hankyoreh

Ko Kwang-hyo, director-general of the Individual and Corporate Income Bureau at the Ministry of the Economy and Finance, outlines a plan for a digital tax at the Government Complex in Sejong on Oct. 13. (Yonhap News)

The Organization for Economic Cooperation and Development (OECD) and the G20 group of major economies have agreed to apply the “digital tax” not only to digital service providers like Google but also to companies that sell ordinary goods and services such as Samsung Electronics. However, different levels of taxation will be applied to the two categories of companies. As a result, South Korean companies such as Samsung Electronics and LG Electronics that are categorized as vendors of goods and services are expected to face a lower digital tax rate than IT firms such as Google and Facebook.

Officials at the Ministry of Economy and Finance (MOEF) told the Hankyoreh on Oct. 13 that these are some of the provisions found in a blueprint for long-term measures for digital taxation that the OECD approved the day before. The digital tax has been proposed as a way to address the fact that IT companies such as Google and Facebook make huge profits in countries around the world without paying corporate tax there on the grounds that they don’t have a fixed place of business there. The goal of the digital tax is for such companies to divide the tax they’ve been paying in their home countries among the various countries from which their profit derives.

The digital tax would be assessed on two categories of companies: providers of automated digital services and customer-facing companies that sell ordinary goods and services. Under the blueprint, the category of customer-facing companies would exclude B2B companies that sell intermediate goods and parts as well as the industries of natural gas, finance, infrastructure construction, international aviation, and shipping.

The digital tax rules would be applied more narrowly to customer-facing companies than to digital service providers. That means that a smaller portion of the taxes paid by Korean companies such as Samsung Electronics and LG Electronics would be distributed to other countries than in the case of Google and Facebook. The exact scope and methodology of the tax are among the unresolved issues that will be discussed at a later point.

Negotiators have also agreed to adopt a global minimum tax rate, the other plank in the campaign to squeeze out tax evasion. If, for example, Samsung Electronics’ subsidiary in Vietnam was paying taxes at a rate lower than the global minimum, the South Korean government would be authorized to levy enough taxes to make up the difference. Once again, negotiators agreed to discuss the exact method of calculating this rate on another occasion.

The OECD has delayed its goal for reaching an agreement on the final digital tax plan from the end of 2020 until the middle of 2021, given the impact of COVID-19. The actual implementation of the agreement, once approved, is expected to be at least two or three more years down the road.

“According to the analysis of several organizations, [the digital tax] is not expected to necessarily be disadvantageous to Korea in regard to tax revenue,” said a MOEF official.

But from the corporate perspective, the overall tax burden is likely to increase. The day before, the OECD released a report assessing the economic impact of the digital tax, in which it estimated that adopting the global minimum tax rate would boost tax revenue by US$47-81 billion a year.

By Lee Kyung-mi, staff reporter

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