Pillar One, Pillar Two
The Organization for Economic Cooperation and Development (OECD) has decided to delay Pillar One of a global digital tax, which will require multinational companies such as Google, Apple and Samsung Electronics to pay taxes in countries where they actually generate sales, by one year from 2024 to 2025.
“To prepare for the introduction of global digital tax, countries have agreed to delay the deadline for agreeing to prohibit the standalone country-by-country taxation of multinational companies from July December 31, 2023 to December 31, 2024,” the OECD said in a statement on July 12.
In other words, the implementation of Global Digital Tax Pillar One has been delayed by one year to 2025. It was originally scheduled to be introduced in 2023, but it was postponed once and then again by one year due to repeated requests from multinational companies. If it is introduced in 2025, it will be implemented in 2026 or 2027, depending on the rules in the multilateral treaty.
Global digital tax is based on an international tax treaty that requires multinational companies such as Google, Apple, and Samsung Electronics to pay taxes not only in countries where they are headquartered, but in countries where they actually make sales. International discussions are being led by the Group of 20 (G20) and the Inclusive Framework (IF), a global consultative group of 142 countries led by the OECD.
It was initially promoted to prevent information technology companies from avoiding taxes by having their headquarters in low-tax countries, but its targets have since been expanded to include other multinational corporations. In October 2021, the IF announced the final agreement on global digital tax consisting of Pillar One – the allocation of taxing rights to countries where sales were made, and Pillar Two – introduction of the Global Minimum Tax.
Pillar One of global digital tax is being implemented to prevent one single country’s taxation of multinational corporations. Pillar One forces multinationals with consolidated revenues of more than 20 billion euros (approximately 2.8 trillion won) and an operating margin of more than 10 percent to pay taxes in the countries of their markets as well as in their home countries. With the introduction of a global digital tax, Google and Apple will pay significantly increased corporate taxes in Korea. Samsung Electronics and SK hynix are highly likely to pay global digital tax among Korean companies. Companies subject to the global digital tax system will have to pay 25 percent of their excess profits over 10 percent of their global sales to countries where they actually earned money.
Pillar Two applies a minimum corporate tax rate of 15 percent, which varies by country. Companies doing business in countries with tax rates lower than 15 percent have to pay differences in taxes to countries where their parent companies are located. Pillar Two will be implemented in many countries starting next year, including Korea.
The introduction of global digital tax has been controversial around the world. In particular, the United States, which is home to many big tech companies, has asked the OECD to delay the introduction of global digital tax, citing a lack of tax revenue. And according to the OECD, Canada, Russia, Belarus, Pakistan, and Sri Lanka declined to engage in global digital tax.
Some observers believe that these countries will be able to introduce their own laws similar to global digital tax to tax multinational corporations. The deadline for countries to ban standalone taxation, agreed to by the 142 countries participating in the OECD-led Pillar One discussions, is the end of this year. Under the premise that a digital tax will be introduced beginning from 2024, global digital taxes prepared in advance by individual countries will be abolished.
“Some countries, such as Canada, have opposed it, but they may change in favor of a multilateral agreement by the end of this year, so it is difficult to judge in advance that global digital tax can be implemented beginning from 2024,” said an official of the Korean Ministry of Strategy and Finance.