Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

Korea

Korea has met all of the terms of reference (ToR) for the calendar year 2017 (year in review) and no recommendations are made. In the prior year report, Korea had received two recommendations. Korea has resolved these issues and therefore none of the prior year recommendations remain.

Korea can legally issue one type of rulings within the scope of the transparency framework.

In practice, Korea issued 45 past rulings; for the period 1 April 2016 - 31 December 2016, Korea issued one future ruling; and for the year in review, Korea issued four future rulings within the scope of the transparency framework.

Korea did not have the necessary domestic legal basis for spontaneous exchange of information on rulings for the year in review. As such, no exchanges on rulings were permitted to occur.1 As no exchanges on rulings could be undertaken under Korea’s domestic legal framework, no peer input was received in respect of the exchanges of information on rulings received from Korea.

1. The Action 5 Report notes that jurisdictions which do not currently have the necessary legal framework in place for spontaneous exchange of information on rulings will need to put in place such a framework in order to comply with the obligations under Action 5, but that in such cases the timelines are subject to a country’s legal framework.

Introduction

711.  This peer review covers Korea’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

712.  Korea can legally issue the following type of rulings within the scope of the transparency framework: cross-border unilateral APAs and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles.1 Rulings on APAs are issued by the International Taxation Bureau at the Central Office of the National Tax Service (“NTS”).

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

713.  For Korea, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2014 but before 1 April 2016; or (ii) on or after 1 January 2010 but before 1 January 2014, provided they were still in effect as at 1 January 2014.

714.  In the prior year peer review report, it was determined that Korea’s undertakings to identify past rulings and all potential exchange jurisdictions were sufficient to meet the minimum standard. Korea’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

715.  For Korea, future rulings are any tax rulings within scope that are issued on or after 1 April 2016.

716.  In the prior year peer review report, it was determined that Korea’s implementation of a new system to identify future rulings and all potential exchange jurisdictions was sufficient to meet the minimum standard. Korea’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Review and supervision mechanism (ToR I.4.3)

717.  In the prior year peer review report, it was determined that Korea’s review and supervision mechanism was sufficient to meet the minimum standard. Korea’s implementation in this regard remains unchanged, and therefore continues to meet the minimum standard.

Conclusion on section A

718.  Korea has met all of the ToR for the information gathering process and no recommendations are made.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

719.  For the year in review, Korea did not have the necessary domestic legal basis to spontaneously exchange information on unilateral APAs. This was because domestic regulation specifically restricted the tax administration’s use of data that is submitted in an application of an APA to (1) review of the APA and (2) follow-up procedures related to the APA.

720.  As of 13 February 2018, a legislative amendment in Article 9(5) of the Enforcement Decree of the Adjustment of International Taxes Act was enacted, and Korea now has the necessary domestic legal basis to spontaneously exchange information on unilateral APAs.

721.  Korea has international agreements permitting spontaneous exchange of information, including being a party to the (i) Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”) and (ii) double tax agreements in force with 94 jurisdictions.2

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

722.  During 2017, tax officials in charge of the MAP division of the NTS completed the templates in the form of Annex C of the 2015 Action 5 Report (OECD, 2015), in anticipation of being able to quickly exchange after the domestic legal basis entered into effect. The templates were reviewed by a designated tax officer who has been put in charge of the exchange of unilateral APAs. With respect to future rulings, Korea has educated its tax officers to ensure that the completed templates on rulings are submitted to the Competent Authority on a quarterly basis and to ensure that the overall time by which the exchange of information is completed is within three months of the ruling being issued. The summary section of the template is completed in accordance with the internal FHTP suggested guidance. For the spontaneous exchange of information on unilateral APAs, the tax official will use the OECD XML Schema (OECD, 2017b).

723.  The timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	0	139	No domestic legal basis for the exchange of information.
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	0	12	As above.
Total	0	151

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	0	N/A	N/A

724.  The NTS finished the enhancement of its internal information transmission system, the “Automatic Exchange and Analysis of Foreign Financial Information System” (AXIS) to make it available for the exchange on information on rulings. The AXIS is connected to the OECD Common Transmission System. The NTS is testing whether the enhanced system works properly for each jurisdiction. When the results of these tests are positive, the NTS will use the enhanced AXIS system for the exchange of information on rulings. In advance of the finalisation of this system, a paper based format for the exchange of information on the 50 rulings was used. The first exchanges were sent by electronic and postal mail in March 2018 and additional exchanges were carried out in July 2018.

Conclusion on section B

725.  For the year under review, Korea did not have the necessary legal framework in place for exchanging information on rulings. It is noted that Korea has now put in place the domestic legal basis, and commenced exchanges in the month following the entry into force of the new legal basis. Korea has met all of the ToR for the exchange of information process that can be met in the absence of the domestic legal framework and no recommendations are made.

C. Statistics (ToR IV)

726.  As there was no legal basis for exchange in the year of review, no statistical data can be reported.

D. Matters related to intellectual property regimes (ToR I.4.1.3)

727.  Korea offers an intellectual property regime (“IP regime”) that is subject to transparency requirements under the Action 5 Report (OECD, 2015) (Special taxation for transfer, acquisition, etc. of technology). It states that the identification of the benefitting taxpayers will occur as follows:

• New entrants benefitting from the grandfathered IP regime: as this is a new regime, grandfathering is not relevant.

• Third category of assets: such assets are required to be registered and managed with the Korea Institute for Advancement of Technology. Information on the third category of assets is collected via the corporate tax returns. A new appendix table, attached to the tax return, under the Ordinance of Ministry of Strategy and Finance has been created to collect information on how many taxpayers enjoy benefits from the third category IP asset and the total amount of income generated from such assets. As the new IP regime came into effect as of 1 January 2017, the corporate tax returns will be filed within 3 months after the end of the tax year. Therefore, this data was not available for the year in review and the transparency requirements will be reviewed in the subsequent peer review. Korea notes that it will exchange the information received from the tax returns within three months after receiving the filed returns.

• Taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption: not applicable as the regime does not allow the nexus ratio to be treated as a rebuttable presumption.

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
	No recommendations are made.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  Korea notes that although it has an advance rulings program, binding administrative guidance prevents a taxpayer from requesting, or the authority from granting, advance rulings which would depend on, or involve a determination of, the facts and circumstances (such as a permanent establishment or conduit arrangement). The issuance of these rulings is governed by the binding administrative guidance published by the NTS.

← 2.  Parties to the Convention are available here: www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm. Korea also has Double Tax Agreements with Albania, Algeria, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Belgium, Brazil, Brunei Darussalam, Bulgaria, Canada, Chile, China (People’s Republic of), Colombia, Croatia, Czech Republic, Democratic People’s Republic of Korea, Denmark, Ecuador, Egypt, Estonia, Ethiopia, Fiji, Finland, France, Gabon, Georgia, Germany, Greece, Hong Kong (China), Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, Kuwait, Kyrgyzstan, Laos, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Mongolia, Morocco, Myanmar, Nepal, Netherlands, New Zealand, Norway, Oman, Pakistan, Panama, Papua New Guinea, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela and Viet Nam.