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Toward the Best Digital Tax

With the IT industry in the era of the Fourth Industrial Revolution, the issue of taxation of companies that generate income using the Internet network of IT industries has been disputed. As a result, the EU was the first to try to resolve the issue, but it was not easily resolved. As the process expands, France and the United States have now engaged in a digital tax fight. Let's find out more about these digital tax problems and think about how to solve them.

 

What is a Digital Tax?
Taxes are collected in countries where business establishments exist, and as the Internet industry grows, there is a debate over what is right about taxation. Because Internet services exist across national borders without having a fixed business location like manufacturing, IT operator can directly trade with consumers connected to Internet servers through the network without having a business establishment in the country. Therefore, there is a movement to impose taxes in line on sales, regardless of the location of the business establishment. Before the digital tax was discussed, Google tax was discussed and mandated at the G20 Summit in Turkey on November 16, 2015. The Google tax refers to taxation by sales through Internet servers on the network, not by fixed businesses. This extension of the Google tax has led to the emergence of digital taxes. Digital taxes are taxes that the EU imposes on online and mobile platform companies such as Google, Amazon, and Facebook. Unlike ordinary companies that are able to measure taxation at fixed workplaces, it is difficult to apply taxation to digital companies, because some companies make profits without a headquarters, such as a store or a factory. Digital taxes, therefore, are applied according to sales of digital services regardless of whether the company's headquarters is located in the country where digital services are introduced.

The digital tax began in  the EU. On March 8, 2019, Trump, the U.S. president, announced that the U.S. will impose 25 percent tariffs on all steel and 10 percent on aluminum from every country, including the EU. The EU imposed retaliatory tariffs on U.S. products, which EU said that they impose huge digital taxes and specifically targeted the U.S. IT conglomerate of GAFA (Google, Apple, Facebook and Amazon). According to a digital tax plan unveiled by the EU in March 2018, digital taxes will target companies that make more than 750 million euros in sales annually and 50 million euros in Europe. The tax rate is about 3% of sales. When the digital tax is introduced, the EU will collect 5 billion euros in annual tax revenue. On March 16, 1919, U.S. Treasury Secretary Steven Mnuchin said that "We strongly oppose any country's tax that is pointed at IT companies in the U.S and imposed on them." He strongly opposed that "These companies are contributing greatly to job creation and growth in the U.S.” In addition, the United States has increased the taxation on iron, aluminum, rice, cranberries, orange juice, bourbon, tobacco, cosmetics, clothing, footwear, some steel, motorcycles, yachts, and motorboats. It is worth 2.8 billion euros (approximately 3.7 trillion won) per year based on the amount of imports” But the decision to introduce the digital tax failed, because a unanimous agreement of the 28 member states in the EU's digital tax discussions was not reached. The issue of the U.S.-EU confrontation has also been put on hold. France, Italy, Spain, Portugal, the United Kingdom agreed, but countries whose IT companies are headquartered in their countries, namely Ireland (Facebook, Google, Microsoft, Apple), Luxembourg (Amazon), and Sweden (Spotipi) were strongly opposed because of their responsibilities and concerns about the movement. In addition, Germany and Finland have reservations because of the concern about the U.S. tariff retaliation.

Why do we need a Digital Tax?
First, a digital tax is necessary to prevent tax avoidance. Until now, digital companies have avoided paying taxes by using the tax rates differences between countries, and their digital tax avoidance has become a matter of course. For example, Auchan, a French mart company, operates a company in Vietnam using the tax rate difference between 33.3% in France and 15% in Vietnam. The existing corporate tax system followed the principle of collecting taxes in countries had the companies have physical bases. So global companies have avoided taxes by operating in countries of low tax rates and not having offices or staff in other countries of high tax rates. The result, while traditional manufacturing companies had to pay a tax rate at an average of 23.2%, IT conglomerate that recorded higher sales and profits pay an averge tax rate of only 9.5% through digital tax avoidance. In addition, the amount of tax break by leading IT companies such as Google, Apple, and Amazon is estimated to be between $100 billion and $240 billion (approximately 120 trillion to 290 trillion won) per year. In particular, Google paid a tax rate of only 2.4% through digital tax avoidance, although 80% of total sales occurred overseas in 2015. In this way, corporate tax exemption strategies have become more prevalent, and the reduction of taxes that are imposed has become an international problem. The need for a new tax system is required to resolve this tax problem, so the discussion of digital taxes increases.
Secondly, the digital tax prevent  monopolies of large companies and helps the growth of start-up companies. Another reason for imposing digital taxes is the formation of a healthy composition in a mobile ecosystem. The biggest characteristic of the modern economy is that large online platform providers such as Google and Amazon become the center of information and product distribution by developing ICT (Information Communication Technology) and expanding distribution of smartphones, so ‘strain phenomenon’ is intensified. Google's global search engine share is over 90% and Amazon's share in the U.S. is close to 50%. In response, the EU has another purpose of the digital tax, which is to improve GAFA's proprietary environment by the collection of digital taxes and give start-up companies a chance for  growth. The state creates a standard for certain imports and prevents online platform companies becoming more proprietary by imposing a digital tax on companies that earn more than the standard. The governments can again support start-up companies through the taxes they collect from conglomerate. Startup companies usually have innovative technology and ideas, but they are often underfunded and can not grow easily in the monopoly of technology and Internet-based conglomerates. Because 80% of start-ups close within two years, the stage of stagnant growth after the initial one to three years is called the "Death Hill." Most operators create and operate their own companies from their own funds, so if the company faisl, a heavy burden  falls on the businessmen. In order to help start-up companies that have so much difficulty growing, governments are trying to control the power of big companies through digital taxes.

Digital Tax in several countries
Interest in digital taxes is increasing. What do countries around the world think about the digital taxes and how do they apply them?
Italy has investigated tax evasion and imposed punitive taxes of between 1,118 million euro (about $131.3 billion and 417.5 billion won) on GAFA between 2015 and 2018. Apple paid about 318 million euros (410 billion won) in taxes in 2015 because of the charges of tax evasion. Google paid 300 million euro (390 billion won) in 2017 after the investigation about taxes, and Facebook and Amazon paid 100 million euro (130 billion won) in 2018. In a recent issue, on October 7, 2019, the Italian daily publication <Corierre della Sera> reported that Italian prosecutors and authorities of taxation business have launched an investigation about California-based Netflix into suspicion of tax evasion. Netflix started their first service in Italy in 2015. As of 2018, the number of subscribers reached 1.4 million, and Italy investigated allegations of tax evasion with the sudden growth of Netflix. Netflix uses an Italian Internet network to reduce the pressure of data streaming. So Netflix has the infrastructure in Italy of  servers and optical cables that are used by  the world's largest online video streaming service. But Netflix does not have an office or staff in Italy, so they have not paid any corporate taxes on its business profits. The Italian authorities decided that Netflix is designated as a business enterprise within Italian territory and is obligated to pay taxes to the authorities, because Netflix services 1.4 million Italian consumers using the Internet network in Italy. Netflix is being investigated more strongly for tax evasion due to the EU's digital tax controversy.

France was the first country to introduce digital taxes. The Ministry of Finance decided to introduce the digital tax independently in January 2019 and passed the final draft in July. Accordingly, global IT companies that have annual sales of more than 750 million euros and an additional 25 million euros (about 965.4 billion won) in France are required to pay 3% of their annual sales in France in taxes. This is being applied retroactively from 1 January 2019. The French government expects that the introduction of the digital tax will generate revenue of 400 million euros in 2019, 450 million euros in 2020, 550 million euros in 2021, and 650 million euros in 2022. The digital tax introduced in France was mainly targeted at U.S. IT conglomerate such as GAFA, which led to trade friction with the U.S. Administration which rebutted France's digital tax under the provision of  "Article 301 of the Trade Legislation." Article 301 of the Trade Legislation allows the U.S. government to investigate unfair trade systems or practices of trading partners and to take retaliatory measures, such as imposing duty. In particular, the online market platform Amazon announced that they would increase charges by 3% for French small and medium-sized companies using the platform from October 1, 2019. There are concerns that higher platform fees could affect retail prices, weakening the competitiveness of small and medium-sized enterprises in France.


Southeast Asian countries such as Singapore, Thailand, and Malaysia are seeking to revise relevant laws to allow taxes to be imposed on foreign IT companies that provide digital services in their countries. On February 18, 2019, Singapore became the first Southeast Asian country to begin deliberations on digital taxes. The targets for these taxes are companies that has more than 1 million Singapore dollars (about 870 million won) of annual global sales and more than 100,000 Singapore dollars (about 87 million won) of annual sales in Singapore. The Singapore government expects that tax revenue will increase by 90 million Singapore dollars (about 78 billion won) per year. In Thailand, sales through social media such as Facebook and Instagram doubled from 2016 bu 334.2 billion baht (about 13 trillion won) in 2017. Due to the rapid growth of digital businesses, the Thailand government has been deliberating a bill about levying digital taxes since February 2019 and, if the bill is passed, it will take effect in January 2020. The government expects to collect between 3 billion and 4 billion baht (about 117 billion won to 157 billion won) each year. Malaysia's plan is to apply the digital taxes from 1 January 2020. Dattuk Ami Rudin Hamza vice-minister of Malaysia insists that the Malaysia government should levy a 6% digital taxes to overseas IT companies that earm more than 500,000 Malaysian ringgit (about 150 million won) in annual sales, including Spotify, Netflix, Amazon and Steam. In addition, the government will require that overseas IT companies must register as foreign operators at the Malaysian Customs Service between October and the end of 2019 in order to be certain of imposing their digital taxes. This is so Malaysic can accurately distinguish between domestic and overseas companies and impose more accurate taxes on overseas companies. If foreign operators don't register in the customs office, they will face fines up to 50,000 ringgit (about 15 million won) or punished to up to three years in prison labor.
The digital tax expanded beyond the EU to the OECD. The role of the OECD became important because the digital tax controversy has not only been a matter between the EU and the United States, but has also been became an issue in Asia and Latin America. OECD is the Organization for Economic Cooperation and Development, which was created for the purpose of economic growth, aid to developing countries, and increased trade. It is composed of members of various countries in the world, including Japan, the United States, and Canada as well as well as the EU countries. The OECD's digital taxation plan will be applied to all global companies, not limited to GAFA companies in the U.S., in order to avoid resistance from the U.S. Also the OECD's tariff plan considers the power and recognition of brands as "intangible assets" and will impose additional taxation on them as well as the EU's digital tax. However, the OECD proposal, which is currently in place, does not specify how to calculate the benefits of intangible assets or how to calculate corporate sales. The OECD aims to draw up recommendations for digital tax in 2020. The introduction and spread of digital taxes will be decided according to its recommendations.

Digital Taxes in Korea
Digital tax issues are growing in many countries around the world. So, what is the impact of digital tax in our country?
Because our country belong to the OECD, our bill is also under the OECD. The OECD said that multinational manufacturing companies such as home appliances and automobiles companies will be subject to the digital tax concerning awareness on recognition. So, if the OECD digital tax plan is decided, it will be greatly influenced by 'intangible assets' such as brand power and recognition. It is expected that Korean manufacturing-based global companies such as Samsung Electronics and Hyundai Motors will be affected by the OECD's 'digital tax.'. In addition, domestic IT companies such as Naver are expected to be included in the potential taxation list, and specific review results will be announced in early 2020. Also, there are ongoing discussions about introducing digital taxes in Korea. According to Korean law, a fixed business establishment is required to pay taxes to our country. However, it is difficult to collect taxes in Korea. For example, multinational IT companies such as Google cannot pay taxes because they do not have a headquarters in Korea. Because Singapore's corporate tax rate is 17 percent while Korea's corporate tax rate is 25 percent, Google pays some taxes only on advertising and other services to our nation, but in Singapore conducts sales on digital networks in Singapore by using Singaporean corporations. In this situation, there is an urgent need for Korea to adopt digital taxes.
Discussions about digital taxes are continuing in Korea as well. In order to prevent tax evasion of foreign digital companies, the National Assembly and the government held discussion to debate the issue of tax problems. On September 10, 2018, the 'Digital tax, where there is profit' policy debate was hosted by Kim Sung-sik and Park Sun-sook of the Bareunmirae Party in the 8th meeting room of the National Assembly building. The forum was held to discuss the digital tax in order to provide an opportunity to engender thinking about Korea's future direction and strategy. Park Sun-sook said "Digitalization affects the overall economy and consumption, including living and labor, and creates new challenges, but the current legal system does not reflect changes in reality." She argued that "the overhaul of laws that guarantee transparent and fair market order in the digital economy area is urgent." In addition, on September 18, 2019, a ‘Create a fair and light environment for the domestic platform market’ meeting of experts was held. Here, the Ministry of Strategy and Finance announced "The government will actively participate in international discussions on long-term digital tax measures by 2020. Korea is participating in a leading group within the OECD that drafts digital taxes, including detailed technical reviews of digital taxes." Kim Seung-min, a researcher at the Korea Institute for Information and Communication Policy (KISDI), also emphasized, "We need to think over the long term whether our companies will become international players."

I think it is right that times change and laws change accordingly. The world must give equal rights to all companies and these companies must be taxed on a reasonable basis. Although digital taxes are still in the beginning stages and many difficulties and problems remains, we hope to find the best suggestion to resolve problems and reach the most ideal compromise. Also, as the application of digital taxes in our country is still under discussion, we hope to set a good standard and to draw up an optimal tax plan.

 

 

박아리엘  parkariel2@gmail.com

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