Government: "Digital Tax Introduction is Revenue Neutral"…Business Community Expresses Concerns Over Impact on Corporate Activities

Samsung Electronics, SK Hynix Likely Included... Uncertainty Over Application to Automotive Companies
Ministry of Economy and Finance: "Double Taxation Adjustment Procedures Established... Minimal Impact on Domestic Companies and Tax Revenue"
Corporate Tax Attributed to Domestic Jurisdiction Expected to Increase for Global Companies like Apple and Google

[Asia Economy Reporters Kim Hyunjung (Sejong), Kim Heungsun] The South Korean government expects the impact of the introduction of digital tax and global minimum tax, as announced under the OECD’s ‘Digital Tax International Framework IF Provisional Agreement,’ on domestic tax revenue to be limited. Among domestic companies, only Samsung Electronics and SK Hynix are likely to be subject to the digital tax, but since the tax rate and allocation criteria have not yet been finalized, it is difficult to accurately estimate the tax revenue effect. The final agreement is expected to be reached by the G20 summit in October, following the G20 Finance Ministers’ meeting scheduled for next week. Meanwhile, the business community has expressed concerns that the provisional agreement could hinder free corporate activities.

The discussion expected to have the greatest impact on domestic tax revenue among the provisional agreement contents is ‘Pillar 1,’ which allocates taxing rights to the country where sales occur. The agreement allows taxation of foreign companies without a physical presence, setting the threshold at annual sales of 27 trillion KRW (approximately 20 billion euros) and a profit margin of over 10%. This raises the possibility that corporate taxes of domestic companies with a high proportion of overseas sales will be allocated abroad.

◆ Samsung Electronics’ Corporate Tax Allocated Abroad... Impact Neutral = Globally, IF expects about 100 companies to be subject to taxation. Domestically, Samsung Electronics, with consolidated annual sales around 200 trillion KRW, and SK Hynix, with about 30 trillion KRW, are the main candidates. Last year, Samsung Electronics paid 4.8 trillion KRW and SK Hynix 1.4 trillion KRW in corporate taxes domestically. Jeong Seonghoon, Director of Income and Corporate Tax Policy at the Ministry of Economy and Finance, said, "Samsung Electronics will meet the sales threshold, and considering the characteristics of the home appliance, mobile phone, and semiconductor sectors, the profit margin will exceed 10%. Hynix is also close to the criteria, but the actual business conditions and global economic situation at the time of implementation must be considered." He added, "There are other large domestic multinational corporations in the automotive and heavy industries sectors, but their applicability is uncertain."

Regarding the impact of Pillar 1 on domestic tax revenue, the government emphasizes ‘neutrality.’ While corporate taxes of a few domestic companies may be allocated abroad, and corporate taxes of digital companies like Apple and Google may be attributed domestically, the lack of finalized tax rates makes estimation difficult. Director Jeong stated, "The system design involves advanced countries with strong industrial bases, including South Korea, allocating some taxing rights to developing countries with large market sizes. A separate double taxation adjustment procedure is established, so the corporate tax burden will be neutral compared to before the introduction, and the impact on corporate competitiveness will be minimal." He added, "However, it is difficult to precisely estimate whether the overall effect will be positive or negative."

Regarding the introduction of the global minimum tax (‘Pillar 2’) with a minimum rate of 15% or more, considering the domestic corporate tax rate (maximum 25%), the impact is expected to be limited, though tax revenue is anticipated to increase initially. Director Jeong explained, "With the minimum tax, effective tax rates in various countries will change, establishing a fair global market and tax economic system. Accordingly, domestic tax revenue will increase initially, but the direct effect may somewhat diminish later." He also forecasted, "Competition to lower corporate tax rates between countries will decrease, and the importance of other business environment factors will increase, which is positive for attracting global companies to South Korea."

◆ Business Community: "Virtually All Industries Targeted... Concerns Over Hindrance to Corporate Activities" = The business community views the provisional agreement’s digital tax scope as effectively covering all industries, raising concerns about potential suppression of normal corporate activities. Choo Kwangho, Director of Economic Policy at the Korea Economic Research Institute under the Federation of Korean Industries, said, "Strengthening the taxing rights of the market jurisdiction aims to prevent tax avoidance by digital service companies, but the proposed agreement effectively targets all industries. This could suppress legitimate corporate activities unrelated to tax avoidance." He added, "The global minimum tax also restricts healthy tax competition between countries and may hinder free investment activities by companies. It should be used restrictively as a supplementary measure to prevent tax avoidance."

A business community official explained, "Since it is not double taxation, business operations will not be disrupted, but companies expanding overseas will carefully evaluate incentives, tax benefits, and infrastructure support in countries where they pay digital tax to sales jurisdictions and choose locations offering the most benefits." A semiconductor industry official said, "It is still at the draft stage within the framework, and there is time before full implementation, so it is difficult to predict or comment on specific impacts. Since tax credits considering double taxation are available, the impact is expected to be limited."

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