Multinationals in Korea pay OECD’s lowest share of corporate tax

The Google logo on a screen in this picture taken on Sept. 17. (Getty Images)

The proportion of South Korea's total corporate tax revenue that comes from foreign multinational companies, including Google and Netflix, stands at just 7 percent, one of the lowest ratios in the Organization for Economic Cooperation and Development.

According to an analysis of OECD corporate tax data by Rep. Ahn Do-geol, submitted at the parliamentary audit of the National Tax Service on Wednesday, the share of corporate tax revenue from foreign multinationals in Korea is less than one-third of the OECD average of 22 percent.

In contrast, tax havens like Ireland, Hong Kong and Singapore saw corporate tax revenue from multinationals comprising 79 percent, 56 percent and 55 percent of their totals, respectively.

During the parliamentary audit Wednesday, Ahn called for stricter regulations to prevent multinational firms from avoiding tax in Korea.

He specifically highlighted allegations that Google has avoided corporate taxes by transferring app store revenues generated in Korea to Singapore, where Google Asia Pacific is located.

According to Data.AI's analysis of the top 1,000 apps by revenue on Google Play over the past decade, total app store revenue reached at least 6.5 trillion won ($4.75 billion) as of August this year, with projections indicating it could rise to 6.9 trillion won by year-end.

However, last year, Google Korea reported sales of 365.4 billion won to the local government, paying only 15.5 billion won in corporate taxes. In contrast, Naver, headquartered in Korea, reported sales of 9.67 trillion won during the same period and paid 496.3 billion won in corporate taxes. Google Korea's tax contribution was a mere 3.1 percent of Naver's.

In 2020, the NTS ruled that revenues from the app store and in-app purchases generated in Korea should be attributed to Google Korea, regardless of the location of Google's servers. Consequently, it imposed a corporate tax liability of 500 billion won on Google Korea, which the company contested through an administrative lawsuit.

Ahn noted that the NTS often faces challenges in enforcing corporate taxes on multinational companies, many of which resist through litigation. Last year, the NTS recorded a 42 percent loss rate in tax-related administrative lawsuits involving claims over 10 billion won, four times its overall average loss rate of 9.5 percent.

To tackle tax evasion and avoidance, the international community is discussing the adoption of a "digital services tax," of which the Pillar 1 rule stipulates that 25 percent of profits in excess of a 10 percent margin for large multinationals would be allocated to jurisdictions based on sales share. However, the rule remains pending due to opposition from the US.

Ahn urged the NTS to strengthen its litigation capabilities for large lawsuits involving multinational corporations and emphasized the need to regulate entities that assist in tax avoidance. "We need to introduce a law requiring law firms and accounting firms that recommend tax avoidance strategies to report these activities, with fines imposed for non-compliance," Ahn stated.

By Choi Ji-won(jwc@heraldcorp.com)