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The Copernican Revolution of International Taxation
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I. The New Origins of the International Tax System
Traditionally, the authority to tax corporations has been exercised by the state having jurisdiction over the physical location of the corporation’s permanent establishment. However, this traditional rule has allowed multinational corporations that do not have a separate permanent establishment in a specific country to avoid taxation in the countries where their markets are located by transferring profits from one country to another with a lower tax rate. This pattern is particularly popular among multinational companies whose main business activity is the provision of digital services.
According to the Organization for Economic Cooperation and Development (hereinafter referred to as the “OECD”), the amount of tax avoidance by such multinational corporations varies between US$100-240 billion annually for each OECD member, which is roughly equivalent to the amount of their respective total corporate tax revenues. In fact, it is estimated that these annual tax revenues losses account for about 4-10% of each state’s global corporate income tax revenue.1
To address this issue, the Group of 7 (hereinafter referred to as the “G7”) and the OECD designed a new international tax system to guarantee the taxation authorities of countries where multinational corporations operate business to prevent profit taking, and announced preliminary details regarding the new system in June 2021.
II. G7 Agreement
At the inaugural G7 Finance Ministers and Central Bank Governors Meeting held on 4-5 June 2021 in London, the Group of 7 agreed on the conditions under which the jurisdiction of the territory where direct sales are derived can tax multinational corporations, regardless of the location of their permanent establishment (hereinafter referred to as the “G7 Agreement”).
Specifically, under the G7 Agreement, the world’s largest and most profitable multinational corporations are now taxable by countries that are hosts to markets where those corporations derive profits of at least 20% in excess of 10% of their global margins.2
It is noteworthy that although the discussions leading up to the new international tax system were centered on multinational corporations providing digital services, the G7 Agreement did not specifically refer to the types of business operated by multinational corporations. In other words, unlike in the past, when discussions mainly targeted digital service providers, the G7 Agreement covers all multinational corporations of a certain size or larger without taking their specific field of business into account.
III. OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting3
The G7 Agreement was embodied at the 12th General Assembly of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (hereinafter referred to as the “IF BEPS”) held in July 2021 (hereinafter referred to as the “OECD Agreement”). The OECD Agreement largely presented two approaches (so-called “Two-Pillar Solution”) to prevent tax challenges by multinational corporations.4
The first approach (“Pillar 1”) is called the ‘unified approach.’ This approach prescribes that when a multinational corporation generates sales and profits beyond a certain threshold in a given market, tax authority is granted to the country in which that market is located, regardless of whether the company has a permanent establishment or physical presence there.
The second approach (“Pillar 2”) establishes the lowest corporate tax rate at a global level so that the income of multinational corporations is not taxed at an effective rate below the threshold. This is to prevent tax avoidance not addressed by Pillar 1. The specific minimum corporate tax rate will be finalized at the time of agreement in October 2021. For now, the OECD Agreement tentatively set a minimum corporate tax rate at least 15% for all OECD members. The ultimate goal of Pillar 2 is to prevent countries from competing against one another in excessively cutting corporate tax rates to provide tax havens, and ultimately to deter multinational corporations’ from engaging in tax shopping.
The OECD Agreement further requires OECD members to hammer out the remaining pending issues and agree on a detailed implementation plan by October 2021.
IV. What European Global Companies should Pay Attention to
In accordance with the basic principle of the existing international tax rules, taxation on a foreign company was possible only when that company had a physical place of business within the jurisdiction of the country which intended to tax it. If the OECD Agreement is developed into an international norm, however, a significant number of countries that host a market for multinational corporations will be able to tax all corporations that generate sales and profits beyond a certain amount, regardless of whether they have a permanent establishment or not.
Presumably, based on the newly created norms, countries where multinational corporations operate business will actively tax profits which had been previously overlooked due to the absence of a permanent establishment. Considering this likely trend, multinational corporations subject to the OECD Agreement should take a keen interest in its specific terms.
1. Expansion of the Scope of Application
The OECD Agreement has expanded the scope of corporations that are subject to taxation in two ways.
The first is the expansion of applicable industries. As mentioned earlier, initial discussions surrounding the new international tax system revolved around multinational ‘digital’ service providers, but the scope of the proposed system has now expanded to include multinational manufacturing companies whose core business is simply the transaction of goods. In other words, not only digital service providers but any corporation whose main business is manufacturing could also be taxed by a country in which its markets are located (except for mining and financial services).
Second, the OECD Agreement plans to expand the scope of application by lowering the ‘global sales standard’ for judging target companies. It has been agreed that the target of the new tax system shall be any multinational corporation with a global consolidated turnover of more than €20 billion (equivalent to about 27 trillion won in Korean currency) that has a profit margin above 10% (i.e. profit before tax/revenue). In addition, it should be noted that depending on the success of this new taxation system, the G7 and OECD will further consider lowering the global sales threshold of the applicable companies from €20 billion to €10 billion 7 years after implementation.
2. Double Taxation
If the revenue sourcing standards of the OECD agreement are not meticulously designed, global companies are likely to face the problem of double taxation. Although the OECD Agreement clearly recognizes that the introduction of a new tax system should prevent double taxation for individual multinational corporations, it does not suggest specific measures to prevent this problem from arising. Moreover, considering that the market-located countries are expected to impose aggressive taxation policies based on the new system, multinational corporations will solely suffer the damage caused by double taxation if they fail to thoroughly comprehend the new norms.
V. Trends of the Korean Government in Relation to the New International Tax System
The Korean government fully expects and intends to increase tax revenues through the OECD Agreement since it can now validly tax multinational corporations doing business in its territory. Still, the Korean government acknowledges that it will have to share the authority to tax multinational corporations headquartered in Korea with other countries in which those corporations also operate.
Crucially, the Republic of Korea is a member of the IF BEPS Council, which consists of a total of 24 countries, and can participate in all IF BEPS steering committees and working-level meetings.
In particular, the latest IF BEPS Council meeting revealed that the Korean government’s New International Tax Standards Division (newly established in February 2021) under the Tax and Customs Office of the Ministry of Economy and Finance is designing the domestic taxation system in line with the establishment of new international tax rules.
1 For more information, see OECD/G20 Inclusive Framework on BEPS, Base erosion and profit shifting, <> accessed 19 August 2021.
2 For more information, see G7 Finance Ministers and Central Bank Governors Communiqué, <> accessed 19 August 2021.
3 For more information, see OECD BEPS, International collaboration to end tax avoidance, <> accessed 19 August 2021. 4 For more information, see OECD/G20 Base Erosion and Profit Shifting Project, Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy, <> accessed 19 August 2021.
About mr. Joo Hyun PARK
Joo Hyun (Julian) Park is an attorney-at-law and a member of Yulchon’s Dispute Resolution Group, specializing in international disputes. Mr. Park received his LL.B. from Seoul National University and his J.D. from Hanyang University Law School. He has also completed coursework for the S.J.D. degree at the Graduate School of Law, Seoul National University, with a focus on International Transaction Law.
Park started out his legal career as a judge advocate in the Korean Air Force and the Ministry of National Defense. Afterwards and immediately prior to joining Yulchon, Mr. Park worked for the National Board of Audit and Inspection and International Legal Affairs Division at the Ministry of Justice. As a consequence of these diverse experiences, he has expertise in responding to administrative regulations of the Korean government and risk management for overseas companies investing in Korea. Currently at Yulchon, Mr. Park practices primarily in the areas of international/domestic litigation and international arbitration, and also provides legal advice on international transactions and trade.
He is reachable via email at
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