Seoul exploring new taxes on Google

Britain, Spain propose digital taxes on global tech giants

Google is likely to face new taxes in Korea on revenue from digital services, as the country has vowed to join a global wave of tackling tax avoidance by internet media companies.  Following Spain, Britain proposed a 2 percent tax on global technology giants like Google, Amazon and Facebook, Tuesday, on profits they make through search engines, social media platforms and online marketplaces. Recently, a growing number of countries are moving to update their taxation regimes as economic activities are shifting rapidly online, making it difficult for governments to levy taxes on such online platforms. The moves come as discussions on imposing a heavier tax on Google are gaining momentum in Korea as part of efforts to make it shoulder an amount corresponding to its lucrative business here.

In 2016, Naver, Korea’s largest search engine and portal site, paid 400 billion won ($353 million) in corporate tax, nearly 10 percent of its annual sales figure of 4 trillion won, whereas Google Korea paid only 5 percent of that figure, or 20 billion won. Many global tech heavyweights have long managed to pay only a fraction of their profits as taxes here, largely by routing them to lower-tax jurisdictions where their headquarters are based. The Ministry of Economy and Finance said Oct. 24 it will join global efforts to tackle base erosion and profit shifting (BEPS), or tax avoidance strategies that exploit gaps and mismatches in tax rules through artificially shifting profits to low- or no-tax locations. “We are actively participating in the ongoing global discussion to fight the strategy,” the ministry said in a statement. “Under an OECD-led initiative, over 100 countries and jurisdictions are collaborating to implement measures to tackle this.” The broad statement came four days after remarks made by Deputy Prime Minister and Finance Minister Kim Dong-yeon. Kim said that government measures were “in store” including on corporate taxes, indicating a review was underway to revise the law. “Currently, global IT companies that operate here with overseas servers are subject to only value-added tax, not corporate tax,” he said at the National Assembly audit of the ministry. The remarks reflected a growing need to require them to pay a “fair share” of taxes here where they do business.

However, concerns over fairness arose as Korea’s global firms doing business overseas could be subject to “double taxation,” as the government is seeking to tax revenue instead of profit. The Korean government’s move is in line with global efforts undertaken by most advanced nations to impose a so-called “Google tax,” whereby large digital companies must pay a corporate tax of up to 3 percent, a move to tax them based on where their revenues are generated, not where their regional headquarters are. In March, both OECD and the European Commission suggested the idea. According to measures drafted by the executive arm of the European Union, measures to increase taxation on digital giants were outlined primarily by levying them on gross revenue, instead of profit. The 2018 OECD interim report, “Tax Challenges Arising from Digitalisation,” showed over 110 countries agreed to review the international tax system, amid shared concerns that some parts of it remain obsolete in the digital economy. In July, European finance leaders called for “progress on global rules to tax the digital economy” at a meeting of G20 finance ministers and central bankers in Argentina.

20% of big foreign firms not paying taxes

Meanwhile, the public debate on the issue here was further fueled by a report that showed about one in five foreign entities that posted over 1 trillion won in annual sales here managed to avoid paying corporate taxes over the past five years. According to data from the National Tax Service on foreign corporations’ income and tax filings between 2013 and 2017, 21.8 percent filed “nil returns.”In 2013, of 90 companies, 15, or 16.7 percent, paid no corporate taxes. This compares with 24.7 percent in 2014, 28 percent in 2015, 26.1 percent in 2016, and 14 percent in 2017.

Rep. Park Young-sun of the ruling Democratic Party of Korea said such “stunning figures” require an immediate correction.”While small- to medium-sized entities are not able to pay tax due to low profit, their large counterparts are suspected of shifting profits to overseas tax havens, a deviant and unethical way that undermines hardworking taxpaying Koreans,” he said. The top priority should concern revising the laws on permanent establishment (PE), or the fixed place of business which gives rise to income or value-added tax liability in a particular jurisdiction, according to a civic activist. “The U.S. tech giant practically exists in the virtual world, which cannot be identified under the PE-based tax code. The law should therefore be revised to state firms are subject to tax where their services are used,” said Pang Hyo-chang, IT committee head at the Citizens’ Coalition for Economic Justice. “Also required is public disclosure of their sales details, including revenue and profit to identify taxable income accurately.”

Stringent scrutiny of global tech firms is likely given overseas precedents. 

In May 2017, Google reached a settlement with Italy to pay $334 million, ending a 14-year tax dispute. The Sydney Morning Herald reported in March 2017 that Australia’s newly passed Diverted Profits Tax Laws are aimed at multinationals with global revenue of more than $1 billion and Australian revenue of greater than $25 million, hitting them with a 40 percent tax on all profits. The rate is 10 percent higher than the 30 percent corporate tax rate. However, an economist at the Korea Institute of Public Finance said revisions should be made after careful consideration of their far-reaching consequences. “Identifying taxable income is a meaningful effort, but the government should understand the revision will have a broad impact not only on domestic industries but on compliance issues with international rules,” the economist said.

By Lee Kyung-min

(Korea Times)