Top-tier South Korean firms such as Samsung Electronics, LG Electronics and Hyundai Motor may have to pay corporate taxes overseas due to the growing worldwide debate on digital tax, raising concerns about its economic impact here, according to experts.

According to the Finance Ministry, a debate is underway in the Organization for Economic Cooperation and Development to apply digital tax -- in the form of corporate tax -- on manufacturing companies selling consumer goods, such as smartphones, home appliances or cars.

If the proposal goes through, Korean firms may have to pay corporate taxes in the countries where they sell their products if their global sales and profit margins are above a certain level. Specific targets and tax bases will be set in future OECD discussions.

The OECD debate on a digital tax initially began to target internet-based global companies, such as Google and Facebook, doing business across borders. They are profitable all over the world but do not pay taxes on profits made in places where they have no physical presence.

But, the discussion recently expanded to include manufacturing in digital tax as the US -- home to many internet-based firms -- opposed the idea of imposing the tax only on internet firms. 

“(If, for instance, Samsung and Hyundai have to pay digital tax in other markets,) they may make a loss in the countries which have a higher corporate tax rate than in Korea,” said Hong Ki-hong, an accounting professor at Incheon National University.

Currently, the corporate tax rate in Korea is 27.5 percent, a little higher than 25.9 percent in the US while being lower than some European countries, such as France, Italy and Germany, although the rates are changing every year.

Korea’s influential civic group Citizens’ Coalition for Economic Justice released a statement on Wednesday last week, saying, “Making the general manufacturing industry a target of digital taxation is tyranny to overturn the international tax system and trade system.”

It also urged the government to take strong action to remove “manufacturing” from the OECD digital tax target and to actively suggest revised ideas to the international community.

The government still sought to downplay the consequences, saying not many Koreans firms will be the targets even if manufacturing is included in the range of digital tax.

“Taxes are likely to be imposed on each business unit rather than a whole company. Although many Korean firms are export-oriented, their operating profits are not very high -- except for some lucrative units of Samsung,” said Kim Jung-hong, chief of the Finance Ministry’s international tax division.

As of the third quarter of this year, the profit margin of Samsung Electronics’ chips and display units stood at 17 percent and 12 percent, each. The margin rates of its mobile and home appliance divisions came in 10 percent and 5 percent, respectively.

LG Electronics had no division with double-digit business profits in the period, with the most profitable unit being business solution with a 9.6 percent profit margin while that of Hyundai Motors was 1.4 percent.

Samsung and Hyundai said they are “carefully paying attention to” the ongoing debate and are considering it internally.

The discussion with the new addition of the manufacturing sector raises uncertainty not only for companies but also for national tax revenues. This is because if Korean companies pay more taxes abroad, they pay less here to prevent double taxation. Korea follows an international rule of the Double Tax Avoidance Agreement, a tax treaty to help taxpayers avoid paying double taxes on the same income.

“So overall, a nation, rather than companies, may suffer more losses. For instance, the amount of Samsung’s total taxes paid could be the same, but the nation’s tax revenues might be reduced,” said professor. Hong.

This, however, also requires a complicated calculation because Korea could also collect corporate taxes from multinational companies, such as Google, Facebook and Amazon, doing business here.

Google is estimated to gain around 2 trillion won ($1.7 billion) to 3 trillion won in Korea as of 2017, but it paid less than 20 billion won in corporate tax here. During the same period, the nation’s largest search engine firm Naver generated 4.6 trillion won in sales and paid 423 billion won in corporate tax.

A public hearing over the digital tax will be held later this month and next month in Paris and more details will be outlined in the meeting for the OECD/G-20 Inclusive Framework in January 2020. 

By Shin Ji-hye (shinjh@heraldcorp.com)