The government is considering a plan to impose taxes on global corporations to prevent losing its taxing rights to other countries. The method is the introduction of the Qualified Domestic Minimum Top-up Tax (QDMTT).
To prevent multinational corporations from evading taxes, major countries have set a common corporate tax minimum of 15%. Corporations applying a lower corporate tax rate will pay taxes to the host country for the difference, which is the QDMTT. For example, if a foreign corporation operating in Korea pays an 8% corporate tax to Korea and an additional 7% corporate tax to its home country, the introduction of this system will require them to pay 15% in Korea.
According to financial authorities on the 21st, the Ministry of Economy and Finance is reviewing the introduction of QDMTT in tax reform proposals scheduled to be announced as early as the end of this month. To prevent multinational corporations from evading taxes, the Organization for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) set a global minimum tax, and the QDMTT emerges from this process.
The global minimum tax is a system that requires multinational corporations to pay additional taxes in their parent companies' countries for any rates lower than 15% to prevent the abuse of low tax countries as tax havens. Even if a corporation establishes a subsidiary in country A with a corporate tax rate of 10% to save on taxes, it has to pay 5% (15-10%) to country B where the parent company is located, which is an agreement among about 140 countries including Korea, OECD, and G20.
QDMTT is a mechanism that allows country A to receive 5% of the corporate tax that should be paid to country B. Under the global minimum tax, the additional tax corporations owe has to be collected from the country where the subsidiary is located, not the parent company. Since corporations have to pay 5% regardless of whether it's in country A or country B, it doesn't matter much to them, but the position of the country with taxing rights is different. The introduction of QDMTT is necessary so that they do not lose their taxing rights to the countries that introduced the system first.
Vietnam implemented QDMTT early on. Aside from Vietnam, 47 countries, including Hong Kong, Germany, Australia, and Singapore, adopted it as of early this year. Korea is also reviewing whether to adopt it late to align with this trend.
Korea introduced only the global minimum tax last year, excluding QDMTT. A government official explained, "At the time we decided to implement the global minimum tax, we judged that we should introduce it when the effectiveness of QDMTT became evident."
QDMTT is a new tax that must be introduced through law. The Ministry of Economy and Finance, the governing ministry, should propose it as a government bill or as a bill from members of the National Assembly. Currently, there is neither a government proposal nor a member's proposal. Regarding the global minimum tax, only a special provision for loss treatment has been established to mitigate the impact of the global minimum tax introduction at the end of last year.
The United States criticizes the global minimum tax itself, but it is the Ministry of Economy and Finance's assessment that this has little relevance to Korea's introduction of QDMTT. A Ministry of Economy and Finance official noted, "We understand that the U.S. is not trying to undermine the OECD and G20 global minimum tax system," adding, "The U.S. is trying to align its own tax system with the OECD and G20 global minimum tax."
The United States is currently imposing its own minimum tax called 'Global Intangible Low-Taxed Income (GILTI)' on foreign-source income. This is its global minimum tax to prevent capital outflow, but GILTI differs from the OECD and G20 global minimum tax in specific details. GILTI imposes a minimum tax rate of 10.5% on profits earned abroad through intangible assets.
Meanwhile, the United States is responding sensitively to the OECD and G20 global minimum tax. President Donald Trump stated that if discriminatory taxes were imposed on U.S. companies, the tax rate on the respective country would double. This was aimed at the global minimum tax. As the U.S. Congress prepared a bill to impose additional taxes on investors from targeted countries who gain from U.S. stocks, Trump's methods of retaliation became more concrete.
Ultimately, it was the G7 that had to back down. Last month, the G7 decided to exclude U.S. corporations from the application of the global minimum tax. However, this decision was made only by the G7 (the U.S., the United Kingdom, France, Germany, Italy, Canada, and Japan) and does not apply to all countries implementing the global minimum tax. Just as when the global minimum tax was introduced, agreement must be reached within the Inclusive Framework (IF), which includes about 140 countries.
Korea has not yet determined what position to take in the IF regarding the G7's decision. A Ministry of Economy and Finance official stated, "Since the global minimum tax was agreed upon and implemented in the IF, (the G7's decision) will also require agreement from all countries for negotiations," adding, "We are still watching the situation without any concrete proposal."