Tax Evading Foreign Companies
More than half of the foreign companies operating in South Korea have been found to not have paid any taxes on their profits in 2011.
According to data given to ruling Saenuri Party lawmaker Lee Man-woo on October 21 by the National Tax Service, 722 of the 1,409 foreign companies, or 51 percent, did not pay any corporate taxes in 2011.
Of the total, 688 reported sales of less than 50 billion won (US$47.1 million) in the year, while the number of companies with revenues ranging from 50 to 300 billion won (US$47 to 282 million) amounted to 24. There were even three firms that paid no taxes, despite their sales exceeding 1 trillion won (US$943 million).
Detailed information on those foreign companies was not unveiled, but Lawmaker Lee singled out Apple as an example case that might have evaded paying due taxes on profits obtained here. He pointed out that Apple evaded corporate taxes in Korea in 2011. The company recorded 1.8802 trillion won (US$1.7730 billion) in sales here in 2011 alone.
According to global IT consulting firm Gartner’s data, Apple had sold 1.657 million devices in Korea in 2010 to record 1.2071 trillion won (US$1.1383 billion) in sales and boosted its sales volume to 2.581 million units in the following year.
Also, according to the May 21 US Senate hearing report cited by the lawmaker, Apple earned US$22 billion on a pre-tax basis in 2011 in non-US markets, but paid just 0.05% of it, approximately US$10 million, as taxes for that year. It also achieved US$38 billion in pre-tax income between 2009 and 2011 in overseas markets, and the taxes paid during the three years were 0.06% of the amount.
“The data shows that the taxes paid by Apple to the Korean government in 2011 are just a fraction of 10 billion won [US$9.42 million],” said the lawmaker, continuing, “We need to tighten our taxation criteria by clarifying the transfer price for intangible assets, and by means of closer international cooperation to deal with the tax avoidance strategy of multinational companies like Apple.” He added that Apple seems to have adopted the Double Irish with Dutch Sandwich strategy for tax avoidance.
The tactic is as follows. When Apple’s products are imported into Korea, Apple Korea pays the re-licensing fee for the technical license agreement with ASI to supervise the sale of Apple’s products out of the United States, which is its affiliated company located in the tax exempt country of Ireland. Then, ASI transfers about 83% of the fee to AOI, another affiliated corporation in Ireland which manages Apple’s intellectual property rights. As a result, the huge technological transfer fee can be transferred and Apple’s operating profits and net income appear minimal, even when the sales volume is high.
“Besides, Apple Korea turned itself into a limited liability company in August 2009 and became free from the obligation of public announcements to heighten the possibility of tax avoidance,” lawmaker Lee continued to point out.