Korean tax: Korean National Tax Services releases second APA annual report

The Korean National Tax Service (NTS) on September 4 released its second annual report on the operations of the NTS's Advance Pricing Agreement (APA) program. The second annual report updates the key statistical information provided in the first annual report, issued in 2008. Taxpayers and tax practitioners can see that the general trend in most of the 2008 program statistics is consistent with the 2007 information. But the second annual report discloses information that was not revealed in the first annual report.


Highlights of the 2008 APA program statistics

Korea concluded its first APA in 1997 with the United States, and by the end of 2008, a total of 106 cases had been concluded. The highlights of the 2008 statistics include the following:
- New statistics have been released for the first time on rollback terms, breakdown of completed cases involving foreign parents versus Korean parents, completed APAs on a counterparty country basis, and cumulative data on key program statistics;
- Thirty-five new applications (13 unilateral, 22 bilateral) were filed and 30 new cases (16 unilateral, 14 bilateral) were completed in 2008;
- The average completion time required for an APA was 18 months for unilateral APAs and 27 months for bilateral APAs;
- The transactional net margin method (TNMM) and operating margin were the overwhelming favorites for methods and profit level indicators used in 2008;
- The majority of unilateral and bilateral APAs closed in 2008 included a five-year term. Of the 30 completed cases in 2008, 25 cases were concluded with a five-year term. Of the total 106 APA requests completed on a cumulative basis, 71 cases were concluded with five-year terms;
- Of the 106 completed cases, 78 cases are for Korean taxpayers with foreign parents or affiliates (inbound) and 28 cases are for Korean parents with foreign subsidiaries (outbound);
- Forty-three percent of APAs (13 out of 30 cases) completed in 2008 were concluded with the United States, but the number of bilateral APA applications with China is growing fast; and
- A China team has been formally established within the APA program.


Application and completion

As shown in Table 11, 35 new applications were filed during 2008, the highest number of applications on an annual basis in the Korean APA program's history. Of the 35 new applications, 22 are for bilateral APAs, a significant increase compared to the 10 cases filed on an annual average basis over the 2003-2007 period. However, the number of new applications for unilateral APAs in 2008 decreased from 19 applications in 2007 to 13 applications in 2008. These figures imply two things: first, taxpayers have accumulated enough experience through unilateral APAs and moved on to take more proactive approaches to eliminate double taxation exposures in multiple jurisdictions at the same time. Second, the taxpayers' level of confidence in the NTS capabilities and capacity to handle multiple bilateral APA cases has significantly increased.