Is Google too big to be taxed?

Finance ministry hit for being too easy on global tech giants

By Lee Kyung-min

The Ministry of Economy and Finance has been slammed for not holding global tech giants to the same taxation standards Korean firms are subject to.

The backlash came after the finance ministry announced Feb. 14 that it has no immediate plans to revise the corporate tax code to impose heavier taxes on IT giants, such as Google, Apple, Facebook and Amazon.

The passive stance came amid fierce criticism against the ministry after earlier media reports that Apple's French operation reached a deal with France to pay an undeclared amount of back tax. French media estimated the amount at around 500 million euros (636 billion won).

The incident was widely seen as a victory for the French governments against one of the tech multinationals in requiring it pay a fair share in the local market.

“The ministry is simply helpless,” said Ahn Jeong-sang, a policy adviser for the National Assembly Science ICT, Broadcasting and Communications Committee.

“Given that the finance ministry is repeating the same thing over and over, 'coward' is a word that could best characterize the ministry's response. It simply shows how unwilling the ministry is to require global IT giants pay the due amount of tax.”

The ministry's announcement also came despite mounting calls to revise the tax code to recognize the Korean branches of global tech giants as permanent establishments.

Permanent establishments, or fixed places of business, give rise to income or value-added tax liability in a particular jurisdiction.

Under the current permanent establishment-based tax code, the tech giant practically exists in the virtual world, which cannot be identified as an entity subject to a rate of 25 percent in corporate tax here.

This is a reason why many multinational IT giants set up servers in low-tax jurisdictions in a move to legally avoid the high corporate tax where their services are provided.

The ministry, instead, only reiterated its earlier opinion that Korea will continue to join a global wave of efforts to tackle base erosion and profit shifting (BEPS).

Under the initiative led by the OECD, over 100 countries are trying to fight BEPS, a series of tax avoidance strategies that exploit gaps and mismatches in tax rules through artificially shifting profits to low- or no-tax locations.

It added that it will continue to review the issue with “great caution.”

Ahn said that the ministry's stance is considered “unfair” and “arbitrary,” given how often it revises tax codes that affect domestic entities.

“Korean businesses are in constant fear. It is about fear of uncertainty, because they have to pay higher taxes with no room for negotiation whatsoever when the government revises a law. It is the height of unfairness. The ministry essentially bullying whom they can instead of whom they should stand against.”

In response, a ministry official said the situation has no room for improvement any time soon.

“It is true that the tax code gets revised every year. So do international tax laws, but they have to be revised with international treaties taken into consideration. This is not easy because there are many parties with varying, conflicting interests,” the ministry's international tax division head Kim Jung-hong said.

Ahn added the global tech giants should be willing to assume greater social responsibility by paying a due amount of tax corresponding to their lucrative business here.

“There must be tax where there is income. If global tech giants such as Google fail to uphold such a basic moral principle, it only proves that it is nothing but a profit-seeking, irresponsible, opportunistic entity blinded by short-term moneymaking. And the ministry is the principle enabler of the continuation of such morally bankrupt behavior.”