Google tax in doubt, but audits are possibility

Tax authorities are looking closely at global IT companies and will audit them if evasion is suspected, but they are doubtful about imposing a so-called Google tax as a levy of that sort could lead to unintended consequences and harm local businesses.

“Companies like Naver and Baedal Minjok, which have huge revenue, could be taxed on top of the existing corporate tax,” said Kim Jung-hong, head of the international tax division, Ministry of Economy and Finance during a press briefing Thursday.

“In the case of the European Union (EU), it does not have many of its own IT companies that have huge revenues, so even if they adopt the digital services tax, there wouldn’t be concern of double taxation,” he added.

Kim said World Trade Organization regulations prevent discrimination. As such, once the government adopts the digital services tax, the same tax has to be applied equally on Korean IT companies.

“There’s a need to be cautious in reviewing the adoption of the digital services tax, and comprehensive factors have to be considered, including the impact on the local industries as well as the effect on our taxation.”

Kim added that taxation targeting foreign IT companies, which are mostly US based, could start a trade war.

Calls are on the rise for the Korean government to take a more aggressive approach to taxing multinational IT companies, especially since Apple earlier this month reached a settlement with France to pay 500 million euro ($571 million) of back taxes. Last year, the company agreed to pay Britain ￡136 million ($175 million) in back taxes.

EU states are currently in discussion about adopting a digital services tax - dubbed the Google tax - whereby multinational IT companies are taxed 3 percent on total revenue. Separate from the EU’s efforts, Britain and France are working on similar taxes.

Countries allege that global IT companies, such as Google, are shifting profits or royalties to jurisdictions that have low or zero tax rates.

“The situation for us is different,” said the Finance Ministry’s Kim in response to criticism that the Korean government has been less aggressive. He said it is because of a difference in tax structures.

“In Europe, the tax audit comes in strong and the taxation conditions are adjusted, but in our case we have a system where taxation requirements are first stipulated by law,” Kim said. “And taxation based on revenue goes against our corporate taxation principle that taxes on income.”

He added the taxes could just be shifted by the IT companies to consumers. Kim said one option is to adopt a penalty system.

“It is a disciplinary penalty tax where 5 percent is charged when a company is found to have evaded tax on their earnings,” Kim said. “

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]