“Google and Facebook make good money here but don’t pay taxes and create no jobs,” Naver founder Lee Hae-jin said, as he was responding to criticism from lawmakers concerning the company’s own alleged abuse of its market dominance.
He was effectively diverting attention away from Naver’s influence on news circulation to reverse discrimination against Korean firms, saying stricter regulations are imposed on local firms while foreign firms enjoy tax pass-through advantages without the social and economic responsibilities here.
Lee’s offensive against Google soon lost steam as the counterpart chose to stay out of the fray, but it has brought, once again, into light the operating status of global firms conducting successful business in Korea.
Many of the global firms here now are registered as limited liability companies, a form of business organization without obligation to external audits or disclosure of financial information. They include the Korean arms of Google, Apple, Facebook, Microsoft, HP, Louis Vuitton, Gucci, Pizza Hut and Coca-Cola.
They file their taxes to authorities, but no one knows whether their reported information is accurate to a tee because they do not have to undergo an external audit.
Lawmakers have long demanded “better transparency” for the global firms. They passed a revision of the external audit law last year to force limited liability companies into external audits and disclosure of financial information such as sales, operating profits, net profits, dividend and taxes. The revised law is expected to take effect in November 2019.
“Things will change as the revision of the external audit law is implemented. With the revised law, global firms will be have more eyes watching them,” said Park Yoon-jong, CEO of local accounting firm Anse.
Experts, including Park, have called for tougher regulations, citing there is still room for companies to exploit legal loopholes.
But the revision, whose scope and range are not yet fixed, may provide exceptions for companies based on sales or the number of employees.
For instance, the local arms of Google, Apple and Facebook, whose workforces are relatively small compared to their sales generated here, may be excluded. Or the firms can simply change their entity type. These form, to some hard-line observers, too large a loophole.
“The revision of the law can be makeshift. The best way is to make all companies have external audits regardless of their entity type and then grant an exception if necessary (to small firms for instance),” said Choi Min-sik, a professor lecturing in intellectual property rights at Sangmyung University.
Currently, companies subject to external audits follow a positive list approach, which means the subjects include only listed companies, stock companies with more than 12 billion won ($11 million) in assets or stock companies with more than 300 employees. Choi contended such a positive list approach should be changed into a negative list approach to include all companies doing business activities and to prevent companies from exploiting any legal loophole.
Korea’s taxation of foreign firms is more lax compared to its bigger rivals in the US, the EU and Japan, according to the professor.
The limited liability firms were originally designed to protect firms’ partners from personal liability for the business’s debts. It was initially confined to companies with less than 50 employees.
But, when the limitation on the number of employees was abolished in 2011, many foreign firms changed their entity type into limited liability to benefit from not disclosing financial information. The number of limited liability firms rose 122 percent from 12,091 in 2005 to 26,858 in 2016.
Many global firms, however, have long faced criticism for being elusive in paying taxes, even though most of their dividends and royalties are flown out of the nation, which critics say could otherwise lead to local investments and jobs.
The foreign firms paid dividends twice that of local firms, but invested at half the rate last year, according to corporate information provider CEO Score.
“Korea gives handsome benefits with relatively lax regulations to global firms to attract them. However, many of them were found to enjoy the benefits only and give less social contribution such as donation, hiring or investment,” said Park Ju-gun, head of corporate analysis firm CEO Score.
Despite the country’s relatively small population, global tech firms are reportedly generating handsome revenues in Korea, taking advantage of its advanced technology infrastructure and tech-savvy consumer base. Korea came in third in Google Play and fifth in Apple’s iOS in terms of sales generated in the global mobile app market.
By Shin Ji-hye (email@example.com)