Netflix ruling seen as a shield against 'tax avoidance' claims; Google and Oracle also head to court

Netflix Korea recently effectively won its first-instance lawsuit over a corporate tax dispute, bringing the issue of a Big Tech 'tax gap' back into the spotlight. Similar cases in which Google Korea and Oracle Korea won at the first or second trial are also drawing renewed attention. Critics say the system should be revised so that companies can be taxed in the country where the actual revenue is generated.
■ Google Korea and Oracle Korea face more than 1 trillion won in combined lawsuits
According to legal and IT industry sources on the 3rd, the National Tax Service (NTS) is expected to actively review whether to appeal after the first-instance ruling in Netflix's corporate tax dispute on the 28th of last month. The court largely rejected the arguments the NTS had used as the basis for the tax assessment.
Netflix paid 2.2 billion won in corporate tax in Korea in 2020. It argued that it generated 415.5 billion won in sales in Korea, but treated 320.4 billion won as fees paid to overseas affiliates. The NTS, however, viewed this as payment for copyright use, or royalty income, and imposed 80 billion won in corporate tax. If classified as royalty income, Netflix Korea would be subject to withholding obligations. Netflix countered that the Korean entity was merely a distributor reselling subscription services, and the court accepted Netflix's argument.
Similar disputes are also continuing at Google Korea and Oracle Korea.
Google Korea paid 975.1 billion won in advertising resale fees to Google Asia Pacific Pte. Ltd. (GAP) in Singapore out of advertising revenue earned from 2016 to 2018. The tax authorities treated this as royalty income and imposed 154 billion won in corporate tax in 2020. Google Korea filed a tax appeal and won in January last year, and is now awaiting the appellate ruling.
Oracle Korea's case is similar. From 2008 to 2014, Oracle Korea paid 1.9 trillion won in fees to its Oracle Ireland subsidiary. Under the Convention between the Republic of Korea and Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, income paid from Korea to an Irish entity is taxed only in Ireland. The NTS therefore viewed the Irish entity as a conduit company established for tax avoidance and imposed 314.7 billion won in corporate tax in 2017. A ruling that had favored the NTS was overturned on appeal last November. The appellate court found that the Irish entity qualified as the beneficial owner of the income. Oracle Korea currently has seven ongoing corporate tax lawsuits, with the total amount in dispute exceeding 1 trillion won.
■ "Even with high sales, taxation is limited if servers and headquarters are overseas"
The current international tax system follows the permanent establishment (PE) standard, which gives taxing rights to the country where a company has a physical business presence. That is why companies with servers or headquarters overseas face limited taxation even if they generate huge sales in Korea. As a result, the OECD Digital Tax, which would allocate taxing rights to countries where companies generate revenue above a certain threshold even without a permanent establishment, has been discussed as a possible solution. However, the talks have stalled under pressure from the United States, home to many major Big Tech firms.
Kim Woo-cheol, a professor in the Department of Taxation at the University of Seoul (UOS), said, "If the introduction of the OECD Digital Tax is delayed, each country will have no choice but to respond on its own, but handling cases only through individual lawsuits by the NTS has clear limits." He added, "The government and the National Assembly should design a system that can clearly define the standards for attributing revenue." Kim also said, "Domestic subsidiaries and overseas headquarters should be treated as the same company, and when a domestic subsidiary transfers income to an overseas headquarters, it should be regarded as a dividend rather than a fee. Tax standards need to be made much sharper, and the NTS also needs more specialized staff."
kaya@fnnews.com Choi Hye-rim Reporter