hankyoreh

The companies subject to a digital levy often known as the “Google tax” will include not only digital service providers but also consumer-facing businesses (that is, businesses that generate revenue from selling goods or services). That makes it even more likely that Samsung Electronics and other South Korean conglomerates will be subject to the digital tax.

The Inclusive Framework (IF) on BEPS (that is, base erosion and profit sharing), a multilateral deliberative body representing 137 countries organized to prevent tax evasion by multinational firms, reached an agreement during a conference in Paris on Jan. 27-30, South Korea’s Ministry of Economy and Finance (MOEF) reported on Jan. 31.

The discussion of the digital tax was originally aimed at internet companies such as Google and Facebook whose operations have come to transcend national boundaries during the development of the digital economy. But because of pressure from the US, which hopes to shelter its domestic industry, the scope of the tax was expanded to include multinational firms that produce consumer goods.

According to MOEF’s report about the agreement, the IF will enable countries to levy a digital tax on a portion of the global profits of multinational firms above a certain size that are selling products in those countries. Under the agreement, the digital tax can be assessed not only on digital service providers (such as online platforms, game developers, and video services) but also on consumer-facing businesses such as franchises and manufacturers of mobile phones, consumer electronics, packaged foods, and computers. This tax will not apply to intermediate goods (semiconductors, for example) or to the finance and shipping industries.

While many companies make such products, the only ones subject to this digital tax will be multinational firms that exceed a certain level in global revenue, total revenue in the relevant business area, and excess earnings subject to distribution. Furthermore, it’s not enough for a company to simply have revenues in a foreign market; it must also be a major and continuing market participant that raises revenue through advertising, promotion, and the collection of customer information. This draft agreement doesn’t specify the standards for selecting companies for taxation. Moving forward, there’s likely to be a sharp debate between countries hoping to secure their tax base and countries seeking to protect their domestic firms.

Consequently, the actual amount of digital tax that South Korean companies will have to pay will likely depend on the outcome of future discussions. But the government emphasized that domestic companies won’t face a heavier tax burden.

Lim Jae-hyeon, MOEF’s deputy minister for tax and customs, offered the following example. “While Samsung Electronics might be subject to the new tax rules, that just means the taxes it’s been paying in South Korea will be shared with other countries, so the amount will remain the same. The scope of taxation for consumer-facing businesses is expected to be reduced, so the effect on domestic companies will be limited.”

Pending confirmation of the agreement at a meeting of finance ministers from the G20 countries, which is scheduled for mid-February, the IF plans to draw up a final draft by the end of the year. But it’s likely to take three or four more years for each country to prepare their detailed tax measures and conclude a multinational treaty.

By Noh Hyun-woong, staff reporter

Please direct comments or questions to [english@hani.co.kr]