Global Digital Tax Discussions Accelerate... Will Corporate Tax Burden Increase for Korean Companies?

[Asia Economy Reporter Suyeon Woo] As discussions on the global digital tax accelerate around the OECD (Organisation for Economic Co-operation and Development) and the G7 (Group of Seven), Korean companies are closely monitoring the direction of these talks. Concerns are also being raised that if the criteria such as taxable targets are expanded, the global tax burden on Korean companies could increase.

According to foreign media on the 12th, on the 5th (local time), G7 finance ministers met in London, UK, and agreed in principle to set a global corporate tax rate floor at 15%. The target is global large corporations with an operating profit margin of 10% or more, and at least 20% of the excess profit can be taxed in the country where the relevant revenue is generated.

However, before introducing the digital tax, establishing specific taxable targets and criteria remains a task. If, as per the recent agreement, companies with an operating profit margin of 10% or more and annual sales exceeding $20 billion are designated as targets, major domestic companies such as Samsung Electronics and SK Hynix could also be included. Recently, the OECD added consumer-facing industries to the scope of introduction, and there are also calls, mainly from the United States, to expand the range of target industries to all sectors.

According to the Federation of Korean Industries, if the digital tax is imposed on all industries with sales exceeding $20 billion as proposed by the United States, 4.7 trillion won, equivalent to 8.5% of the annual domestic corporate tax revenue, would fall under the influence of the digital tax. This means that depending on the detailed conditions of the digital tax introduction, the global tax burden on domestic companies could increase.

[Image source=Reuters Yonhap News]

The necessity of introducing a digital tax began to be discussed as issues of tax avoidance by global digital companies such as Google and Facebook emerged. Until now, taxation on profits was determined based on the presence of a physical business establishment, but with recent advances in digital technology, the number of digital service companies operating without a physical place of business has increased, raising claims that there is a blind spot in the existing tax system.

The main points can be summarized as ▲market jurisdiction taxation, where a portion of multinational corporations’ global profits is allocated according to each country’s revenue and taxed in that country, and ▲global minimum tax, where if the effective tax rate of corporate tax paid by subsidiaries overseas does not meet the minimum tax rate, the shortfall is taxed in the headquarters’ country.

In the domestic business community, it is argued that the scope of the digital tax should be limited to 'digital service companies' with sales exceeding $20 billion, and the global minimum tax rate should be set at 12.5% or lower as proposed by the OECD. Additionally, to resolve side effects arising from the introduction of the new tax system, they have proposed granting a grace period of at least three years and establishing a dispute resolution organization.