Can Korea tax Big Tech? Google, Netflix, Meta's legal victories suggest not.

Korea has been trying to tax the billions earned here by global tech giants. The problem: Google, Netflix and Meta keep beating the tax authorities in court.

The latest setback came in a case involving Google Korea, after the Supreme Court upheld a lower-court ruling that canceled about 154 billion won ($115 million) in corporate tax assessments, legal sources said on Monday.

The case highlights a broader problem facing tax authorities as they try to apply traditional tax rules to global online businesses.

Income earned by overseas Big Tech companies in Korea can generally fall into two categories for tax purposes.

Royalty income — payments for the use of intangible assets such as copyrights and trademarks — is subject to withholding tax in Korea. Business income, such as profits from advertising sales or services, is taxable only when the foreign company has a permanent establishment in Korea.

Tax authorities have typically argued that income earned by global tech companies falls into one of those two categories: either royalty income or business income generated through a permanent establishment in Korea. Big Tech companies have pushed back.

In Google Korea’s case, tax authorities took issue with part of its advertising revenue that was sent to Google Asia Pacific as advertising resale fees and imposed corporate and local income taxes in 2020.

Singapore-based Google Asia Pacific serves as Google’s headquarters for the Asia-Pacific region.

Google Korea earns revenue by reselling advertising inventory obtained from Google Asia Pacific to advertisers in Korea. Tax authorities argued that the income constituted taxable royalty income because it was generated through the use of Google’s copyrights and know-how.

Google Korea countered that the money was business income earned by Google Asia Pacific and filed an administrative lawsuit.

A lower court ruled in favor of Google Korea in January last year.

“Google Korea does not own the physical facilities needed to provide the advertising services, and Google Asia Pacific is the entity that provides the advertising,” the court said.

An appeals court upheld the ruling in May, and the decision became final after the Supreme Court declined to review it.

Netflix has also prevailed in a similar tax dispute.

Netflix Services Korea, the company’s Korean unit, won a partial victory in April in the first trial of a lawsuit seeking to cancel a corporate tax assessment.

Tax authorities imposed 76.2 billion won in corporate taxes in 2021 on fees that Netflix Services Korea paid to overseas affiliates in countries including the Netherlands. The authorities argued that the payments constituted royalty income because the Korean unit held the domestic reproduction and transmission rights to video content owned by its headquarters.

The court disagreed with much of that assessment.

“Netflix Services Korea is merely a service intermediary,” the court said as it ordered the cancellation of 68.7 billion won in tax assessments.

Meta also won a partial victory against Korean tax authorities in May in the first trial of its lawsuit challenging a corporate tax assessment.

Tax authorities argued that Facebook Korea effectively constituted a permanent establishment in Korea based on activities such as advertising sales.

The court sided with Meta, however, and found that Meta Platforms Ireland did not have the right to dispose of or use the Korean business premises.

The debate over how to tax global Big Tech companies is not limited to Korea.

The issue has drawn particular attention here because domestic IT companies face far larger corporate tax bills, fueling criticism that Korean firms are at a disadvantage.

Google Korea and two other Korean Google entities paid 28.3 billion won in corporate taxes last year, according to Google’s audit report. That compared to 528 billion won paid by Naver and 170 billion won by Kakao over the same period.

“The fundamental problem is that the existing tax system was designed around physical permanent establishments such as factories, but those standards do not work well for profits generated by online businesses without physical business sites,” a lawyer who previously worked at a major law firm said on condition of anonymity.

“Korean authorities also face structural limits under the law when trying to exercise enforcement powers over foreign companies,” another former lawyer at a major law firm said.

“We respect the Supreme Court’s decision,” an official from the National Tax Service (NTS) said. “We will learn from this case and respond better in future cases.”

Some European countries, such as France, have introduced a digital services tax, which taxes a portion of the domestic revenue generated by multinational companies.

The approach has faced considerable pushback, however, with the United States threatening retaliatory tariffs in response to such taxes.

“It is true that Korea, which relies heavily on exports, has difficulty aggressively pursuing unilateral taxation,” said Prof. Kim Woo-cheol of the Department of Science in Taxation at the University of Seoul. “Outdated tax treaties need to be fundamentally revised, but the NTS also needs to keep looking for areas where taxation is possible.”

BY SUNG JI-WON, PARK TAE-IN, IM SOUNG-BIN [[email protected]]