Korea Transfer Pricing: What Documents Should You Prepare for an NTS Audit?

Transfer pricing compliance for Korean companies dealing with overseas related parties, including documentation, Local File, Master File and APA.

A Korean subsidiary buys products from its overseas parent company.

It may also pay headquarters for IT support, management services, trademarks, technology or financing.

Inside the group, these can look like ordinary intercompany transactions.

For Korean tax purposes, however, one question comes first:

Would independent companies have agreed to comparable terms?

Korea’s transfer pricing rules allow the tax authorities to adjust taxable income when transactions between a Korean taxpayer and an overseas related party are not priced at arm’s length.

So preparing for a National Tax Service (NTS) transfer pricing review is not simply about having an intercompany agreement.

The company needs to show what actually happened, how the price was determined and why the result is reasonable under the arm’s length principle.

Here are the key checks to make before an audit begins.

Check 1: Identify Your Transactions With Overseas Related Parties

Start by mapping the transactions.

Do not look only at product purchases.

Korea’s international tax rules can apply to transactions involving goods, services, intangible assets and financing between a Korean taxpayer and an overseas related party.

Typical examples include product purchases or sales, management and technical service fees, royalties and license payments, and intercompany loans and interest.

Under the Adjustment of International Taxes Act, where a transaction price between a Korean taxpayer and an overseas related party differs from the arm’s length price, the tax authority may determine or adjust taxable income using the arm’s length price.

That means the first question is not:

“Do we have an intercompany contract?”

It is:

“What did the Korean company transact with its overseas related parties, and how was each price determined?”

Check 2: Choose an Arm’s Length Method That Fits the Transaction

Korean law does not require every company to use the same transfer pricing method.

The Act provides several methods and requires the arm’s length price to be determined using the most reasonable method after considering the characteristics and circumstances of the transaction.

These methods include the Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Profit Split Method and Transactional Net Margin Method, together with other methods permitted under the statutory conditions.

The appropriate method therefore depends on the transaction.

A Korean distributor buying finished products from headquarters may require a different analysis from a Korean company paying a royalty for technology or receiving services from its parent company.

The company should be able to explain the functions performed, assets used and risks assumed by the parties, and why the selected method produces a reasonable arm’s length result.

Check 3: Keep Evidence Behind Management and Service Fees

Management and service fees deserve particular attention because a contract alone does not show what happened during the year.

Suppose headquarters charges the Korean subsidiary for regional IT, accounting, legal or management support.

A global service agreement may show that the parties intended to provide those services.

But the company should also be able to demonstrate that the services were actually provided and explain how the expenses relate to the Korean company’s business.

Depending on the transaction, supporting records may include correspondence, reports, work products, project records, invoices, cost calculations and explanations of the allocation method.

The evidence should connect three things:

the service actually performed,

the amount charged to Korea,

and the method used to calculate that charge.

Trying to reconstruct several years of service activity only after an audit begins is much harder than keeping contemporaneous evidence as the transactions occur.

Check 4: Do You Have to File a Master File and Local File?

Not every Korean company with a foreign parent must file a Master File and Local File.

Under the current Enforcement Decree, the obligation generally applies to a Korean corporation or a foreign corporation with a Korean permanent establishment when both statutory thresholds are exceeded:

Annual sales exceed KRW 100 billion.

Annual specified transactions with overseas related parties exceed KRW 50 billion.

The transaction threshold includes relevant transactions involving goods, services, intangible assets and lending.

If both conditions are met, the taxpayer is subject to the Master File and Local File requirements.

The Master File provides group-level information about the multinational enterprise, including its organizational structure, business, intangible assets, financing activities and financial position.

The Local File focuses on the Korean taxpayer, including its organization, business, related-party transactions, pricing information and financial information.

These reports generally must be submitted within 12 months from the end of the month in which the business year ends.

The distinction is important.

A smaller foreign-invested company may fall below the Master File and Local File filing thresholds, but its transactions with overseas related parties are not therefore exempt from Korea’s arm’s length rules.

The documentation filing threshold and the substantive transfer pricing rule are separate questions.

What Happens If a Required Report Is Not Filed?

Under the current Enforcement Decree, failure to submit, or false submission of, a required Master File, Local File or Country-by-Country Report can result in an administrative fine of KRW 30 million per report.

This is one reason companies should check the Korean rules applicable to the relevant filing year rather than rely on an old group tax manual or presentation.

Check 5: Does the Transfer Pricing Analysis Match the Actual Korean Business?

A polished Local File cannot compensate for a business model that looks different in practice.

Suppose the Korean subsidiary is described as a routine distributor with limited risk.

Its contracts, employees, decision-making authority, risks and financial results should be reasonably consistent with that description.

If the actual conduct tells a different story, simply applying a benchmarked operating margin does not resolve the underlying inconsistency.

Benchmarking is evidence, not a magic shield.

Comparable-company data is useful when the transaction and functional analysis support the comparison.

The stronger position is one in which the contracts, actual business conduct, financial results and transfer pricing analysis describe the same economic relationship.

Check 6: Review Royalties and Other Intangible-Asset Payments

A Korean subsidiary may pay an overseas related party for trademarks, patents, software, technology or know-how.

A license agreement is important, but it does not answer every transfer pricing question.

The company should be able to explain what intangible asset is being used, what rights the Korean entity receives, what the parties actually do and how the royalty or other compensation was determined.

A royalty percentage used throughout a multinational group should not automatically be assumed to be arm’s length for the Korean transaction.

The Korean payment still needs support based on the actual transaction and relevant economic circumstances.

Check 7: Consider an APA Before the Pricing Dispute Exists

For large, recurring or complex related-party transactions, an Advance Pricing Agreement (APA) can provide greater tax certainty.

Under Korea’s Adjustment of International Taxes Act, a taxpayer may apply to the Commissioner of the National Tax Service for advance approval of a transfer pricing method for specified international transactions and taxable years.

Under the current Enforcement Decree, the application must be submitted by the day before the first taxable year of the requested APA period begins.

The required materials include information about the parties’ business history, activities, organization and ownership relationships; financial statements and tax returns for the previous three years; international transaction agreements; and materials explaining the proposed arm’s length pricing method and comparability analysis.

An APA can therefore reduce uncertainty about how covered transactions should be priced.

But it should not be described as a blanket exemption from NTS tax audits.

Its purpose is to obtain advance approval of the pricing method for the covered transactions and period, subject to the applicable conditions.

What Should a Foreign-Invested Company Prepare Before an Audit?

Start with the transactions, not the audit binder.

Map the material dealings between the Korean company and its overseas related parties.

Then identify what the parties actually do and why each transaction exists.

Determine the appropriate arm’s length pricing method and preserve the data supporting that method.

For service fees, keep evidence connecting the service, cost and allocation.

For royalties, document the rights involved and how the payment was determined.

For product transactions, make sure the functional analysis and pricing method match the Korean company’s actual role.

Then check whether the KRW 100 billion sales threshold and KRW 50 billion related-party transaction threshold trigger mandatory Master File and Local File filing.

If the transactions are large, recurring or likely to create cross-border pricing disputes, consider whether an APA is appropriate before the relevant pricing years begin.

The Key Poi3nt

Korea transfer pricing compliance is not simply about whether the Korean subsidiary has signed contracts with headquarters.

A contract shows what the parties agreed to.

Accounting records show what was paid.

Business records show what actually happened.

And the transfer pricing analysis explains why the resulting price or profit is reasonable between independent parties.

Those pieces should tell the same story.

That is the real preparation for an NTS transfer pricing review—not creating a perfect report after the questions have already begun.

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