Korea agrees to the ‘Google Tax’

The Korean government will adopt the so-called Google Tax next year to prevent multinational IT businesses from evading taxes, the Ministry of Strategy and Finance said on Wednesday.

Ninety-four countries around the world are preparing to adopt the new rules, also known as the Base Erosion & Profit Shifting (BEPS) regulation.

The announcement comes after the leaders of the Group of 20 agreed on the need to take action against tax evasion on Monday in Antalya, Turkey.

The BEPS aims to punish those who evade taxes by abusing different tax rules among countries. Global IT businesses such as Google, Amazon, Apple and Facebook have been criticized for shifting profits earned in countries with higher tax rates to countries with lower tax rates.

According to the Organization for Economic Development and Cooperation (OECD), the total losses triggered by such tax evasion acts amount to between $100 billion and $240 billion annually across the globe, which accounts for 4 to 10 percent of the total expected corporate income tax revenue.

The OECD has published a final version of the BEPS report in October.

As the global economy is going through an unexpectedly prolonged slowdown, each government is searching for new sources of revenue, especially targeting business moguls suspected of tax evasion.

In Korea, 4,752 out of 9,532 foreign companies didn’t pay their corporate income taxes in 2013, according to the ministry data.

Google has been evading the taxes estimated at 1.5 trillion won ($1.3 billion), earned from selling smartphone applications in the country, by arguing that its server is based in Ireland.

“As technology advances, it has become easier for IT companies to evade taxes,” said a former high-ranking official who oversaw taxation policies at the Finance Ministry. “Borders mean nothing to them, as they’ve become able to hide their assets here and there to evade taxes.

“It is difficult for governments to know the profit structures of foreign companies since there is no regulation or duty to report or audit.”

The Finance Ministry is planning to comply with four minimum standards of the final BEPS report approved by the G-20, which are mandatory for all 94 countries that decided to adopt the regulation.

The four minimum standards are to monitor treaty shopping, resolve disputes, apply measures according to harmful tax practices and implement country-by-country reporting requirements.

Treaty shopping has been a common tax evasion tool for many multinational companies.

The term refers to when a company shifts its income made in a country that doesn’t have a taxation treaty with the company’s home country to a third country that does.

That third country is unrelated the company’s actual business activities, but the firm legitimizes the move by establishing a paper company there.

“The BEPS project ... is expected to help enhance our ability to tax cross-border companies including Google and Apple,” said Choi Kyung-hwan, deputy prime minister for the economy.

To prevent more sophisticated acts of tax evasion, Korea will start regularly exchanging tax information with 10 countries, including the United Kingdom, Germany, France, Italy, India and Mexico, from 2017.

Currently, financial information is shared between governments in specific circumstances and on request.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]