The National Tax Service (NTS) launched an investigation into Google Korea on Wednesday, sending an official to secure accounting documents at the company’s office in Gangnam District, southern Seoul. The investigation is thought to be into YouTubers suspected of avoiding taxes, as NTS Commissioner Han Sung-hee previously promised during the National Assembly’s annual questioning session in October to take measures to “prevent tax evasion” by well-paid YouTubers.
Commissioner Han revealed that the NTS had advised 513 YouTubers to pay income taxes in the past, and was open to launching investigations into those who have not declared taxes.
The raid comes just a day after global IT giants like Google and Amazon were ordered to start paying 10 percent value-added tax (VAT) in Korea from next July.
The National Assembly passed a bill to revise the country’s Value-Added Tax Act in a move to impose VAT on foreign IT firms, the Assembly announced Tuesday. Specifically, the revision means IT firms will have to pay 10 percent in taxes for revenue made from business-to-consumer services, which include online advertisements and cloud computing services.
Also subject to VAT will be revenue made from online-to-offline services like hotel booking platforms that market online to raise sales in physical stores, as well as sharing economy services, which are spearheaded by companies like Airbnb. The revision will go into effect from July 1 next year.
“We will continue discussing the issue of taxing business-to-business transactions between Korean and overseas firms, which could not be agreed on in this revision,” said Rep. Park Sun-sook of the minor opposition Bareunmirae Party, who submitted the bill for the revision.
Like in other countries, the issue of taxing global IT giants has been the subject of fierce debate in Korea. Politicians have long raised concerns over how little IT giants like Google are being taxed in Korea, while domestic IT firms have bemoaned how the “reverse discrimination” was allowing overseas competitors to thrive at the expense of domestic companies.
Google Korea is estimated to have paid less than 20 billion won ($17.7 million) in corporate taxes in 2016, when it raised nearly 5 trillion won in revenue in Korea in the same year through the Google Play store and YouTube advertisements. In 2017, however, Naver, which earned slightly less at around 4.67 trillion won, paid a total of 423 billion won in taxes, or 20 times more than Google.
Strengthening regulations on corporate taxes will be much more difficult to achieve than changing VAT rules, however.
Current international agreements like the OECD Model Tax Convention and tax treaties protect enterprises from paying income tax to foreign countries if they do not have permanent establishments in those countries. Though the definition of permanent establishments is often questioned, by current standards, Korea is not home to permanent establishments of any of the major IT firms – they mostly operate small affiliates here and conduct most of their business online from headquarters in the United States and other countries.
These global IT firms only need to fulfill the corporate tax requirements for revenues made by their Korean subsidiaries, which is not much.
