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THE INVESTOR

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Multinational firms using royalties to avoid tax

  • PUBLISHED :March 29, 2017 - 17:58
  • UPDATED :March 29, 2017 - 17:58
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[THE INVESTOR] Multinational firms in South Korea tend to transfer much higher proportions of their revenues to their headquarters overseas in dividends and royalties than their Korean counterparts, an expert said on March 27.

Payments in royalties and dividends are categorized as expenses, which in turn lowers their reported earnings to the Korean authorities.

Some companies may take advantage of such system to avoid paying corporate taxes, which needs extra monitoring by the National Tax Office, said Kim Kab-lae, a research fellow at the Korea Capital Market Institute.

For instance, according to data by the Financial Supervisory Service, Adidas Korea’s revenue skyrocketed 231 percent over the past 10 years from 217 billion won in 2006 to 897.4 billion won in 2015. Its accumulated revenues in the past decade amounted to 5.42 trillion won.

Out of the accumulated revenue, the Korean unit of the Germany-based multinational firm Adidas AG paid more than 10 percent, or 693.5 billion won, to its owner in royalties, and another 4 percent, in international marketing expenses. It also transferred 450 billion won from Korea to Germany in dividends during the 2006-2015 period, about 80 percent of the accumulated profits of 553 billion won.

Cigarette maker Philip Morris Korea, 100 percent owned by Philip Morris Sarl, a subsidiary of US-based Philip Morris International, also saw its sales surge 262 percent during the 2006-2015 period to hit 811 billion won in revenue in 2015. The accumulated royalties paid from the local firm to the US was 1.4 trillion won over the same period, larger than the 1.2 trillion won it recorded in accumulated net profits, according to the FSS data. Royalties took up about 6-14 percent of revenues.

In contrast, at four Korea-based multinational companies with a holding company structure -- SK, LG, GS and LS – royalties made up between 0.08 percent and 0.24 percent or revenues in 2014, according to a report by Kim Ki-sik, a former lawmaker of the main opposition Democratic Party of Korea, who cited each firm’s financial reports.

“I’m not saying the Korean tax authorities are doing anything wrong. But concerns over tax avoidance through excessive royalty payments at foreign companies are bigger now than in the past, because of the large sales they earn now and the large proportion of royalties,” Kim at the Korea Capital Market Institute told The Korea Herald.

“The National Tax Office should put this area in their upper list of taxation priorities.”

Kim said that the parent companies of multinational firms tend to have a bigger say in financial affairs than their Korean units, and thereby tend to skirt from the so-called “arm’s length principle” in transfer pricing. Under the arm’s length principle, a unit in Korea and its parent firm overseas treat each other as independents and royalties should not rise above the market value, he added.

An official at Philip Morris Korea said, “The company’s decision on the proportion of royalty was based on the OECD guidelines for transfer pricing and applies not only to the Korean market but other overseas markets.”

Adidas Korea was unavailable for comment.

One official at a Korean unit of a multinational company, who declined to be named, said comparing the proportion of royalties with local firms was unfair because each companies had different brand strategies and were involved in different industries.

Meanwhile, multinationals were tightfisted when it came to corporate social responsibility in the Korean market.

According to the FSS data, Adidas Korea and Philip Morris Korea spent less than 0.1 percent of their revenue on CSR in 2015. 

Fast fashion brand Uniqlo Korea, whose revenue exceeded 1 trillion won in 2015, spent nothing in donations and social activities.

By Kim Yoon-mi/The Korea Herald (yoonmi@heraldcorp.com)
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