Samsung, SK Hynix to pay corporate taxes to foreign countries

South Korea’s chipmaking giants Samsung Electronics Co. and SK Hynix are set to pay hundreds of millions of dollars in corporate taxes to foreign countries where they make a profit under a new landmark global taxation scheme.

Members of the Organisation for Economic Cooperation and Development (OECD) agreed to allow countries to collect taxes from multinational companies if they sell their products there even if they don't have business units in those countries.

The OECD had initially discussed that such taxes were only to be imposed on global major IT companies such as Google, Amazon.com Inc. and Facebook Inc., but have expanded the new taxation scheme to other multinational companies.

The South Korean government decided to exclude taxes paid by the country’s companies to foreign countries from domestic corporate taxes.

TO RE-ALLOCATE TAXING RIGHTS ON 25% OF EXCESS PROFIT

The OECD on Oct. 8 announced an agreement on the digital tax and a minimum 15% tax rate to be implemented from 2023. The landmark deal was agreed by 136 countries and jurisdictions, representing more than 90% of global GDP, out of the 140 members of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS), according to the OECD.

Four countries -- Kenya, Nigeria, Pakistan and Sri Lanka -- have yet to join the agreement.

Multinational companies around the world will re-allocate some taxing rights for 25% of "excess" profit from their home countries to the markets where they have business activities and earn profit. In the digital taxation system, profit within a margin of 10% of a company’s total global sales is classified as "ordinary" profit, while the rest is classified as “excess” profit.

In other words, multinational companies pay tax on total ordinary profit and 75% of excess profit to countries where they have headquarters or workplaces, while paying taxes equivalent to 25% of their excess profit to nations where they have markets.

The share of taxation rights was decided at 25% after discussing rates between 20% and 30%.

“Most countries insisted on 30%, but Korea and many other developed nations suggested 20%. So, it was decided in the middle at 25%,” said a South Korean finance ministry source.

SAMSUNG ELECTRONICS AND SK HYNIX

Multinational enterprises with global sales above 20 billion euro ($23.1 billion) and profitability above 10% will be subject to the new rules, according to the OECD. In South Korea, Samsung and SK Hynix are expected to be liable to the rules and pay hundreds of millions of dollars to governments in other countries.

Samsung reported 236.8 trillion won ($198 billion) in sales last year with an operating profit of 36 trillion won and a net profit of 26.4 trillion won. Under the digital taxation system, Samsung’s ordinary profit was estimated at 23.7 trillion won and its excess profit was calculated at 12.3 trillion won.

Samsung is supposed to pay taxes on the total ordinary profit of 23.7 trillion won and 9.2 trillion won -- 75% of the excess profit -- under the current, pre-changed rules. For the remaining excess profit, taxation rights will be re-allocated to countries around the globe depending on the proportion of its sales. Considering that South Korea accounts for 16% of Samsung’s total sales, taxes on the excess profit of 492.5 billion won will be paid at home.

In total, Samsung’s taxes to South Korea are expected to decline to about 7.5 trillion won from the current 8.1 trillion won under the new rules, while other countries will receive the remaining taxes of 600 billion won.

“Digital taxes paid overseas are deducted from local taxes,” said an official from the Ministry of Economy and Finance. “Companies will not face an additional burden since the rules just change the distribution of existing taxes.”

The new rules are unlikely to have a significant impact on South Korea’s tax revenue since major global IT companies including Google and Facebook are set to pay more taxes in countries around the world, balancing out the lower tax payments from large domestic companies.

Write to Jin-gyu Kang at josep@hankyung.com
Jongwoo Cheon edited this article.