Reverse Discrimination
Korean cloud service companies are feeling uneasy after Amazon Web Service (AWS) announced that its cloud service will make Korean companies free from the value added tax. This is because AWS does not receive ten-percent value added tax thanks to an exemption in the Korean Value Added Tax Act. The world’s largest cloud service company put its Seoul Data Center into operation in January.
The Korean Value Added Tax Act states that Korean companies which use services provided by foreign companies do not need to pay their value added tax. So it is said that Korean IT companies are suffering reverse discrimination due to the act.
AWS Korea recently sent its corporate clients emails that said, “Provided we have received a valid business registration number by the last day of a month, Amazon Web Services will not apply VAT on the cloud computing service usage during that month.” Cloud computing is a service via which companies use ICT resources such as servers and storages on the internet without directly building them.
“Under these circumstances, corporate customers compare value added tax-free services of foreign companies and services including the value added tax of Korean companies,” said a representative at a Korean cloud service provider. “I am concerned that this fact will deal a big blow to Korean cloud companies who are underdogs to AWS in terms of brand power and market shares.”
The latest revision of the Value Added Tax Act that took effect in July last year aimed at imposing the value added tax on Korean sales of applications by Google Play and Apple’s App Store. This is because some raised a fairness issue about them since Korean application markets impose the tax on application sales. But an exception was added to the act at the end of last year, making corporate customers free from the tax.
“The exception was added to preclude Korean companies which gave the value added tax to foreign companies which cannot issue tax invoices from not reimbursing the value added tax by way of purchase tax amount deduction,” said an official at the Ministry of Strategy and Finance.”
Korean cloud service companies are standing up to the ministry, arguing that the exception is reverse discrimination against them. “In the event that a company uses a service of a Korean cloud service company, the company can reimburse the value added tax later. As a result, there is no discrimination,” said a representative in the cloud service industry. “But at the point of buying the service, Korean companies appear ten percent weaker vis-à-vis foreign companies in price competiveness.” In addition, some point out that foreign companies can enjoy the benefit that Korean customers don’t need to take reimbursement procedures later if they use foreign cloud services.
A section of industrial circles is questioning the business operator qualifications of AWA Korea as an overseas business operator. They say that as the company is doing business with its servers in Korea, it is difficult to regard them as a business operator which is out of Korea.
“Overseas business operators subject to the exception of the Value Added Tax Act refer to foreign corporations which do not have worksites in Korea and do not pay the corporate and income taxes to the Korean government,” the ministry official explained.