FKCCI Suggests to OECD "Digital Tax Introduction Should Limit Tax Rates and Industries"

[Asia Economy Reporter Suyeon Woo] Amid discussions on the introduction of a global digital tax centered on the OECD, there have been calls from the Korean business community to impose restrictions on the scope of application, industries, and minimum tax rates.

On the 9th, the Federation of Korean Industries (FKI) announced that it delivered a proposal emphasizing minimizing the scope of digital tax subjects, limited application of the global minimum tax, and granting a grace period of more than three years before the system's implementation to Mathias Cormann, Secretary-General of the OECD, and Charles Rick Johnston, Chairman of BIAC (OECD Business and Industry Advisory Committee).

Recently, as tax avoidance issues by global digital companies such as Google and Facebook have emerged, the need to establish new tax standards centered on the OECD is being discussed. Until now, taxation on profits was determined based on the presence of a physical business establishment, but with the recent advancement of digital technology, the number of digital service companies operating without a physical place of business has increased, raising concerns about blind spots in the existing tax system.

Photo by Yonhap News, Reuters

The main points can be summarized as ▲market jurisdiction taxation, which allocates a portion of multinational corporations' global profits according to each country's sales and taxes them in that country, and ▲global minimum tax, which taxes the shortfall in the effective corporate tax rate paid by subsidiaries overseas compared to the minimum tax rate in the parent company's country. Recently, the OECD has added consumer-targeted industries such as automobiles, mobile phones, home appliances, and franchises (hotels and restaurants) to the scope of strengthened market jurisdiction taxation, and there have been calls, mainly from the United States, to expand the scope to all industries.

In response, the FKI proposed limiting the application of the digital tax to 'digital service companies' with sales exceeding $20 billion. The FKI expressed concern that if the digital tax is imposed on all industries with sales over $20 billion as the U.S. suggests, 4.7 trillion won, equivalent to 8.5% of Korea's annual domestic corporate tax revenue, would fall under the influence of the digital tax, and some of this could be lost overseas.

Furthermore, the FKI argued that indiscriminate expansion of the tax base deviates from the original purpose of the system, which is to prevent tax avoidance by global digital companies, and that including 'manufacturing,' which has a low possibility of tax avoidance, in the scope of strengthened taxation violates the principle of proportionality.

Regarding the global minimum tax rate, the FKI pointed out that it restricts healthy tax competition among countries to attract corporate investment, which contradicts the principles of a free market economy. They suggested that the minimum tax rate should be set at 12.5% or lower, as proposed by the OECD.

Finally, the FKI proposed granting a grace period and establishing a dispute resolution body to address side effects arising from the introduction of the new tax system. Since the introduction of the digital tax will cause a major change in the existing tax system and the detailed taxation criteria are complex, a sufficient grace period of at least three years should be provided to minimize initial confusion and allow for preparatory work.

Kwon Tae-shin, Vice Chairman of the FKI, emphasized, "Excessively expanding or raising the scope and rates of the digital tax not only goes against the purpose of the system but also risks stifling normal corporate activities," adding, "Normal corporate activities and tax avoidance behaviors must be clearly distinguished."

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