Digital Tax Delayed by One Year to 2024... Disagreements Over Detailed Plans (Update)

[Asia Economy Sejong=Reporter Kwon Haeyoung] The introduction of the 'digital tax,' which requires global companies to pay taxes in the countries where actual sales occur, will be postponed by one year.

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 matter, will be announced at the Group of Twenty (G20) Finance Ministers' meeting held in Indonesia on the 15th-16th. The G20-OECD Inclusive Framework (IF) will conduct a written public consultation until the 19th of next month.

IF member countries have decided to delay the implementation of Pillar 1 by one year, from the originally agreed 2023 to 2024. The members had planned to prepare model rules for Pillar 1 and promote related legislation in the first half of this year, but due to unresolved disagreements on some issues, the schedule was postponed. Accordingly, the members will first prepare a draft of the model rules, gather additional opinions, and finalize the plan by the end of October. Subsequently, they aim to conclude a multilateral agreement for implementation in the first half of next year and enforce Pillar 1 starting in 2024.

The digital tax, scheduled to be introduced next year, will be imposed on global companies with consolidated revenue exceeding 20 billion euros (approximately 2.7 trillion KRW) and a profit margin exceeding 10%, if they achieve sales of over 1 million euros in a single country (or over 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 in at least two 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 revenue 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 20 billion euros revenue and 10% profit margin criteria.

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 refined from crude oil, to apply tax exemptions.

The taxable income subject to taxation is 25% of the excess profit, which is the adjusted pre-tax profit of the global company exceeding the routine profit margin (10% of sales). This is allocated proportionally based on the sales attributed to each country. In this process, the adjusted pre-tax profit is calculated by adjusting the accounting net profit or loss recorded in the consolidated financial statements for tax adjustments and loss carryforwards.

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 in countries with a high residual profit margin (profit margin relative to asset depreciation and wages).

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