Global Companies' 'Digital Tax' Excludes LNG and LPG Sales Businesses

Progress Update on 'Pillar 1' Presented at G20 Finance Ministers Meeting on 15-16

[Asia Economy Sejong=Reporter Kwon Haeyoung] Regarding the introduction of the 'digital tax,' which requires global companies to pay taxes in the countries where actual sales occur, countries have agreed to exclude profits from sales activities of processed products that have undergone primary processing after extraction, such as liquefied natural gas (LNG), liquefied petroleum gas (LPG), and diesel, in addition to simple mining operations, from the scope of taxation.

According to the Ministry of Economy and Finance on the 12th, a report containing the progress of Pillar 1 of the digital tax, including this content, will be announced at the G20 Finance Ministers' Meeting to be held in Indonesia on the 15th-16th. The G20 and the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework (IF) will conduct a written public consultation until the 19th of next month.

The digital tax, scheduled to be introduced in 2023, will be imposed on global companies with consolidated sales exceeding 20 billion euros (approximately 2.7 trillion KRW) and a profit margin exceeding 10%, if they achieve sales of more than 1 million euros in a single country (or more than 250,000 euros in countries with GDP under 40 billion euros). The IF decided that if these requirements are not met in the previous two years, the digital tax will be imposed if the company meets the criteria for at least two years out of the previous four years or if the average pre-tax profit margin over the last five years (including the current year) exceeds 10%. If the sales threshold is met but the profit margin is below 10%, the digital tax will be imposed on specific disclosed segments of the group that meet the sales of 20 billion euros and profit margin of 10%.

However, regulated financial sectors such as mining, deposits, securities brokerage, insurance, and asset management are excluded. In particular, the scope of mining has been expanded to include primary processed products after extraction, such as LNG, LPG, and diesel, to apply tax exemptions.

The taxable income is 25% of the excess profit exceeding the normal profit margin (10% of sales) from the adjusted pre-tax profit of global companies. This is allocated proportionally according to the sales attribution ratio by country. In this process, the adjusted pre-tax profit is calculated by tax adjustments and loss deductions from the accounting net profit or loss recorded in the consolidated financial statements.

Countries that already tax the excess profits of global companies will be exempted or reduced from the Pillar 1 country-specific taxable income allocation. If profits are high in a specific country, that country will bear the burden of eliminating double taxation mainly for countries with a high residual profit margin (profit margin relative to asset depreciation plus wages).

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