Digital Tax Taking Shape

The Inclusive Framework held an online general meeting on Oct. 8 and finalized the Pillar 1 and 2 agreements and action plans on the digital tax. As a result, multinational IT companies doing business in South Korea such as Amazon, Google, Facebook and Netflix are likely to have to pay more taxes in the country.

The South Korean government initiated additional tax imposition on those companies in earnest last year. For example, the National Tax Service imposed an additional corporate tax of 600 billion won and 150 billion won on Google Korea and Amazon Korea last year, respectively. This year, it told Netflix to pay an additional corporate tax of 80 billion won.

According to industry sources, the 19 major IT companies including Microsoft, Facebook, Apple, Disney and Cisco paid 153.9 billion won in corporate tax in South Korea in 2020, when Naver alone paid 430.3 billion won.

At present, an Internet company registered in a tax haven without a physical place of business does not have to pay taxes regardless of the country where its sales have been generated. Pillar 1 is to deal with this problem. It targets each multinational company whose consolidated sales are at least 20 billion euros and profit ratio is at least 10 percent. According to the agreement, the government of the country where the company is located can collect taxes from it with regard to 25 percent of its excess profit exceeding an ordinary profit ratio of 10 percent.

Pillar 2 is related to the introduction of a global minimum corporate tax rate. Specifically, according to it, the effective tax rate applied to each multinational company with consolidated sales of 750 million euros or more must be 15 percent at the least. This is to block such companies from avoiding taxes using tax havens.

Of South Korean companies, Samsung Electronics and SK Hynix are likely to be subject to Pillar 1. Last year, Samsung Electronics’ consolidated sales and operating profit were approximately 236.8 trillion won and 35.99 trillion won, respectively. The first digital tax imposition is scheduled for 2023 and the sales threshold is scheduled to be changed to 10 billion euros in 2030.

Samsung Electronics’ sales and operating profit for next year are estimated at 316.8 trillion won and 62.8 trillion won, respectively. In this case, approximately 7.5 trillion won is subject to digital tax imposition and the corporate tax it must pay abroad is about 1.45 trillion won at an overseas sales ratio of 84 percent and an OECD average corporate tax rate of 23 percent. The tax will be paid in those countries with a GDP of more than 40 billion euros where Samsung Electronics’ sales are one million euros or more and those with a GDP of 40 billion euros or less where Samsung Electronics’ sales are 0.25 million euros or more.
 

Pillar 2 will be applied to each multinational company whose consolidated sales are one trillion won or more. In South Korea, the minimum corporate tax rate is divided into 10 percent (applied to those with a tax base of 10 billion won or less), 12 percent (tax base of 10 billion won to 100 billion won), 17 percent (tax base of more than 100 billion won) and 7 percent (applied to non-large companies). About 80 South Korean companies are likely to be subject to Pillar 2.

According to the Ministry of Economy and Finance, South Korean companies’ actual tax burden will not increase at all because the taxes they have to pay in South Korea will not include the digital taxes they have to pay abroad. The agreements will be reported at the G20 financial ministers meeting in Washington D.C. on Oct. 13 and then confirmed at the G20 summit in Rome at the end of this month.