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Digital Tax Application to Manufacturers under Discussion
OECD Proposes Unified Approach to Digital Taxes
Digital Tax Application to Manufacturers under Discussion
  • By Jung Suk-yee
  • October 31, 2019, 08:52
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The OECD Secretariat has proposed that digital taxes be applied to a wide range of consumer business companies.

Early this month, the OECD Secretariat proposed a unified approach so that digital taxes can be imposed on global manufacturing as well as IT companies if their global sales are above a certain level.

Digital taxes are imposed on global Internet companies such as Google and Facebook. The approach proposed by the OECD Secretariat is to apply the taxes to a wide range of consumer business companies. The approach is likely to include B2B transactions and detailed application rules are yet to be discussed. Multinational corporations such as mobile phone manufacturers, consumer electronics manufacturers and automakers are likely to become subject to the taxes unlike those in the financial, primary and mining industries.

It is said that the proposal is a result of pressure from the United States. At present, the main target of digital taxes is the United States, which is home to many global IT companies such as Google.

An alternative minimum tax is being discussed as another principle of digital taxation. The idea is to determine a minimum tax rate, see if an overseas subsidiary’s tax rate in the country of its residence satisfies the minimum rate, and include the shortfall into the taxable income of the parent company of the subsidiary in the case of a shortfall.

Global sales criteria for the taxation are likely to become an issue of controversy. According to the Korea Economic Research Institute, the 100 largest South Korean companies in terms of 2018 sales include 36 in which domestic and global sales are indistinguishable, which means more than one-third of major South Korean enterprises have to prepare new financial statements before digital tax introduction. In addition, the United States, Japan and China are yet to introduce the International Financial Reporting Standards (IFRS) unlike approximately 140 countries, including South Korea.

The South Korean government formed a task force in March this year to look into how digital taxes will affect its corporate tax revenue. Digital taxes began to be discussed in 2015 and the government has joined the discussions from the very first, claiming that manufacturers should not be subject to digital taxes, while the United States has been opposed to digital taxes as a whole.

A public hearing is scheduled for Nov. 21 and 22 in Paris with regard to the unified approach and the alternative minimum tax will be discussed on Dec. 13. The final conclusion will be announced at the general meeting of the Inclusive Framework scheduled for Jan. 29 and 30, 2020.