[Exclusive] Government Plans to Exclude Semiconductors from Digital Taxation Targets

Government Aims to Exclude 'Semiconductors, Cosmetics, Food Products' from Consumer Targeted Projects
Final Agreement Expected in July... "Sharp Conflicts Anticipated Due to Divergent National Positions"

[Asia Economy Reporter Jang Sehee] The government is pushing to exclude semiconductors from the taxable items in the discussions on the introduction of a digital tax by the Group of Twenty (G20). The digital tax grants taxing rights to countries where IT or manufacturing companies earn profits, even without a physical business presence, but the government intends to make an exception for semiconductors, which are a core part of the Korean economy. While the intention is strong to maintain taxing rights over domestic companies, it is also interpreted as the government's will to minimize damage to Korean companies amid the global semiconductor hegemony competition.

According to the Ministry of Economy and Finance on the 14th, the government is focusing on minimizing consumer-targeted companies in ‘Pillar 1’, which proposes corporate tax taxing rights to governments of various countries. A senior government official said, "Since semiconductors have a significant impact on our economy, they are a core industry that must be protected," adding, "In addition, industries such as cosmetics and food products, which have a high profit ratio, are also being prepared to be excluded as much as possible." The Organisation for Economic Co-operation and Development (OECD) created a framework in 2019 for digital tax discussions, including ‘Pillar 1’, which covers not only digital and information technology (IT) companies but also manufacturers, and ‘Pillar 2’, which sets a global minimum tax rate. The G20 is discussing specific measures within this framework. Under the current framework, large companies including Naver, Kakao, and the gaming industry would fall under the scope of taxation.

The government's choice appears to consider the situation where the Korean semiconductor market is also threatened as the United States enters the semiconductor hegemony competition. It is believed that if subject to taxation, investment capacity would decrease, leading to weakened industrial competitiveness.

As countries show movements to minimize damage to their key industries, there are also forecasts that actual agreement will be difficult since decisions are made through negotiations among member countries. Currently, the UK is trying to exclude the financial industry, and Europe is trying to exclude the pharmaceutical industry. It is reported that among G20 member countries, ‘semiconductors’ are considered to be on the borderline of consumer-targeted companies. A government official said, "Excluding semiconductors is the most important for us," adding, "Since the interests of each country are sharply opposed, it remains to be seen whether an actual agreement will be reached."

As a second-best option, the government is also considering an approach that includes only some semiconductor products. For example, individually sold semiconductor products may be included, but if semiconductor parts are inside a computer, it is difficult to consider it as directly provided to consumers. Also, if semiconductor parts account for more than 50% of the product price, it can be regarded as a consumer good; otherwise, it may not be considered a product directly provided to consumers.

However, the government expects that if Pillar 2, another axis of the digital tax discussion, operates, additional domestic tax burdens on companies will be inevitable. Since Korea’s corporate tax rate (including local taxes, up to 27.5%) ranks 9th among OECD countries, the damage from overseas companies leaving is not significant, but companies generating sales in low-tax countries will have to pay additional taxes domestically. Taxes below the minimum tax rate will be additionally collected, increasing tax revenue. A government official said, "Since Pillar 2 logically requires taxing the amount of tax shortfall at the parent company’s location, tax revenue will increase."

Meanwhile, G20 finance ministers plan to come up with solutions for the introduction of digital tax and the global minimum tax on multinational corporations by July.

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