Digital Tax Implementation Delayed by One Year...Giving Global Tech Companies More Time

Declaration on 'Digital Tax' by 138 Countries Worldwide

The enactment of the 'digital tax,' a taxation principle for multinational digital companies, is nearing completion. Once the digital tax is introduced, the burden on companies that generate massive revenues in multiple countries while avoiding taxes through low-tax jurisdictions is expected to increase. However, the implementation timeline has been postponed from next year to 2026?2027.

According to the Ministry of Economy and Finance on the 12th, the 'OECD/G20 Inclusive Framework' announced a digital tax statement at the 15th plenary meeting held in Paris, France. The digital tax is broadly divided into Pillar 1 and Pillar 2, with the main point being that multinational companies pay taxes in the countries where they generate revenue and are prevented from avoiding taxes through low-tax jurisdictions. After six years of multilateral negotiations, 138 out of 143 countries approved the agreement.

The actual implementation is expected to be possible only in 2026 or 2027. This is because the deadline for the agreement to prohibit unilateral taxation by individual countries on multinational companies has been extended from December 31 this year to December 31 of the following year. If introduced in 2025, actual application will occur one to two years later according to the multilateral treaty provisions.

'Pillar 1 Amount A' is a principle that allows the country where a large multinational company generates income to tax that income. Its purpose is to reduce the unfairness where a digital company earns money in Country A but pays taxes in Country B, where its headquarters are located. 'Pillar 1 Amount B' contains methods to calculate the appropriate transaction prices in international transactions of multinational companies. It helps reduce tax disputes between companies and countries.

Pillar 2 focuses on narrowing the differences in tax rates between countries. If the recipient country taxes payments such as interest or royalties at a low rate below 9%, the source country has the right to collect additional taxes. This is implemented by creating tax treaties upon requests from developing countries.

Pillar 1 Amount A aims for enactment in 2025, with the multilateral treaty draft to be first disclosed in the second half of this year. Additional discussions on Pillar 1 Amount B will continue until the end of the year, with the final draft to be prepared in January next year. However, the specific implementation timeline is undecided. Pillar 2 is expected to be implemented in multiple countries in 2024.

The Ministry of Economy and Finance stated, "It is significant in that it allows the introduction of taxation standards suitable for the new digital economy," and added, "The approval of this statement means that the overall framework of the digital tax is being completed."