[‘Countdown’ Global Minimum Tax] ② 107 Virgin Islands and Cayman Tax Haven Corporations... Subsidiaries Each Fending for Themselves

Companies Busy Seeking Breakthroughs on Global Minimum Tax
Overseas Subsidiaries Established in Virgin Islands, Cayman Islands, etc.
Increased Contact Between Companies and Government
Discussions on Aligning Minimum Tax Rate to 15% in Subsidiary Jurisdictions

The biggest reason why domestic conglomerates with overseas operations fear the global minimum tax is the uncertainty over which country will impose what tax rate. Even within the same country, tax rates vary by company depending on subsidies and various tax benefits. The predictability is significantly low. The global minimum tax is an agreement among major countries that requires at least a 15% corporate tax rate anywhere in the world, and it came into effect this year.

The view of George Town, Cayman Islands. Photo by Cayman Islands Government Website

Virgin Islands Necker Island

Domestic companies’ overseas affiliates are spread widely not only in major countries but also in regions known as tax havens. According to the “Analysis of Overseas Affiliates of 82 Domestic Groups” released by the Korea CXO Institute as of August last year, Korean companies have the largest number of affiliates in the United States with 1,321 locations. China follows with 845, then Vietnam with 299, Japan with 210, and Singapore with 206. France has 190, Indonesia 187, and India 154 affiliates. Hong Kong hosts 154, and Spain 140 affiliates.

In particular, it was found that domestic groups have established 107 overseas corporations in regions cited as tax havens by the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF), such as the Virgin Islands, Cayman Islands, and Marshall Islands. Since these countries have significantly low corporate tax rates, the tax burden on the parent companies is inevitably large. Among domestic companies, Hanwha has the most overseas corporations with 739, surpassing Samsung. SK follows with 598. Samsung has 566, CJ 393, LG 278, Lotte 204, and GS and POSCO have 156 and 142 corporations respectively. Naver has 105 affiliates.

Recently, companies have been focusing on ‘B2G (Business to Government)’ transactions as a way to reduce the burden of the global minimum tax. This involves negotiating directly with the government of the country where the subsidiary is located to settle tax-related matters locally.

A company official said on the 21st, “Most companies likely subject to the global minimum tax are increasing contact with the governments of the countries where their subsidiaries are located.” These companies are reportedly meeting or communicating with government officials in those countries to discuss paying taxes aligned with the minimum tax rate of 15%, which is the baseline for the global minimum tax. If the subsidiary is taxed at 15% or higher in a specific country, the parent company does not have to pay additional taxes.

The most likely option under consideration is for the relevant government to reduce or eliminate tax benefits and subsidies currently applied to the companies to meet the minimum tax rate of 15%. This is seen as the best option companies can choose amid uncertainty about the exact calculation of tax rates and amounts following the introduction of the global minimum tax.

This method is regarded as a ‘win-win’ for both the companies and the countries where their subsidiaries are located, and experts are said to be advising this approach frequently. From the companies’ perspective, it prevents any potential tax bomb caused by the global minimum tax. For the governments, it allows them to retain subsidiaries of companies they have worked hard to attract, benefiting their economies. Companies and governments can also use the negotiation table established by the global minimum tax to discuss other issues.

There is also a positive assessment that this approach can prevent ‘international tax disputes’ with the countries where subsidiaries are located, which may arise due to the global minimum tax. Attorney Choi Yong-hwan and Certified Public Accountant Jung Hyun from the law firm Yulchon emphasized at a ‘Global Minimum Tax Briefing’ jointly held by the Korea Chamber of Commerce and Industry, Ministry of Strategy and Finance, National Tax Service, and Korea Listed Companies Association at the Sang-ui Hall in Jung-gu, Seoul, that legal disputes could occur due to differences in interpretation of provisions, country-specific incentives, and conflicts with tax treaties. It is expected that meeting and discussing in advance between companies and foreign governments can reduce the possibility of disputes.

There are also voices from the business community hoping for government-level support and cooperation. It is suggested that the government should verify the distribution of companies’ subsidiaries in advance and consider ways to reduce the tax burden on Korean companies through discussions with the governments of countries where many subsidiaries are concentrated.