Digital Tax Agreement in October... "Export Companies with Annual Sales Over 1 Trillion Won Also Subject to Taxation"

Minimum Tax Rate of 15% to Apply to Companies with Annual Sales Over 1 Trillion Won
Includes Majority of Domestic Firms
Detailed Issues Such as Excess Profit Distribution Rate and Minimum Tax Rate to Be Discussed

[Asia Economy Reporter Hwang Yoon-joo] It has been argued that if the OECD digital tax agreement is finally ratified at the G20 Summit this October, many of our export companies, in addition to Samsung Electronics and SK Hynix, will be affected.

The Korea Chamber of Commerce and Industry, together with the Korea International Trade Association, held an online live broadcast on the 6th titled "Explanation Session on the Key Contents of the OECD Digital Tax Agreement and Its Impact on Companies." This seminar was organized to forecast the impact on our companies ahead of the OECD digital tax agreement and to discuss countermeasures.

The digital tax is a tax system that requires global companies to pay taxes where sales occur, even if they do not have a permanent establishment abroad. Since the taxable entities include not only IT companies but also manufacturing companies, there are concerns that Korean export companies will be affected.

Lee Dong-hoon, a US accountant at Yulchon LLC, presented on "The Impact of Digital Tax Introduction on Domestic Companies," explaining, "Pillar 1, which involves the allocation of taxing rights, targets companies with sales of 27 trillion won and a pre-tax profit margin of over 10%, so only two domestic companies meet this criterion. However, Pillar 2, which introduces a minimum tax rate of 15%, has a lower sales threshold of 'over 1 trillion won,' so many domestic companies are included."

Additional Discussions Planned Until Final Agreement at the End of October... Detailed Issues Such as Excess Profit Allocation Rate and Minimum Tax Rate Level

Kim Tae-jung, an official from the Ministry of Economy and Finance, explained the OECD digital tax discussion process and the details of the digital tax. In addition to the basic concepts of Pillar 1 (allocation of taxing rights to countries where sales occur) and Pillar 2 (introduction of a minimum tax rate of 15% or more), which have been publicized through the media, he introduced the overall system in an easy-to-understand manner, including the tax nexus criteria (allocation of taxing rights to countries with sales exceeding 1 million euros) and the total allocation amount (20-30% of the pre-tax profit exceeding 10%).

Until the final agreement in October, major issues remain such as ▲ the proportion of taxing rights allocated to other countries (currently planned to be decided within 20-30% of excess profits) ▲ the sales attribution criteria for intermediate goods, where it is difficult to determine the final consumption market such as semiconductors ▲ the appropriate minimum tax rate level (planned to be decided at a minimum of 15% or more) ▲ the exclusion ratio of wages and tangible assets from taxable income (planned to be decided at 7.5% or more for the first five years, then 5% or more thereafter).

Kim said, "With the introduction of Pillar 2, competition among countries to lower corporate tax rates will decrease, and the importance of the business environment beyond taxation will increase, so companies must consider this when establishing overseas expansion strategies. Since the digital tax differs significantly from the basic structure of the existing international tax system, the government will also make every effort to ensure reasonable institutionalization during the domestic legislative process after the final plan is confirmed."

He also recommended that companies with overseas subsidiaries and sales of over 1 trillion won check in advance how much digital tax they will be liable for.

Lee Kyung-geun, a tax attorney at Yulchon LLC, provided specific examples to help companies calculate the digital tax themselves, explaining, "If a Korean parent company owns a subsidiary in a low-tax country, additional tax under the minimum tax rate will be derived, and the parent company must make additional payments to the Korean National Tax Service."

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