Can Google be taxed as much as Naver? The world is discussing ‘digital tax’

The government and ruling party’s argument that global companies such as Google, Facebook Korea, Netflix, and Airbnb should be taxed in the same way as domestic large corporations is gaining strength. Even though these global companies have made huge profits in Korea, they have paid lower taxes than large domestic companies because their headquarters are located abroad.

To ensure tax fairness, European countries and Canada have imposed a ‘digital tax’ on large global companies. The introduction of a digital tax is expected to be discussed as a major agenda item at the G20 summit held in Brazil next month.

Deputy Prime Minister and Minister of Strategy and Finance Choi Sang-mok said at the National Assembly audit on the 11th, “We will actively review taxation methods for global digital companies.” Deputy Prime Minister Choi responded as follows when People Power Party lawmaker Park Seong-hoon pointed out, “There is a problem of tax avoidance by the global IT industry, which pays far too little tax compared to the astronomical amount of money it makes domestically.”

Rep. Park said, “Recently, the highest court of the European Union (EU) imposed a fine of 13 billion euros (approximately 19 trillion won) on Apple under the logic that ‘failure to pay taxes commensurate with profits in the country where the sales occurred constitutes illegal support.’ He emphasized, “Of course, you have to pay taxes on the money you earn in that country.”

During the audit of the Ministry of Strategy and Finance conducted by the National Assembly’s Planning and Finance Committee at the National Assembly on the 11th, People Power Party lawmaker Park Seong-hoon’s question screen is being broadcast on National Assembly Broadcasting. Screen capture of the National Assembly broadcast.

Only 3.1% of Google and Naver pay corporate tax

The problem of tax fairness between domestic and foreign companies is serious. The corporate tax paid by Google Korea last year was 15.5 billion won, which is only 3.1% of the corporate tax paid by Naver (496.3 billion won). Google Korea reported 365.4 billion won in sales last year, and Naver reported 9.67 trillion won in sales. The reason why Google Korea is able to report absurdly lower profits than Naver is because most of the profits earned in Korea are accounted for as the share of ‘Google Asia Pacific’ in Singapore and are excluded from its sales.

However, Google Korea’s corporate tax last year, estimated by the Korean Society of Finance, was up to 518 billion won, which is 33 times more than the actual tax paid. This is because Google Korea’s estimated domestic sales are up to 12.135 trillion won, which is 33 times higher than the reported amount (365.4 billion won). Likewise, Netflix Korea paid 3.6 billion won in corporate taxes last year, but it was found that it had to pay up to 87.6 billion won compared to actual sales estimates. Facebook Korea paid 5.1 billion won, and the Korea Institute of Finance estimated that it would have to pay up to 50.9 billion won.

There are global companies that enjoy 0 won corporate tax even though they make huge profits in Korea. According to data received from the National Tax Service by Rep. Chun Haram of the New Reform Party, one out of two foreign corporations (44%) that earned more than 5 trillion won in annual profits in Korea last year did not pay any corporate tax at all. The average corporate tax amount for companies with sales exceeding 5 trillion won is 263.9 billion won for large domestic companies, while that for large foreign companies is only 14.1 billion won, a difference of more than 18 times. Nike Korea and McDonald’s Korea, which generate annual domestic sales of 2 trillion won and 1 trillion won, respectively, paid 0 won in corporate tax last year. Profits were reduced by treating money sent to foreign headquarters as an expense.

This does not mean that tax authorities have given up on taxing digital companies. The National Tax Service imposed 500 billion won in corporate tax on Google Korea in 2020, saying that even if Google servers are located overseas, sales such as App Store and in-app payments generated domestically should be considered Google Korea’s. However, Google Korea objected and filed an administrative lawsuit. Netflix Korea also filed an administrative lawsuit against the National Tax Service, saying it would not be able to pay 80 billion won in taxes in 2021.

“I can’t wait for international discussion”… Canada introduces digital tax

Countries in Europe have announced plans to introduce a digital services tax. Yellow is a country that has currently introduced a digital service tax but has announced its intention to abolish it once an international agreement is reached on ‘Pillar 1’. Light blue is a country that proposed the introduction of a digital tax. Dark blue indicates a country implementing a digital service tax. Screen capture of the Tax Foundation, an American tax policy research institute.

The European Union (EU) has promoted the introduction of a ‘digital tax’ to create a legal basis for imposing taxes on global companies. Digital tax is a tax system that allows the country where the profit is made to levy taxes when an IT company makes a profit, regardless of where the server is located. The Organization for Economic Cooperation and Development (OECD) predicted that global tax revenues would increase by more than 4% ($100 billion, 136 trillion won per year) if a digital tax is introduced in 2020.

The EU and the UK have taken the lead in discussing the introduction of a digital tax. France, Italy, Spain, the UK, Austria, India, and Turkuye have introduced their own digital service taxes (DST). The UK imposed a digital service tax of 2% of sales on IT companies earning 500 million pounds (about 890 billion won) annually in 2022. In the first year of introduction of the digital service tax, tax revenue of 360 million pounds (about 640 billion won) was collected. This amount exceeds the total corporate tax paid by global digital companies to the UK that year. The US government responded to countries that introduced digital taxes with the threat of ‘tariff retaliation’. The United States opposes the introduction of a digital tax on the grounds that it is “discrimination against American companies,” such as Google, Meta, and Netflix.

The ‘digital tax war’ between the United States and several countries is at a truce thanks to the mediation of the OECD. The OECD proposed an arbitration plan that prevents any country from introducing a digital tax on its own until a global agreement is reached. Accordingly, the United States, France, Britain, and Spain agreed to a kind of ‘truce agreement’ in 2021. Countries that have introduced digital service taxes have decided to abolish their own digital service tax systems and replace them with a new international agreement (Pillar 1) once a global digital tax agreement is reached by 2024, and the United States has decided to withdraw its threat of retaliatory tariffs. However, Canada has broken away from the ‘truce line’ and will introduce its own digital services tax starting next year, despite the threat of tariff retaliation from the United States. The United States, in opposition to this, began dispute resolution procedures under the Canada-U.S. trade agreement last August.

The introduction of a digital tax is expected to be on the agenda at the G20 summit to be held in Rio de Janeiro, Brazil in November. The digital tax discussed at the OECD and G20 level consists of two axes: Pillar 1 and Pillar 2. Pillar 1 contains provisions granting taxation rights to the country in which a digital company makes profits, regardless of where its headquarters are located. For large companies with annual sales of more than 20 billion euros (approximately 30 trillion won) and profit margins exceeding 10%, a plan is being discussed to pay an amount equivalent to 25% of excess profits as a digital tax to the country where the sales are generated. In addition, discussions are underway to reduce legal disputes between digital companies and tax authorities of each country by simplifying the pricing of transfers to headquarters for marketing and distribution costs. Pillar 2 is the introduction of a ‘global minimum tax’. A corporate tax rate of at least 15% is uniformly applied to the income of multinational companies. The United States agreed to the introduction of a global minimum tax (Pillar 2), but is lukewarm on the introduction of a digital tax (Pillar 1).

Deputy Prime Minister Choi also said at the G20 Finance Ministers’ Meeting last July, “We urge the speedy conclusion of digital tax pillar 1.” However, regarding whether Korea will introduce its own digital service tax, it showed an attitude of ‘international agreement comes first.’ Deputy Prime Minister Choi said at the National Assembly audit on the 11th, “It is better in the national interest to proceed with the digital tax discussion quickly,” but added, “However, since the methodology is discussed in the OECD and G20 Comprehensive Consultative Body, we hope to actively participate and reach an agreement as soon as possible.” .