International Tax System Reform Imminent... Domestic Companies Face Increased Corporate Tax Burden

3-Day Hankyung Research Institute Corporate Tax Reform Global Trends and Response Strategies Seminar

[Asia Economy Reporter Su-yeon Woo] Concerns are emerging that the tax burden on domestic companies could increase due to the ongoing discussions on the reform of the global corporate tax system led by the United States and the Organisation for Economic Co-operation and Development (OECD). The business community is also calling for efforts to persuade the international community to minimize the scope of targeted industries and the minimum tax rate.

On the 3rd, the Korea Economic Research Institute held a seminar titled "Trends in Global Discussions on Corporate Tax Reform and Response Measures" at the Federation of Korean Industries building. This seminar was organized to review the current status of international tax system reforms amid the recent trend of strengthening global corporate taxation led by advanced countries and to explore response strategies for domestic companies.

Data provided by Hankyung Research Institute

Recently, the OECD has been considering the introduction of a "digital tax (Pillar 1)" that allows the market jurisdiction where sales occur to tax global corporations. This is due to the increase in digital service companies that generate overseas sales but pay corporate tax in the country where their headquarters are located. Initially limited to digital service companies, the scope of taxation is showing signs of expanding to consumer goods companies such as electronics, and the Biden administration's push for digital tax on all industries could significantly broaden the applicable targets.

At the seminar, Professor Dong-geon Lee of Hanbat University’s Department of Accounting, who presented the topic, predicted that the introduction of the OECD-proposed "digital tax" and "global minimum tax" would greatly increase the costs of corporate tax filing and collection, as well as the number of tax disputes. Professor Lee said, "There are too many detailed criteria requiring international agreement, such as the targeted industries, company standards (revenue), and normal profit margins," adding, "We expect many difficulties during the agreement process."

He continued, "Our government needs to make diplomatic efforts to minimize the targeted industries and ensure that our key industries such as automobiles and electronics are not included in the tax base."

Additionally, the "global minimum tax (Pillar 2)" being discussed alongside the digital tax sets a worldwide minimum corporate tax rate, and if the corporate tax paid by foreign subsidiaries falls below this minimum, the difference is paid to the country where the headquarters is located. Initially, the OECD was likely to set the global minimum tax rate at 12.5%, but the Biden administration recently proposed raising it to 21.0%.

Regarding this, Professor Lee stated, "The benefits of increased tax revenue are likely to be concentrated in advanced countries (high-tax countries), which may provoke opposition from some developing countries," and argued, "Since the minimum tax rate is directly linked to corporate tax burdens, the government should raise its voice to ensure it is set below an appropriate level."

Partner Won-yeop Jeon of Samil Accounting Corporation, who presented on the impact and response measures to the global corporate tax reform, advised that since discussions at the OECD are centered on advanced countries, Korea should consider cooperating with developing countries that share common interests. Partner Jeon said, "If the 21% global minimum tax proposed by the Biden administration is implemented, countries will no longer have incentives to provide tax benefits for corporate investments," diagnosing that "the financial efficiency of overseas-invested companies will inevitably decline."

He added, "Overseas-invested companies need to have the ability to negotiate with local governments on other investment incentives such as infrastructure support and subsidies beyond corporate tax," emphasizing, "They also need to increase flexibility in overseas business investment strategies and transaction structures."

Im Dong-won, a research fellow at the Korea Economic Research Institute who participated in the discussion, pointed out, "About 5 trillion won of corporate tax paid by the top five domestic companies to the government last year is related to overseas sales, which is an area potentially affected by the global minimum tax, meaning there could be tax revenue losses."

Another discussion panelist, Professor Moon-sung Oh of Hanyang Women’s University, emphasized, "The original OECD discussion on strengthening the taxing rights of market jurisdictions was targeted at digital service companies without physical establishments," and stressed, "It is unreasonable to unilaterally expand the scope of applicable industries without considering the differences between digital service companies and general manufacturing."

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