Emergence of digital tax

Changing global environment calls for fiscal, taxation reform

A new tax called the "digital tax" will likely be introduced in two or three years. Last weekend, 137 countries, including the U.S., the U.K. and Korea, held a meeting on the prevention of tax avoidance by multinational corporations and agreed on the outline of the digital tax. Their agreement tore down the time-honored principle of international taxation, which had exempted businesses from paying corporate taxes in countries where they have no "permanent establishments."

The rule will affect not only IT giants such as Google and Facebook but also global manufacturers, heralding numerous repercussions. At the meeting, the U.S. delegates went all out to ease the burden on American companies by including global manufacturers as targets of the new tax, which in turn sent sparks to large Korean exporters, including Samsung Electronics and Hyundai Motor. If the large enterprises have to pay the digital tax to foreign governments, it will inevitably reduce the revenue of the Korean government.

It is difficult to estimate the exact amount of revenue loss because the precise method of imposing the digital tax has not been decided on yet. However, it has become urgent for the Korean government to rebuild the domestic tax system in keeping with the rapidly changing environment of international taxation. In this process, Seoul should refrain from making up for possible revenue loss by raising already high corporate tax rates.

Instead, Korea needs to conduct an across-the-board review of its primary tax items, including value-added tax and income tax. Korea's VAT rate stands at 10 percent, not high compared to France (20 percent) and Germany (19 percent). Also, as the government exempts low-income workers from paying income taxs, tax payments by the top 1 percent of wealthy individuals accounted for 41.8 percent of income tax contributions in 2017.

Along with rectifying the distorted taxation, the government should also reform its fiscal structure. The Moon Jaein administration has long abandoned the unwritten rule of maintaining budget deficits to within 3 percent of GDP, and raised it to 3.9 percent. It ought to refrain from expanding welfare benefits for the public recklessly based on populism. This is imperative to prevent any further aggravation of fiscal soundness.