Foreign Loophole
“About half of foreign companies engaging in business activities in Korea do not pay any of their corporate taxes,” said Rep. Lee Man-woo of the Saenuri Party, who is on the Planning and Financial Committee of the National Assembly, on Sept. 10. “Among them, 15 companies posted upwards of 1 trillion won [US$842 million] in sales. This is because foreign companies do not need to disclose their sales in the case that they register themselves as limited companies, so it is impossible to levy accurate taxes on them.”
Out of the 1409 foreign companies doing business in Korea, 722 did not pay any corporate taxes in 2011, according to a report on taxing foreign companies in Korea by sales from the National Tax Service. Among the 722 companies, seven hit 1 trillion won or more in sales. In 2013, foreign companies that did not pay taxes increased 7.5-fold to 4,752 from 2011. Another 15 foreign companies did not pay corporate taxes, although they hit one trillion won or more in sales. The figure is up by eight from 2011.
Last year, Homeplus Korea paid more than 70 billion won (US$59 million) in trademark royalties to its headquarters, Tesco, in the U.K. This means that they wired a third of their operational profits to their headquarters, even through their sales dropped 30 percent. This money transfer saved the company 17 billion won (US$14 million) in corporate taxes for two years, although Homeplus did not use the trademark “Tesco” in Korea. But most of these foreign companies, as limited companies, are not obliged to publicly disclose their business results, and go through external audits.
The 2014 Mobile Internet Business Report by the Mobile Internet Business Association (MOIBA) estimated that Google Play and Apple’s App Store earned about 2.3 trillion won (US$1.9 billion) and 1.4 trillion won (US$1.2 billion) in the domestic application market last year. In addition, these digital companies can evade all of their taxes by excluding such income from their domestically-generated income. To do this, they install servers overseas.
“International cooperation and general measures are needed to address this problem,” said Rep. Lee. “The government has to create an environment where such companies pay proper amounts of tax in Korea.” The Korean government has begun to discover their trade information through a revision of tax law. But it is not clear whether or not multinational companies will cooperate and submit data to Korean tax men. This is because if they refuse to hand in the data, they will only be fined 10 million won (US$8,429).