Deputy Prime Minister Kim Dong-yeon said on October 19 that the South Korean government is considering imposing a corporate tax on multinational IT companies. However, on October 24, the Ministry of Economy and Finance explained that his remark does not mean the government is preparing specific short-term measures similar to those of the EU, but means South Korea is actively participating in the discussions of the OECD for taxation on multinational IT companies.
During the parliamentary audit of the ministry on October 19, the deputy prime minister said that the government still has a way to go when it comes to the so-called Google tax and is working on measures for taxation. This remark was an answer to a question about whether the government has a full grasp of Google Korea’s sales.
The Google tax can be defined as taxes imposed on companies like Google, Apple and Facebook for tax evasion prevention. More and more people are advocating the taxes with the multinational companies paying little tax in South Korea in spite of trillions of won in sales.
According to the current tax treaty, a foreign corporation without a fixed place of business in South Korea cannot be subject to a corporate tax when it comes to its source business income in South Korea. As far as IT service providers are concerned, the fixed place of business refers to where their servers are located. According to the ministry, the multinational IT companies have no fixed place of business in South Korea and their servers are located abroad and, as such, it is not easy to impose corporate taxes on them.
“The tax Google is slated to pay to some countries like the UK is regarded as a special case and the basis of the taxation is yet to be made public,” he said with regard to Google UK’s 220 billion won tax to be paid to the HM Revenue and Customs (HMRC). In France, a US$130 million tax on Google’s fixed place of business was cancelled by the court in July last year.
“The corporate tax on Naver covers domestic and overseas source incomes from various types of businesses like online ads, contents and merchandises,” he mentioned regarding tax burdens on Naver and Google, adding, “Google’s sales are estimated from app purchase prices and Google receives about 30% of the total as its fee and some of the fee is paid to payment agencies and the like.”
The ministry, in the meantime, is prudent about adopting short-term measures similar to the EU’s. First of all, according to the non-discrimination principle of the WTO, taxation on digital service supply is applied to both domestic and foreign corporations, and then domestic corporations are subject to double taxation. The measures are close in nature to an indirect tax, which means even zero-profit companies have to pay taxes and the burden may be shifted to consumers.
“Such sales-based taxes in South Korea may lead to other countries’ response based on the same taxes, and then South Korean companies and related industries may be negatively affected in the global market,” the ministry explained, continuing, “Besides, the basis of such taxes is unclear and they may constitute a violation of the principle of no taxation without law and the taxation treaty.”