The dramatic growth in the digitalisation of the economy, as well as increasing global cries for special laws to tax multinational information and communications technology (ICT) corporations, have also generated a keen interest in Korea.

There is a perception that global ICT corporations generate substantial revenues in Korea but do not pay tax, which has negatively influenced public opinion and led to attempts to level the playing field.

This article provides a brief overview of the public discussions to date on the taxation of ICT companies in Korea, the various players involved and their current status.

Revised bill drafted by Democratic Party

In July of 2017 it was reported that the Democratic (Minjoo) Party, to which President Jae In Moon belongs, was drafting revisions to the Corporate Tax Act (Revised Bill). These would include provisions to treat certain ICT corporations as having a digital permanent establishment (PE) based on business transactions in Korea, even if lacking a fixed physical presence. The Revised Bill was prepared referencing a report issued by Jung-sang Ahn, a chief advisor to the Minjoo Party’s Broadcasting and Communication Policy Committee (August 2016).

The report focused on the necessity of establishing a legal basis to treat ICT corporations as having a Korean PE (i.e., digital presence) beyond the current definition of a PE, so as to attribute additional revenue to Korea and broaden the tax base. The report specifically addressed profit generated from the sale of applications, content and digital services to Korean customers, as well as revenue generated from online advertising to Korean consumers.

The Revised Bill ultimately was not included in the 2017 proposed amendments to the Corporate Tax Act.

Pressure on MOSF during October 2017 National Assembly Audit

Critical attention to the taxation of ICT companies continued throughout 2017. The issue was raised again in October during the National Assembly Audit (a series of annual hearings conducted by the National Assembly on the various Korean government ministries and agencies).

During the National Assembly Audit, representatives of the Ministry of Strategy and Finance (MOSF) – the ministry responsible for tax and fiscal affairs – were sharply criticised for the significant revenues derived in Korea by ICT companies, which largely escaped taxation under existing Korean law.

A representative of the Korea Internet & Security Agency (KISA) was also closely questioned on the taxation of ICT companies and multinational corporations (MNC) as a whole and urged to compel MNC with internet or e-commerce businesses to maintain their servers in Korea (following China’s recent and ongoing restrictions on VPNs and use of servers outside of China).

The National Assembly members made explicit reference to recent legislation in the UK (i.e., the UK diverted profits tax or DPT) and Australia (i.e., the Australian DPT and the Multinational Anti-avoidance Law or MAAL) as well as new or anticipated rules in Italy and Indonesia.

Discussions in Korean academia

Korean academia and public policy organisations have also been deeply involved in discussions on the taxation of ICT companies and the policy implications of implementing various tax proposals.

In a December 2017 conference held by the Korean Association of Public Finance, members of the Korea Tax Research Forum, International Fiscal Association Korea (IFA Korea), Tax Law Association and Korea Academic Society of Taxation discussed the pros and cons of adopting an Equalization Levy in Korea. These discussions included debate on the following key areas:

  1. difficulties in measuring the assets and income of companies operating in the digital economy;
  2. ambiguity associated with classifying the digital economy;
  3. the increased burden of an Equalization Levy on consumers; and
  4. measures to ensure the equal taxation of residents and non-residents and prevent double taxation.

The risks and benefits of proposed legislation aimed at taxing ICT companies were also fully explored during IFA Korea’s Spring Scholastic Conference held in April of 2018, which include a seminar entitled ‘Taxation of the Digital Economy’.

Common themes included the acknowledgement of the changing business environment caused by rapid changes in technology, and different models arising therefrom, as well as the need to review current international taxation principles and standards to determine whether they are sufficient to address these changes. Each presenter also emphasised the need to implement changes to the current rules based on international consensus built around principled and fair rationales that are not disruptive to innovation.

The moderator of the conference framed the discussions generally with the following points:

  1. the impossibility of ring-fencing the ‘digital economy’;
  2. the potential to easily expand rationales for taxing the digital economy to the broader economy, (e.g., the user value of the digital economy is in essence the value of a market in the traditional economy)
  3. the evolving nature of the underlying issue, which was originally to address tax avoidance but is shifting to a discussion about the allocation of taxation rights between the source and residence countries; and
  4. the changing landscape wrought by BEPS and the 2017 US tax reform.

One recurring question raised was whether it was realistic to expect an international consensus by 2020 under the OECD auspices, given the wide disagreement on the substantive issues amongst the countries. Another issue, which is frequently pointed out in the Korean media, was also raised: the perceived unfairness to, and discrimination against, Korean digital companies that are subject to full taxation on all their revenues while foreign MNCs pay little (or no) tax in Korea.

The moderator pointed out that the Korean companies were subject to taxation on full income in Korea by virtue of the fact that they are Korean companies, while foreign MNCs are subject to full taxation in their home countries. He acknowledged that foreign MNCs may have used intermediaries in low-tax jurisdictions to avoid taxation in the past, but noted that the landscape is changing due to BEPS and other general tax developments.

Position of MOSF since April of 2018

On 16 March 2018, the OECD released its interim report, Tax Challenges Arising from Digitalisation. In addition to recognising that the changes in technology and the resultant business models may require new approaches to the taxation of some aspects of the digitalised economy, the report stressed, once again, the necessity for a unified and common approach to addressing these challenges.

The MOSF, throughout public questioning and debate, has kept a measured and balanced view, emphasising that any proposed legislation should align with ongoing OECD work and any changing standards in the international community. The MOSF seems to recognise that the Korean economy includes both multinational and domestic ICT companies, the latter of which could be negatively impacted should countries unilaterally implement tax laws to address a global issue. Accordingly, the MOSF has been very deliberate and careful in its approach to calls for a specialised tax on multinational ICT companies.

The MOSF recently officially denied allegations from the media that it is preparing to push forward a so-called ‘Digital Tax’, stating that it was instead solely focused on gathering opinions from the IT industry regarding digital taxation and researching global policy trends.

Given the restraint urged by the OECD against unilateral action, and the lack of consensus amongst EU members with regard to proposals for the taxation of the digital economy, it appears unlikely that the MOSF will propose a major tax overhaul regarding the digital economy in 2018.

There is, however, a possibility that a bill may be introduced by members of the National Assembly, with or without the endorsement of the MOSF. Further, with the annual National Assembly Audit scheduled for the fall of 2018, there may be continued pressure on the MOSF to act unilaterally.