Korea’s Tax Reality: Every Won You Earn, Every Won You Pay
Published: 20 Sep. 2024, 14:06
Apple, which earned 7.3 trillion won ($5.5 billion) from its operation in Korea in 2022, paid a corporate income tax of 50.2 billion won last year. Sony, with a revenue of 1.6 trillion won in Korea in the same year, returned 0.4 percent of the sum or 6.7 trillion won in taxes. Mercedes-Benz Korea, whose earnings amounted to 7.5 trillion won, coughed up 1.2 percent of its revenue, or 91.1 billion won, in tax, and BMW dished out 1.1 percent, or 66.2 billion won out of its sales of 5.7 trillion won.
Korean companies earning more than 5 trillion won last year paid their income tax of 263.9 billion won on average last year. The average of foreign entities’ stopped at 14.1 billion won. Given the yawning gap, Korea is more like a tax haven for multinational companies.
The Organization for Economic Cooperation and Development (OECD) devised the Global Anti-base Erosion Model Rules to ensure large multinational enterprises pay a minimum level of tax on their income in each jurisdiction of their operations. Multinational enterprises earning more than 1 trillion won must calculate their income and taxes on a jurisdictional basis, and if it results in a tax rate lower than the minimum effective tax rate of 15 percent, their headquarters must return the differences. The OECD-guided tax agreement took effect in Korea from this year.
The minimum tax rate has been set to offset the abuses and side effects from competitive tax cuts to draw foreign investments. The Wall Street Journal pointed out that governments were lowering the effective tax rate through tax credits and subsidies by exploiting the loopholes in the minimum tax rate system.
A balanced tax policy on incomes according to domestic tax law while appealing to foreign capital to add jobs and revenues in Korea is important. The NTS plans to levy compliance deposits to ensure foreign companies comply with tax processing responsibilities. Foreign companies are required to update the contact and information for tax queries, but their submission rate stopped at 45 percent last year.
Cheap tax is not the sole appeal to investments by multinationals. The market condition, location, supply chain and regulations also affect their decisions. Amending the labor rules, including the rigid 52-hour workweek, and deregulations on factory sites can help draw foreign investments.
It is right that global companies should pay taxes on the amount they earn domestically.
Foreign companies with sales of 5 trillion won or more paid 14.1 billion won in corporate tax last year
We need to find a balance between protecting tax sovereignty and promoting foreign investment.
Apple, which posted sales of 7.3 trillion won in Korea in 2022, paid 50.2 billion won in corporate tax in Korea last year. This is 0.7% of its sales. During the same period, Sony, which posted sales of 1.6 trillion won in Korea, paid 6.7 billion won (0.4%). Benz Korea, which posted sales of 7.5 trillion won in Korea, paid 91.1 billion won (1.2%) in taxes, and BMW, which posted sales of 5.7 trillion won, paid 66.2 billion won (1.1%) in taxes. McDonald’s Korea, which posted sales of 990 billion won, and Nike Korea, which posted sales of 2 trillion won, did not pay a single penny in corporate tax. This is what our newspaper reported today after analyzing data submitted to the National Tax Service by the office of Rep. Cheon Ha-ram of the New Reform Party. As of last year, among companies that paid taxes, the average corporate tax burden for domestic corporations with sales of over 5 trillion won was 263.9 billion won, but for foreign corporations it was only 14.1 billion won. This is truly a ‘tax-saving feat.’ At this point, it is suspected that this is not just rational tax avoidance, but active tax evasion.
Excessive tax avoidance or active tax evasion by multinational corporations is not something that has just happened yesterday or today, and it is not something that only happens in Korea. They have reduced domestic profits in various ways, such as raising the cost of sales, which is the import price from overseas, overstating royalties from the headquarters, and paying high dividends to the headquarters. The reason that the Organisation for Economic Co-operation and Development (OECD) took the lead in creating the global minimum tax, an agreement to prevent transnational tax evasion, was to prevent excessive tax avoidance by multinational corporations. The global minimum tax requires the parent company to pay the difference in taxes in its home country if the overseas subsidiary of a multinational corporation with sales of 1 trillion won or more is subject to a tax rate lower than the minimum tax of 15%. Korea has been implementing it since this year.
The global minimum tax is intended to prevent the negative effects of tax competition, where each country competitively lowers its corporate tax rate to attract foreign investment, but it remains to be seen whether it will work as originally intended. The Wall Street Journal (WSJ) reported that each country is using loopholes in the global minimum tax to lower its effective tax rate through tax credits or cash subsidies.
Ultimately, the important thing is a balanced policy that maintains the advantages of foreign investment that creates jobs and revives the domestic economy, while also establishing our tax sovereignty in accordance with the tax principle that taxes are levied where there is income. The recent decision by the National Tax Service to introduce a performance penalty to prevent investigation obstruction such as refusal to submit documents by multinational companies is late, but it is right. The tax authorities have made it mandatory for foreign companies to submit a statement of their liaison offices in order to manage their tax sources, but the submission rate last year was only 45%.
Low taxes are important for multinational companies to decide where to invest, but that is not all. Market size, location costs, good partners, and reasonable regulations also have an impact. Creating a business-friendly environment through labor reforms such as the 52-hour workweek and location regulations will also help attract foreign investment.