April 25, 2024

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[THE INVESTOR] Calls for an overhaul of the tax system are growing in South Korea, as global companies recently faced allegations that they used legal loopholes to minimize their tax payments.

The need for a revision of current taxation rules has constantly been discussed here. The latest debate was sparked after Oracle was reportedly ordered to pay 314 billion won ($278 million) in fines for alleged tax evasion earlier this week. 

On April 13, Google came under fire upon news reports that its Google Play here accounted for 60 percent of the total content sales of the app market in Korea last year. The US internet giant generated around 4.5 trillion won in sales from the digital distribution service in Korea last year. Out of the 4.46 trillion won, Google took 30 percent -- around 1.3 trillion won -- and distributed the rest to app developers.

Despite the profits, the Korean arm of the US tech firm is not obligated to make public its sales or taxes here because it is set up as a limited liability company. Global firms such as Google and Apple can choose to make their regional arms limited companies, which are not able to finance themselves by methods such as issuing stocks, but have no liability to make public their sales.

Along with sales generated in other Asian nations, the revenue generated in Korea is sent to Google Asia Pacific Ltd. located in Singapore, which is considered a tax haven in Asia. This is a similar move to Google in European countries sending sales to Ireland.

Industry watchers argue that such a system should be amended.

“Although Google did not openly evade tax, it is questionable whether it uses aggressive tax planning, which means to actively push the limits of what is allowed in terms of the law, here,” said Ahn Chang-nam, a professor at Kangnam University’s tax law college.

“The government should closely look at the issue as, if aggressive tax planning is true, it can be unfair to companies faithfully paying taxes,” he added.

Other experts said Korea should pay closer attention to Base Erosion and Profit Shifting, or BEPS, which refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

“We cannot criticize Google only by looking at the sales generated via Google Play. However, there has been some circumstantial evidence that the company has evaded tax aggressively and internationally,” said Hong Seong-hoon, a team manager of the tax research center at Korea Institute of Public Finance.

“The government can revise its law, for instance, to clarify how much Google Korea and Google Singapore contribute to the sales generated in Korea and impose taxes based on the proportion,” Hong added. 

Google refuted such speculations, saying it has no tax-related problems and that its Korean arm recently completed an audit.

“Google follows the laws and pays all applicable taxes in Korea. The Korean government recently completed an audit of Google Korea and found that the company is in compliance,” a Google Korea spokesperson said.

Questions concerning Google’s taxes emerged after another multinational firm Oracle was ordered to pay 314 billion won in penalty by the National Pension Service on Monday, based on the charge of omitting taxes amounting to around 7 trillion won. Oracle Korea was found to have sent its revenue to its US headquarters from 2008 to 2014.

The NPS charged that the local unit of the US tech giant failed to pay due corporate taxes by sending its revenue to Oracle’s unit in Ireland, which is known as a tax haven.

Korea’s Tax Tribunal said on its website that Oracle Korea filed a complaint with it in April last year against the tax agency’s earlier decision to slap an unspecified amount of taxes on the company. The tribunal turned down the complaint in November. The company then filed a suit with the Seoul Administrative Court and reiterated that it has faithfully paid due taxes according to relevant laws.

By Shin Ji-hye/The Korea Herald (shinjh@heraldcorp.com)