‘Google tax’ on firms from 2016

Foreign and local businesses with annual sales of 100 billion won ($85 million) or more, and over 50 billion won in transactions with overseas entities must report international transactions to the tax authority starting next year.

Known as the “Google tax” in Korea, the Base Erosion & Profit Shifting (BEPS) regulation has been adopted by members of the Organization for Economic Cooperation and Development and G-20 nations to prevent multinational companies from evading taxes by exploiting subtle differences in tax rules. Ninety-four countries around the world are preparing to adopt similar rules.

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.

The Ministry of Strategy and Finance announced on Wednesday 18 tax codes revisions that will take effect in late January after the laws are passed by a Cabinet meeting slated for Jan. 26.

The Finance Ministry estimates there are about 570 companies in Korea that will be subject to the new regulation.

As the global economy goes through an unexpectedly prolonged slowdown, governments around the world are searching for new sources of revenue, especially targeting big multinationals 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 ministry data. According to the Ministry of Finance, Google has been evading taxes estimated at 1.5 trillion won, earned from selling smartphone applications in the country, by arguing that its servers are based in Ireland.

Starting next year, multinational companies that fall into the size categories will have to report to the National Tax Service (NTS) transactions with both local and overseas business entities, their corporate governance structures and information regarding any merger and acquisitions.

Those who fail to report or make false reports will be slapped with a 30 million won fine.

“The program is meant to discover new sources to tax,” said Lee Jae-mok, director in charge of the international taxation system at the ministry. “It is not about creating a new type of tax, but finding sources that have previously been hidden legally.”

According to the official, the tax authority will impose the same corporate income tax ratio on hidden incomes. Currently, companies with annual revenues of over 20 billion won pay 22 percent in corporate profit tax. Those with revenues between 200 million won and 20 billion won pay 20 percent.

The Finance Ministry also confirmed a new tax on clergymen from 2018 and changed regulations governing “corporate cars.”

Starting in 2018, 20 percent to 80 percent of clergymen’s salaries will be considered necessary expenses and not be taxed. The lower the income, the higher the level of expenses.
For a clergyman with income of 20 million won or less, 80 percent will be considered necessary expenses.
The income tax rates range from 6 to 38 percent, the same as for normal taxpayers.

The ministry expects about 230,000 religious leaders registered with the Ministry of Culture, Sports and Tourism will be subject to the new tax. This will add about 10 billion won to government tax revenues.

The government and lawmakers also decided to downsize the maximum amount of corporate car cost that can be deducted from taxes to a standardized 8 million won per vehicle per year.

Currently, a company can report 20 percent of the price of a vehicle as a business expense for the first five years. The 20 percent is considered a business expense and not subject to taxes.

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