Apple, McDonald’s, Nike avoided taxes in 2023: NTS

Major foreign corporations in Korea, including Apple and Nike, reportedly avoided corporate taxes in 2022, raising concerns over tax fairness.

Clockwise from top left are the logos of Apple, McDonald's and Nike [YONHAP, REUTERS]

Korean branches of overseas firms including Nike, Apple and McDonald's avoided paying corporate taxes on their 2022 income, according to data from the National Tax Service (NTS) that Rep. Chun Ha-ram of the Reform Party received Wednesday.

While it exists in a legal gray area, tax avoidance — the act of reducing tax by taking advantage of a region’s law — can involve a variety of nontransparent tactics, such as inflating the costs of goods sold (COGS) or funneling royalties to headquarters.

Take Apple Korea, for example. The iPhone manufacturer's Korean arm recorded revenue of 7.33 trillion won ($5.5 billion) in 2022, but only 1.2 percent of that, or 86 billion won, was filed as operating profit. Going by numbers only, the branch should be insolvent as its operating margin is far below the market rate.

The reason for that low profit margin, or at least on paper, is Apple Korea’s categorizing 95.3 percent of its revenue, or 6.99 trillion won, as COGS — or as direct cost involved in the production of its items — to reduce its operating profit. Corporate taxes are calculated by rates levied on net income, rather than on revenue. The company, essentially, took advantage of its position as an importer of its products from overseas, rather than as a domestic manufacturer, to reduce its tax burden.

Apple Korea, therefore, ended up paying 50 billion won in corporate taxes for 2022. Domestic IT firm Naver, on the other hand, paid 410 billion won in corporate taxes on 8.22 trillion won in revenue the same year.

“Apple Korea’s [sales] performance is on par with Korea’s largest platforms, and yet they pay corporate taxes at the level of a small to mid-sized business,” said Kang Hyoung-goo, a professor at Hanyang University's Business School.

44% of overseas corporations with over 5 trillion won in revenue in 2022 paid no corporate taxes in 2023. [NATIONAL TAX SERVICE]

Tax returns filed in 2023 indicate that the practice of tax avoidance was widespread among overseas firms regardless of industry, whether it be in IT, manufacturing or food and beverages.

Seven out of 16, or 44 percent, of foreign corporations' Korean branches that earned more than 5 trillion won in revenue in the country in 2022 filed no corporate taxes the following year, according to the data.

In contrast, 15 out of 113, or 13 percent, of domestic firms that recorded revenue of more than 5 trillion won didn’t pay any corporate taxes. Korean companies, on average, paid 263 billion won in corporate taxes while foreign branches paid 14 billion won.

Among tech companies, Microsoft Korea made 1.37 trillion won in revenue and paid 33 billion won in corporate taxes, while Sony Korea paid 60 billion won out of its 1.62 trillion won. In the manufacturing sector, Mercedes-Benz Korea paid 91 billion won in corporate taxes on 7.54 trillion won of revenue while BMW Korea turned in 66 billion won out of its 5.79 trillion won. McDonald's Korea and Nike Korea, which made 994 billion won and 2.1 trillion won respectively, paid no corporate taxes at all.

Under current corporate tax law and tax treaties made with each country, the NTS can only tax the Korean arms of overseas firms on net earnings collected in Korea. Those entities can, therefore, reduce their taxable income by categorizing a large amount of their profit as COGS or paying it to an overseas headquarters as royalties.

A man uses his mobile phone while walking past the Google logo in Singapore in 2019. [EPA]

Google Korea attributed most of its profits made in the country to its Asia-Pacific headquarters in Singapore, removing the amount from its Korean revenue. Google’s actual revenue in Korea is estimated to be several trillion won. The company, however, reported 344.9 billion won in revenue for 2022 and paid 16.9 billion won in corporate taxes.

McDonald's Korea avoided paying taxes by paying 5 percent of its total annual revenue and $45,000 for each new store as royalties to its headquarters in the United States.

Even when corporate taxes are properly levied on such firms, they often oppose them in court. Of the 1,494 administrative tax lawsuits that domestic companies filed against the NTS last year, the organization lost 9 percent, or 135 cases. Of the 42 suits that foreign corporations filed, the NTS lost 8 cases, or 19 percent. This is, at least, a lower loss rate than the 44 percent recorded in 2021. Foreign firms took back 101 billion won, or 65.5 percent, of the 155 billion won they sued for last year.

Rep. Chun Ha-ram of the Reform Party speaks at a hearing at the National Assembly on Thursday. [NEWS1]

Politicians criticize that the tax avoidance committed by foreign firms undermines taxation principles, considering Korea's faltering national tax revenue: The amount of corporate taxes collected from January through July was down 15.5 trillion won from last year.

“There is an issue of fairness when [comparing] domestic companies, who pay their share of taxes, as foreign corporations can invest the money they save on taxes to make their items more price competitive or in other areas,” said Rep. Chun, who is also a member of the Strategy and Finance Committee.

“Strong legal action must be taken against foreign corporations’ tax avoidance, and blind spots in the tax system must be reduced.”

The foreign firms in question argue that they have not broken the law. Apple Korea said it “respected Korean law” and has been “paying taxes faithfully in compliance with the law and regulations” in response to a parliamentary audit last year on allegations of tax avoidance.

NTS Commissioner Kang Min-su said, at a personnel hearing in July before taking office, that he would “arrange responsive measures, such as tax law revisions, to deal with [firms] that interfere with investigations such as intentionally submitting data late while giving the excuse of the data being overseas,” in a pointed remark to multinational companies. The NTS is pursuing a measure that would allow it to impose penalties on global corporations that refuse to submit data for tax audits.

International conglomerates avoiding taxes is not just a problem in Korea; corporate entities take advantage of weak spots in every country's legal system, and discussions to resolve the problem are heated outside of Korea as well.

One such topic surrounds the “digital services tax,” which a number of countries, including Britain and Canada, have introduced.

Under such a system, large tech companies that earn money from digital advertising owe taxes to the country where the advertising was conducted, regardless of where the company is incorporated or where its servers are located. The OECD is discussing a potential overhaul of international taxation rules that would impact multinational corporations. The organization published a draft of a multilateral treaty mandating that large companies' profit be taxed in jurisdictions where their sales took place in 2023, though the deadline for ratifying that agreement has since passed.

Meanwhile, Choi Sang-mok, the deputy Prime Minister and the Economy and Finance Minister, voiced support of digital services taxes during the G20 Finance Ministers' meeting in July.

The United States, home to many of companies such treaty would impact, is lukewarm on the deal.

“The discussion of introducing the digital [services] tax began with the intention to prevent Big Tech firms evading taxes, but it recently expanded to multinational firms of a certain size, including firms in the manufacturing industry,” said Kang Geum-yoon, head researcher at the Korea International Trade Association. “Korean firms are no exception to [the digital tax], so they should cooperate and share relevant data with other countries to prevent a taxation conflict in advance.”

BY KIM KI-HWAN [kim.juyeon2@joongang.co.kr]