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Concern Regarding Overseas Businesses Grows
Global Tax War
Concern Regarding Overseas Businesses Grows
  • By matthew
  • July 19, 2013, 07:15
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Hot S2 combined power plant built by Samsung C&T in the United Arab Emirates in 2011.
Hot S2 combined power plant built by Samsung C&T in the United Arab Emirates in 2011.


The world’s leading IT company, Google, saw advertising revenue of US$ 18 billion for the period from 2006 to 2012, yet paid just US$ 16 million in taxes, less than 0.09% of total revenue. The company had its European headquarters in Ireland, a country known as a tax heaven, while falsely claiming revenue from Britain came from its European headquarters. As a result, the British Parliament criticized Google at hearings this year, yet was less than successful in overturning Google’s claim that it was a legitimate tax saving.

Korean firms have invested money overseas at an almost exponential rate since 2003.The Korea Customs Service discovered some income tax avoidance cases in Diageo Korea, a subsidiary of UK-based Diageo, a company well-known for its whiskey “Windsor”. Diageo Korea paid an extraordinary amount of management guidance fees to its parent company in Britain for years, as they were regarded as a de facto payment of dividends, no taxes were paid. However, income tax must be governed by the National Tax Service, not customs. Diageo Korea has claimed that many Korean companies are doing the same overseas. As a result of uncertainty surrounding the issue, the Korea Customer Service was limited in what it could do against the company.

The above-mentioned cases are examples of delicate tax avoidance cases involving large, multi-national companies that make money across national boundaries. For example, Google evaded the provision regarding “Permanent Establishment,” a requirement for the taxables specified in the tax code. Meanwhile, Diageo used a loophole regarding “Transfer Pricing,” another hot issue related to the income taxes of multinationals. 

Such cases are not simply a problem for Korea and the UK, but for many countries where multinationals invest and take back large profits in the name of dividends and advisory fees. 

In an attempt to solve these kinds of problems, the OECD’s Committee on Fiscal Affairs (CFA) passed a motion on 15 action plans against multinationals’ tax avoidance (“Double Tax Exemption”) in a general meeting in May. Among the action plans to be taken are tighter regulations regarding the permanent establishment and transfer pricing on intangible assets.

Who will be the target of anti tax-avoidance measures?

The action plans will be detailed through the related parties’ research and discussions for the upcoming two to three years. Targets will be the headquarters of multinationals and subsidiaries, as well as IT companies, explained a source from the Ministry of Strategy & Finance (MOSF). Some tax experts from the private sector predict that the global funds of financial institutions and constructors engaged in foreign projects will also be targeted.

The revenue from the intellectual property assets of Korean companies has risen steadily since 2006.If such detailed action plans are executed, foreign companies’ e-commerce deals through overseas servers, even those not based on the actual establishment of Korean subsidiaries or business places, will be interpreted as satisfying permanent establishment requirements in Korea. “With tougher international regulations (i.e., OECD nations’ agreement regarding tax investigation), we will have a legal base for withholding taxes in Korea when some deals are apparently seen as de facto e-commerce contracts even though they are not based on the actual establishment of Korean subsidiaries, branches or servers,” said Oh Yoon, a Hanyang University’s law school professor. This means that authorities may change related tax codes so as not to accept the extraordinary amounts of intangible asset-related fees paid to overseas subsidiaries or parent companies. If so, companies such as Diageo Korea will have to pay more income taxes to Korean tax authorities because they will have higher taxable income.

Korea shouldn’t be swayed by advanced nations and BRICs.

It is seen as good for the increase in national tax revenue on a short-term basis. However, the nation may have more losses than gains on a medium and long-term basis, say some tax experts. This is because Korean companies’ investment and business expansion in the global market is increasing at a far faster pace than foreigners’ entering the Korean market.

In regards to the transactions of intangible assets, Korea gained US$ 2.045 billion in 2006 but rose to US$ 4.320 billion in 2011, more than double. This money was brought into Korea in the name of brand royalty, patent royalty or management know-how fees from the Korean companies’ overseas subsidiaries which expanded their international production and distribution networks. “Korea is a small-size open economy. We should attract investment with low tax barriers, just as tax heavens do. If we take an equivocal attitude in the global tax war, we can become sandwiched between advanced nations and BRICs,” said Lee Kyung-geun, a tax accountant from Seoul-based law firm Yulchon. The MOSF has similar worries, claiming Korea is not strong enough to fight against the advanced nations.