Surge in Double Taxation Disputes... National Tax Service Vows "Full Effort to Resolve Challenges Through Tax Diplomacy" [Customs-Driven Corporate Tax Confusion] ②

As of End-2023, 11,500 Double Taxation Cases Under Negotiation
National Tax Service: "Minimizing Disadvantages for Korean Companies Through Enhanced Cooperation"

Recently, the spread of protectionism worldwide has led tax authorities in various countries to strengthen taxation on global companies in order to secure tax revenue. As a result, companies now face an increased risk of double taxation from both the country where the parent company is located and the country where the subsidiary operates. Korean companies, which have a high dependence on exports and have established overseas production subsidiaries, are also facing the issue of double taxation.

According to the Organisation for Economic Co-operation and Development (OECD) on October 31, unresolved cases of double taxation worldwide reached 11,500 as of the end of 2023. Since 2016, the OECD has published annual statistics on mutual agreement procedures between national tax authorities regarding double taxation and other issues. The mutual agreement procedure is a process in which the relevant countries negotiate to resolve cases of international double taxation that have already occurred.

The number of unresolved double taxation cases under negotiation among countries worldwide, as recorded in 2016, surged from around 8,000 to approximately 11,800 in 2022. By the end of 2023, the figure had slightly decreased to about 11,500, but this is still more than 35% higher compared to 2016. If we also consider cases where taxpayers do not apply for a mutual agreement and thus are not included in the statistics, the number of companies facing double taxation issues globally is estimated to be even higher.

Double taxation arises because each country's tax authority seeks to maximize its own tax revenue by attributing a greater share of profit to companies located within its jurisdiction. For example, if Company A in Korea supplies products to its subsidiary Company B in Germany, or if Company B builds a factory, produces goods, and sells them locally, the Korean National Tax Service may determine that Company A, which owns the core technology and services, contributed more to the sales revenue. Conversely, the German tax authority may consider Company B's production activity as the main contributor to profit generation and thus impose taxes accordingly. Additionally, if sales revenue drops due to an increase in U.S. tariffs, the scope of taxation by the Korean and U.S. tax authorities may vary depending on how responsibility for the loss is determined. From a company's perspective, this means exposure to uncertain tax burdens and the risk of double taxation.

Companies that experience double taxation can request the tax authorities to resolve the issue in accordance with double taxation avoidance agreements and domestic tax law. Under these agreements, if a taxpayer believes that a tax assessment by one country violates the treaty, the taxpayer can request both tax authorities involved in the international transaction to negotiate and resolve the assessment, regardless of domestic legal remedies.

The Korean National Tax Service is strengthening its tax diplomacy to ensure that Korean companies can focus on their business without disadvantage by enhancing cooperation with major foreign tax authorities. This year, the National Tax Service held bilateral meetings with key trading partners such as Saudi Arabia (February), Vietnam (March), and Japan (April). In addition, the agency is actively participating in influential multilateral forums in Europe and the Americas, moving beyond simple tax cooperation to provide comprehensive diplomatic support that directly protects national interests and supports Korean companies' overseas activities. Notably, last month, Commissioner Kwanghyun Lim attended the Asia-Pacific Chief Tax Officers Meeting, which involved tax authorities from 19 countries. There, he held bilateral meetings and discussions with chief representatives from other tax authorities to discuss directions for tax support that companies can directly benefit from, including the prompt resolution of double taxation issues.

Kwanghyun Lim, Commissioner of the National Tax Service, is speaking at the 54th Asia-Pacific Chief Tax Officers Meeting held in Brisbane, Australia on the 16th of last month. National Tax Service

The National Tax Service has dispatched eight tax attach?s to countries such as the United States, China, Japan, Indonesia, Vietnam, and Mexico to serve as negotiation channels with local tax authorities and provide close support for Korean companies' overseas activities. These tax attach?s work with companies to address a wide range of issues, from tax matters to legal and institutional barriers. There have been tangible results, such as securing delayed corporate tax refunds and intervening in excessive tax audits. Through swift responses by tax attach?s, friction with local tax authorities has been resolved early, and unnecessary tax burdens have been reduced.

Furthermore, for the first time this year, the National Tax Service dispatched a tax attach? to Mexico. Serving as a "frontline base for close tax support," this attach? helps resolve unexpected tax issues that arise due to significant differences in economic structures, tax systems, and cultural practices as companies pursue business operations.

While Korean companies' overseas expansion was initially centered on geographically close Asian countries, the acceleration of global supply chain restructuring is broadening their reach worldwide. The National Tax Service is also expanding the scope of tax cooperation globally in response. In particular, the agency plans to strengthen tax cooperation in regions such as Eastern Europe, which is home to advanced industries like batteries, defense, and automobiles, and the Middle East, where many Korean construction companies operate. In addition, the National Tax Service aims to strategically enhance tax diplomacy by sharing Korea's advanced tax systems and administrative expertise with developing countries, thereby fostering a tax environment favorable to Korean interests.

Commissioner Lim stated his intention to further protect overseas Korean companies and actively resolve challenges such as double taxation by personally engaging with counterpart authorities and expanding the role of tax attach?s through strategic and practical tax diplomacy. He said, "The National Tax Service will continue to actively pursue practical tax diplomacy to support Korean companies' overseas expansion and investment," and added, "We will further strengthen cooperation with major foreign tax authorities to ensure that our companies do not face difficulties due to differences in tax laws or double taxation issues."