Democratic lawmaker vows to block global tech firms' 'sneaky' fund outflows

Democratic Party of Korea lawmaker Lee Kang-il said Monday he had introduced a bill to amend the Act on Coordination of International Tax Affairs, aimed at blocking global platform companies that conduct most of their business in South Korea from funneling profits overseas without paying proper taxes.

According to Lee, global platform companies such as Google and Netflix have long been criticized for generating enormous sales in South Korea while using accounting maneuvers to avoid remitting those earnings home in the form of dividends.

Instead of paying dividends, these companies transfer funds to overseas related parties under headings such as service fees, consulting charges and IT maintenance costs — a practice that has surged in recent years. Because such transfers are booked as deductible expenses, they sharply reduce the corporate tax base in South Korea. The result is an entrenched tax-avoidance structure in which profits generated domestically flow abroad while escaping lawful taxation.

Meanwhile, debate over a "digital tax" to counter the sophisticated tax avoidance of global IT companies is intensifying worldwide. Countries including Canada have already moved proactively to protect their tax sovereignty by introducing a digital services tax, or DST, levied as a fixed percentage of the digital advertising and digital services revenue that global IT firms earn within their borders.

The bill contains specific legal provisions designed to cut off domestic revenue concealment by major global tech companies and improve tax equity.

It would bar domestic corporations from deducting as expenses any amounts paid to overseas related parties above the arm's-length price, treating such excess payments as dividends subject to taxation instead. The bill would also require large online platform companies with annual sales of 1 trillion won ($648 million) or more in the preceding fiscal year — those conducting transactions above a certain threshold with overseas related parties — to publicly disclose the counterparty, transaction type, transaction amount and calculation basis, and the specific nature of the services involved.

Companies that violate the disclosure requirement or file false disclosures would face a penalty equivalent to 2 percent of the transaction amount, a provision intended to strengthen enforcement.

In addition, the bill includes a basis for introducing a digital services tax that would impose a 2 percent corporate tax on the domestic sales of foreign corporations of a certain size that provide digital services — including online advertising — to users in South Korea.

"This bill is a first step toward stopping the indiscriminate outflow of national wealth overseas and eliminating the reverse discrimination faced by domestic platform companies that pay their taxes faithfully," Lee said. "We will establish fair and equitable taxation standards suited to the digital platform economy and restore tax justice."