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After IT VAT, experts want more

The tax is not enough to level the playing field for local firms
Dec 19,2018
Following a decision last week to impose value-added tax (VAT) on foreign IT companies in Korea, a discussion body of government officials and experts suggested Tuesday that further adjustments need to be made in order to ensure a more level playing field for local IT companies.

The tax authorities are now assessing a 10-percent VAT on online advertisements and cloud computing services of foreign companies.

Due to domestic law that had taxed IT companies based on the location of their servers, companies with servers based overseas had paid less in tax compared to local competitors - a phenomenon critics call “reverse discrimination.”

“Local internet business operators are affected by a wide range of regulations in the country, but they are often not applied to foreign companies at the same level,” said Kwak Jeong-ho, professor of business management at Hoseo University, at a seminar held Tuesday at the National Assembly.

“This is a weak point for local firms because they can’t compete at the same level as foreign companies relatively free of domestic regulations.”

In February, the Korea Communications Commission launched a discussion body, inviting stakeholders and academics to find ways of addressing so-called reverse discrimination and suggesting appropriate measures to the government. Members from the discussion body presented their opinions at the seminar.

Among the suggestions introduced at the seminar on Tuesday was the extraterritorial application of domestic laws to IT businesses, so that the government would have legal justification to impose local regulations on foreign companies operating in the country.

Also mentioned during the meeting was the possibility of launching investigations on foreign companies and making them establish representative offices to which the government can communicate if they need information or data for the investigations.

A major issue raised was net usage fees. Local IT companies like Naver, Daum and AfreecaTV pay between 10 billion won ($8.8 million) and 70 billion won per year to mobile carriers in exchange for using large volumes of traffic on their networks. Global IT companies like Google or YouTube, on the other hand, barely pay for this despite having huge traffic in Korea.

“Google and Facebook are dodging the net usage fee based on their dominant position with [a massive number of] users as their upper hand,” said Yoon Sang-pil, head of external affairs at the Korea Telecommunications Operations Association. “They’re shifting costs to local carriers.”

But some participants argue that the fundamental reason local companies were facing unfair competition was because Korea has a complicated set of regulations that do not meet international standards in the first place.

“Korea has so many Galapagos regulations, and this is what’s creating ‘reverse discrimination,’ and yet we’re talking about making even more regulations,” said Park Kyung-sin, a law professor at Korea University.

The discussion body plans to release a report on Dec. 26.


BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]