Digital Tax Implementation Accelerates... Samsung and Hyundai Motor's Applicability to Be Outlined in July

by Kim Minyoung

Published 01 Feb.2020 16:44(KST)

[Asia Economy Reporter Kim Min-young] The so-called 'Google tax,' a digital tax, will also be imposed on global companies in the mobile phone and automobile sectors. If the final plan is confirmed by the end of this year, it could become a burden for Korean companies such as Samsung Electronics, LG Electronics, and Hyundai Motor Company. South Korea plans to prepare measures to prevent double taxation based on the criteria for applicable targets to be derived in the future.

According to the Ministry of Economy and Finance on the 1st, the Organisation for Economic Co-operation and Development (OECD) held the 'BEPS Inclusive Framework' steering committee and general meeting in Paris, France, from the 27th to the 30th of last month (local time), with participation from 110 countries, where they agreed on the basic framework and future plans. The BEPS Inclusive Framework is a multilateral consultative body involving 137 countries, including the OECD and the Group of Twenty (G20). The digital tax involves dividing taxation rights among countries.

Two measures were decided at this meeting. The first is to impose a digital tax on a portion of the global profits of multinational corporations above a certain scale. The applicable industries were set as digital service businesses and consumer-targeted businesses.

First, digital service businesses were classified as online platforms such as social media, search, advertising, and intermediaries; content streaming; online games; and cloud computing. Consumer-targeted businesses were defined as computer products, home appliances, mobile phones, clothing, cosmetics, luxury goods, packaged foods, franchises (hotels and restaurants), and automobiles.

The second measure is the introduction of a global minimum tax. This involves taxing global companies' income above a certain level through methods such as income inclusion, shifting taxation rights, excluding deductions for base erosion and profit shifting costs, and excluding benefits from tax treaties.

With manufacturing included in the scope, Korean companies have come under scrutiny. These include Samsung, LG, and Hyundai Motor Company. In Samsung's case, semiconductors are expected not to be applied as 'intermediate goods,' while home appliances, mobile devices, and speakers are likely to be subject to the tax. However, the applicability is expected to become clearer at the meeting scheduled for July. The OECD presented criteria for 'applicable targets,' such as a certain scale of global total revenue, total revenue from targeted businesses, profit margins, the sum of excess profits to be allocated, and confirmation of significant and sustained participation in the market country.

Im Jae-hyun, head of the Tax Policy Bureau at the Ministry of Economy and Finance, said, "Whether domestic companies will be subject to the tax, the total tax revenue, and changes in the tax burden on individual companies will be concluded based on detailed issues to be discussed later." He added, "Technical details are likely to continue to be discussed after the end of the year. We will do our best to secure national interests, including securing tax revenue and minimizing the tax compliance costs for domestic companies."

South Korea established a Digital Response Team within the Tax Policy Bureau of the Ministry of Economy and Finance last year in preparation for the expansion of digital tax targets to global manufacturing companies. In September of the same year, a public-private task force (TF) was also formed, including the National Tax Service, the Korea Institute of Public Finance, and related companies.

The government expects that even though a provisional agreement on the digital tax was reached at this general meeting, it will take 3 to 4 years to complete detailed implementation work such as drafting reports containing the agreement and to actually impose the digital tax. The government plans to focus on minimizing the total tax burden on Korean companies by responding to OECD movements regarding the clarification of taxable companies, the allocation of excess profits, and the introduction of a global minimum tax, including concluding treaties to prevent double taxation.