A group of 15 lawmakers led by Rep. Park Sun-sook has proposed the amendment of the Value-Added Tax (VAT) act to require foreign information and communication technology (ICT) firms to pay taxes on digital products that include search advertisements, cloud computing services and some forms of online-to-offline services. The new bill will likely affect Google, Facebook and Amazon.
The bill’s aim is to ensure that global ICT firms that run digital businesses in Korea are taxed in the same way as Korean firms in a similar business space. Korea’s current regulatory system only affects ICT firms with physical presence or a fixed business site in Korea. Without the physical operations, it is very difficult to properly tax the digital firms.
This situation has certainly caused a blind spot in the taxation system. Foreign digital firms generate considerable profits in Korea but they do not pay the taxes due. This widens the regulatory gap between the local and international ICT firms which is unfair.
Under the current laws, global ICT firms like Google, Facebook, Amazon Web Services and Airbnb are only required to pay VAT on revenue generated from direct-to-consumer services like when games and software are sold or there are transactions made through mobile apps like Google Play. Online search ads, cloud computing and O2O services generate high profits for the foreign ICT firms. The bill will require them to pay VAT on revenue generated from business-to-business transactions.
The bill seeks to achieve fairness and transparency inasmuch as Korean ICT firms that are operating B2B businesses in the digital space are subjected to VAT laws. A level playing ground will be established between the foreign and domestic ICT firms by binding them with same laws on areas that include tax payments and network usage arrangements with the domestic telecommunication firms. The exact amounts of taxes on foreign ICT firms will be determined including the standards of calculations.
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