Readiness of foreign-invested companies under scrutiny

Lee Sung-jin , vice commissioner of the National Tax Service. (National Tax Service)
Lee Sung-jin , vice commissioner of the National Tax Service. (National Tax Service)

By Lee Sung-jin

The Cayman Islands, Bermuda and other small Caribbean islands are known as idyllic retreats, famous for their pristine waters and mild climates. Beyond that, however, they are widely recognized as tax havens for multinational corporations seeking to minimize taxes and bypass regulations.

Just as pirates once sought remote islands to hide their treasure, today’s multinational firms shift profits to low-tax jurisdictions — modern-day “treasure islands.” British journalist Nicholas Shaxson described tax havens this way in his book "Treasure Islands," noting how they attract capital by helping companies circumvent the rules of other jurisdictions.

Multinational corporations with vast global profits legally avoid billions of dollars in taxes by shifting income to low-tax jurisdictions, often through the transfer of intangible assets. For these companies, such jurisdictions are quite literally treasure islands. The problem is that while these locations benefit, most countries lose tax revenue, weakening their fiscal positions.

According to the Organization for Economic Cooperation and Development, the effective tax rate in so-called investment hub countries — where foreign direct investment exceeds 150 percent of GDP — stands at just 1.6 percent. Profit shifting to low-tax jurisdictions is estimated to result in global corporate tax revenue losses of $100 billion to $240 billion annually.

To address base erosion and profit shifting, as well as the global race to the bottom in corporate tax rates, the international community has pursued a new tax framework. In 2021, more than 140 countries, led by the G20 and the OECD, agreed to introduce a Global Minimum Tax.

The regime is designed to ensure that multinational enterprise groups pay at least a 15 percent tax rate wherever they operate. If the effective tax rate in a jurisdiction falls below this threshold, other jurisdictions can impose a “top-up” tax to make up the difference. In effect, jurisdictions that maintain low tax rates without adopting the regime risk surrendering their taxing rights to others. Adoption is no longer a choice, but a necessity.

The Global Minimum Tax applies to multinational groups with consolidated revenues of at least 750 million euros ($864 million). Once fully implemented, it is expected to affect around 910,000 entities across 7,700 groups worldwide. About 70 jurisdictions, including Korea, have adopted or are preparing to adopt the regime. The global race to recapture undertaxed profits has effectively begun.

In response, traditional low-tax jurisdictions are moving to strengthen their own tax systems. Ireland has raised its corporate tax rate to 15 percent, while Bermuda has introduced a corporate tax. Other jurisdictions, including Singapore, are also adopting the regime. In other words, there are few, if any, places left where multinational corporations can hide their profits.

Korea incorporated the Global Minimum Tax into its domestic tax law in 2022, and the first filing deadline is now approaching this June. As this marks the inaugural filing, the National Tax Service will closely monitor compliance to ensure that income undertaxed overseas is reported accurately and completely.

Multinational groups headquartered abroad are not exempt. If they operate subsidiaries or branches in Korea, they are subject to filing requirements. Importantly, filing obligations in Korea may arise even if the jurisdiction of the ultimate parent entity has not adopted the regime. Companies are therefore advised to review their obligations at the group level, in coordination with their parent and affiliated entities.

The Global Minimum Tax is inherently complex. Collecting tax data from multiple jurisdictions and preparing filings is a significant undertaking. Differences in language and tax systems further increase the burden, particularly for foreign-invested companies. The National Tax Service recognizes these challenges and is committed to supporting businesses throughout the process.

To that end, the National Tax Service has introduced a range of support measures to facilitate compliance. It has held dedicated information sessions and maintained close communication with foreign business associations and tax professionals. English-language guidance materials, including videos and pamphlets, will also be released to assist companies with their filing obligations.

This global tax framework requires unprecedented coordination among companies operating across different jurisdictions, languages and systems. Much like “ttechang” — where K-pop fans from around the world unite in a single, synchronized voice — the regime brings diverse participants under a common set of rules.

Just as no fan is left behind in a concert hall, Korea’s tax authorities aim to ensure that no company is left to navigate this new system alone. The National Tax Service stands ready to respond promptly to questions and provide support throughout the filing process.

The first filing will not be easy, but it is critical. Companies are encouraged to fulfil their obligations accurately and in good faith.

Lee Sung-jin is vice commissioner of the National Tax Service. Views in this column are his own. — Ed.


jwc@heraldcorp.com