[Tax Story] The Spring Breeze Harmony of Cultural Hallyu

Baek Jeheum, Lawyer at Kim & Chang

The global atmosphere has turned cold due to the worldwide spread of the novel coronavirus infection (COVID-19). Although spring has come to the human world, the experience of 'social distancing,' which prevents people from feeling each other's warmth, has become routine, making it a case of chunlaebulsachun (春來不似春, spring comes but does not feel like spring). Amid this, the wave of cultural Hallyu (Korean Wave) temporarily helps us forget the chill of COVID-19. In early February, when COVID-19 began to infiltrate Korea, director Bong Joon-ho's film "Parasite" achieved a historic first for Korean cinema by winning four major awards?Best Picture, Best Original Screenplay, Best International Feature Film, and Best Director?at the world's most prestigious Academy Awards. The Best Picture award was the first ever given to a film produced in a non-English language, and the Best Original Screenplay was also the first for an Asian writer, marking an unprecedented achievement. In late February, when confirmed cases surged, BTS's fourth album immediately dominated the world's five major music markets upon release. It topped not only the US Billboard 200 but also the UK Official Charts, Japan's Oricon Charts, as well as charts in France and Germany. This was welcome news that boosted the pride of our people, who had been feeling deflated due to Korea-phobia.

The cultural and artistic literacy of our nation is long-standing. The "Records of the Three Kingdoms" (Samgukji), a Chinese historical text, describes the customs of Goguryeo people as enjoying singing and dancing. The Silla-era relics excavated from Anapji Pond in Gyeongju include a "Juryunggu" (drinking game set) inscribed with phrases such as "Geumseongjakmu (禁聲作舞, dancing without singing or accompaniment)" and "Imuicheongga (任意請歌, freely requesting songs)." The culture of enjoying singing and dancing as leisure activities can be said to be part of the DNA passed down from ancient times in our nation.

Taxes are an inseparable aspect even in the realm of this cultural Hallyu. Typical income from entertainers' performances consists of personal activities such as singing, acting, and dancing, and under domestic tax law, this is classified as personal service income. If the activities are continuous or repetitive, it is considered business income. This income is aggregated into comprehensive income, and if foreign taxes have been paid, they are credited accordingly when Korea taxes the income, making the process straightforward. When foreign entertainers earn performance income in Korea, the payer must withhold the relevant tax as personal service income. However, if entertainers perform overseas as employees of entertainment agencies or if their performances are produced as video content and sold in various forms in overseas markets, relatively complex taxation issues arise.

Regarding entertainers' overseas performance income, the issue has been which country has the right to tax, given the nature of entertainers from specific countries touring other countries for short periods to earn income. Article 17 of the OECD Model Tax Convention generally grants taxing rights to the country where the entertainment or performance activity occurs. Korea also allocates taxing rights with other countries based on this model tax convention when concluding tax treaties. For example, if BTS performs at Wimbledon in the UK, the UK has the taxing rights over that performance income. An interesting related issue is the taxation of so-called "Star Companies." In late 1996, Michael Jackson held a concert in Seoul under the name of a corporation called "Historic Tours." However, the Korea-US tax treaty stipulates that personal services provided by a US corporation cannot be taxed domestically unless there is a permanent establishment in Korea, and it does not provide a special exception for entertainment companies. Since Historic Tours was a US corporation without a branch in Korea, Korea could not exercise taxing rights over the 1.6 billion KRW income Michael Jackson earned. To prevent tax avoidance through entertainment companies like this, the OECD Model Tax Convention includes a special rule allowing taxation in the country where the activity is performed, but the US has yet to incorporate such provisions in its tax treaties with other countries. This is why many entertainment companies are still established with headquarters in the US today.

Recently, it has become difficult to determine the "place" where personal services are supplied. If BTS performs directly at Wimbledon in London, there is no doubt that the service is performed in the UK. However, if BTS performs in Seoul and the performance is broadcast to the UK, the determination is not straightforward. Similarly, if the Vienna Philharmonic Orchestra performs in Korea's Seoul Arts Center, the place of performance is Korea, but if they perform at Carnegie Hall in New York and the live performance is screened in Korean movie theaters via live broadcast, the issue becomes more complicated. In an actual case, a US citizen established a broadcasting station in Mexico to broadcast to US residents and travelers near the border, and after a long dispute, the US Federal Court of Appeals ruled that the place of service was Mexico.

Various tax issues also arise in the film industry where video content is traded. A representative issue is the royalty tariff on film imports. Video content imported in film form (HS 3706) is subject to ad valorem tariffs based on film length, and royalties paid later based on import amounts for film copyrights constitute the customs value for tariff purposes. In contrast, film copyrights that are intangible do not incur customs duties. However, nowadays, films are rarely imported in physical film form; instead, "online transactions" where software is delivered electronically predominate, creating potential tax gaps. Although tariffs on online transactions have been frozen since the 1998 WTO Ministerial Declaration, changes are possible considering the global trend toward digital taxation. There was also a Supreme Court precedent ruling that advertising expenses borne by domestic film distributors are not included in the customs value of imported goods under customs law.

The monumental achievements that attracted worldwide attention were possible thanks to the silent dedication of cultural and artistic professionals despite difficult circumstances. To promote international cultural and artistic exchange, domestic tax systems must be aligned with global standards, and support measures for the cultural and artistic industries should be sought. Especially due to the COVID-19 crisis, many cultural and artistic organizations have been hit hard, making tax support urgently necessary. Proposals such as including cultural and artistic activity expenses within the scope of deductible welfare expenses for companies, including cultural and artistic facilities in welfare facilities for employees, and including education and training expenses using culture and arts as tax credit targets are gaining attention. Furthermore, applying special tax deductions for reserves for the primary purpose of professional arts corporations and organizations, exempting cultural and artistic companies from acquisition tax surcharges, and including them in knowledge-based industries are also worth considering. Expanding tax credit benefits for donations to cultural and artistic organizations by individuals or corporations can also be explored. Tax support and reform in the cultural and artistic fields will become a dual driving force leading cultural Hallyu and provide future growth engines in the era of the Fourth Industrial Revolution. We hope to overcome the chill of COVID-19 with the spring breeze of cultural Hallyu and successfully transplant the Hallyu DNA overseas.

Baek Jeheum, Attorney at Kim & Chang

This content was produced with the assistance of AI translation services.