Korea may refund W3.5 tril. tax to US patent holders

By Kim Tae-gyu

The government runs the risk of losing about 3.5 trillion won ($3.17 billion) in tax revenue to U.S. patent holders who are claiming withholding taxes levied on their royalties income here should be returned.

The claimants include Microsoft and NTP, Inc., a Virginia-based patent holding company that has 50 U.S. patents.

A source familiar with the issue said Sunday that NTP, which is regarded as a patent troll as it uses patents to sue others, recently filed a lawsuit with a Seoul court seeking a refund of 2.1 billion won paid in taxes.

The measure followed the recent news that Microsoft asked the National Tax Service (NTS) in June to return 634 billion won in withholding taxes.

“The NTS has rejected all the refunding requests citing the relevant law revised in 2008. But the thing is that the court is not usually on the side of the NTS, citing an income tax treaty between Korea and the United States,” the source said.

“Since 2008, the NTS has faced nine suits and lost five of them. The remaining four are still pending. If the court continues to rule against the NTS, it will have to return billions of dollars to plaintiffs.”

During the past five years, withholding taxes imposed on royalties income for U.S. patents are estimated to be around 3.5 trillion won in consideration of the maximum tax rate of 15 percent, according to data from the Bank of Korea and Statistics Korea.

Domestic companies pay billions of dollars to U.S. firms in royalties per year because such tech giants as Samsung Electronics and LG Electronics take advantage of U.S.-registered patents.

Some observers point out that the Korea-U.S. income tax convention, which was signed in the 1970s, favors the U.S. side unlike contracts with other countries.

In other words, U.S. patent holders are supposed to pay taxes only to the U.S. government for all royalties income earned in Korea and vice versa, according to Article 14 of the convention.

“Income from real property, including royalties and other payments in respect of the exploitation of national resources and gains derived from the sale, exchange, or other disposition of such property or of the right giving rise to such royalties or other payments, may be taxed by the contracting state in which such real property or natural resources exist,” it reads.

The Korean tax authorities have maintained that it should have the right to collect taxes when any patents are used to produce goods in the Korean market and toward that end, the country revised the relevant law in 2008.

In response, U.S. patent companies have come up with complaints that they are subject to double taxations because they are required to pay taxes to the U.S. authorities too.

Local courts have put the inter-government treaty first before the local law in reaching verdicts in the disputes.

“Let’s assume that NTP and Microsoft eventually get refunds. Then other U.S. patent powerhouses like Qualcomm and IBM will take similar action soon,” said a professor at a Seoul university.

“Worse, the government will have to give up imposing any taxes on U.S. companies’ huge royalties revenue in the future without changing the tax treaty between Korea and the U.S.”