold (the statutory threshold of the parent’s country if it requires a CbCR, or EUR 750 million or the equivalent if not)

In the latter case, a Korean affiliate that does not submit the notification on time must file the CbCR itself within 12 months.
 

What happens if you do not file?

Failure to submit the required documentation, or submitting incomplete information, may result in administrative fines. The Korean tax authorities also use these reports to assess transfer pricing risks. Any inconsistencies between the documentation and actual transactions may raise questions during a tax audit
 

Do you need to prepare even without a filing obligation?

Even if a company is not legally required to submit a Master File or Local File, its intercompany transactions must still comply with the arm's length principle. Companies with significant related-party transactions should therefore consider maintaining supporting documentation, particularly as the tax authorities may request evidence of arm's length pricing during a tax audit.
 

Conclusion

Transfer pricing documentation is more than an annual filing requirement. It is an ongoing process of reviewing whether intercompany transactions and pricing policies remain consistent with the arm's length principle. Maintaining accurate documentation can help companies manage transfer pricing risks and prepare for potential tax audits.