New international order corporate tax is set for the first time in 100 years

Finance ministers from the G7 group of nations, including the U.S., Japan, and the U.K., decided to introduce the minimum corporate tax rate of 15 percent worldwide at a meeting held on Saturday in London. They also agreed to tax multinational companies, such as Google and Facebook, in not only the countries they are headquartered in, but also the countries they generate sales. This is the first time to enforce national corporate tax with an international rule, and it will change the 100-year-old global corporate taxation system in which multinational companies only have to pay tax in the countries where their headquarters are located.

In the early 1920s when the corporate tax system was first introduced, companies produced and sold tangible goods in the locations of their headquarters and paid taxes. With the development of information technologies, however, more and more companies began to have their headquarters in countries with low tax rates and sell intangible IT services to the global market. Countries engaged in “tax dumping” to attract businesses and conflicts among nations emerged as the countries in which companies make money and pay taxes did not coincide. The recent agreement’s aim was to resolve such conflicts.

As South Korea has a relatively high corporate tax rate of 25 percent, excluding local income tax, the country will not be immediately affected by the introduction of a minimum corporate tax rate. However, a changed tax system can cause companies’ relocation and changes in the industry structure. South Korean companies have 473 overseas corporations located in low-tax countries, but the practical benefits of having such corporations will be diminished with the new minimum corporate tax rate. Companies will have to develop a new strategy for the locations of their headquarters, plants, and service provision. The South Korean government should also examine measures to accommodate domestic companies returning to the country and attract foreign businesses.

The agreement also includes that at least 20% of profit exceeding a 10% margin for “the largest and most profitable multinational enterprises” will be taxed in the countries where sales are generated. Foreign media companies mainly point to Google and other tech giants in the U.S., but even South Korean companies may have to pay more taxes to foreign countries once the new system is widely enforced.

The agreement will be refined at a G20 meeting scheduled in July and an OECD meeting in October. South Korea should actively voice its opinions as a key member country to represent the interests of South Korean companies and ensure sufficient tax revenues. The government should carefully examine how the new taxation system will affect South Korean industries in a broad sense and develop response strategies along with companies.