[News Focus] Korea to impose expanded digital VAT on global tech giants from July 2019

Starting next July, global technology giants, such as Google, Amazon and Facebook, will be required to pay value-added tax on a wider range of services they provide in South Korea, as a new law stipulating the change was approved last week.

The National Assembly passed a bill to amend the Value-Added Tax Act that enforces a 10 percent VAT on online advertisements, cloud computing services and forms of online-to-offline businesses provided by foreign information and communication technology companies.

Until now, the law had required global ICT firms to pay VAT on a limited number of direct-to-consumer services, including sales generated from transactions on mobile app stores like Google Play or Apple’s App Store.

The new bill broadens the type of digital services subject to this tax, to reflect new tech services that are now generating big profits.

As a result, profits from cloud services by firms like Amazon Web Services, online ad revenues collected by YouTube and platform commissions earned by Airbnb are now subject to VAT.

However, only direct-to-consumer sales in these areas are governed by the new tax law. Business-to-business sales are not affected. 

Lawmakers who authored the bill say the change provides a legal basis to broaden discussions on imposing the so-called “Google tax,” or corporate tax imposed on global ICT companies accused of dodging taxes.

They also contend that it is a step in ensuring that foreign ICT giants running major digital businesses in Korea -- like Google, Facebook, Amazon Web Services and Airbnb -- are held to the same tax policies affecting Korean firms in the same business space.

Efficacy questions

Although it is a step forward from the perspective of those that have been calling for stricter tax policies, the latest revision is also being labeled as “only a symbolic gesture” that brings little changes.

The original bill had mandated foreign tech companies to pay VAT on revenue from B2B sales made in Korea, the segment that generates the most profits in areas like online ads and cloud computing.

By excluding B2B sales, the government still cannot tax the main business activities that generate the most profit for foreign ICT companies, critics argue.

For this reason, it is unlikely that the new legal changes will enable the Korean government to collect an additional 400 billion won ($354.5 million) in tax revenue from global internet companies -- an estimate proposed at prior National Assembly discussions on the VAT Act revision.

Nonetheless, “(The VAT Act revisions) can become the starting point for a more comprehensive tax system governing digital companies,” said Rep. Park Sun-sook of the minor opposition Bareunmirae Party, who had proposed the amendments on behalf of 15 lawmakers. 

Moves toward ‘Google tax’ continue

On a similar note, Rep. Byun Jae-il of the ruling Democratic Party of Korea proposed four bills aimed at resolving the “reverse discrimination” problem in Korea’s ICT sector in September.

Among them is an amendment to the Act on Promotion of Information and Communications Network Utilization and Information Protection, mandating foreign internet companies like Google, Facebook and Netflix to install physical servers within Korea in order to operate here.

Byun argues that if passed, the stipulation would mandate foreign ICT firms deliver more stabilized services to Korean users, and be governed by the same laws and tax regulations affecting their Korean counterparts.

Establishing a “level playing ground” for foreign and domestic ICT businesses was the main agenda pushed at the Ministry of Science and ICT’s parliamentary audit held in October.

During the audit, Korea’s ICT Minister Yoo Young-min pledged to work with related ministries to determine the exact amount of taxes foreign ICT firms pay in Korea, and the standards under which they are being calculated.

Korea’s moves toward a “Google tax” come in line with global efforts to push for stronger digital taxes on big tech companies. The movement has been most pronounced in Europe, though reaching a consensus across the European Union has proven more difficult.

In March this year, the European Commission proposed levying a 3 percent tax on the turnover of digital companies with annual worldwide revenue of more than 750 million euros ($920 million) and EU revenues of more than 50 million euros.

By Sohn Ji-young (jys@heraldcorp.com)