With the implementation of the “Pillar Two” global minimum tax regime for domestic companies this year, LG Chem, the parent company of LG Energy Solution, estimated the expected Pillar Two tax burden for the first quarter of this year at around 900 million won.
On May 14, LG Chem announced in its quarterly report that it recorded a Pillar Two current corporate income tax expense of 863 million won for the first quarter of this year. A spokesperson of LG Chem stated, “We are planning to bear additional Pillar Two corporate taxes due to LG Energy Solution Michigan in the United States and LG Chem’s plastic factory in Hai Phong, Vietnam.”
The Pillar Two is a tax avoidance prevention agreement led by the Organization for Economic Cooperation and Development (OECD). It targets multinational corporations with consolidated revenues exceeding 750 million euros, imposing additional taxation in the home country of the parent company if the effective corporate tax rate paid in a specific country falls below 15 percent. South Korea has begun implementing this agreement from January this year.
Initially, the industry expected that LG Chem could face an annual “tax bomb” amounting to tens of billions of won starting from this year. This anticipation stemmed from its subsidiary, LG Energy Solution, receiving significant tax deductions in the form of Advanced Manufacturing Production Credit (AMPC) under the U.S. Inflation Reduction Act (IRA), totaling hundreds of billions of won annually. LG Energy Solution’s AMPC benefits for the first quarter of this year stood at 188.9 billion won.
During a seminar jointly organized by the Korea Battery Industry Association and the Korea Petrochemical Industry Association on April 23, Jeong Hyeon, a certified public accountant from the law firm Yulchon, stated, “The scale of AMPC received by domestic battery companies amounted to 1.3 trillion won last year, and with the global minimum tax, an additional tax obligation of up to 15 percent, or 200 billion won, will arise. As production within the United States increases in the future, the size of additional tax liabilities is expected to significantly increase.”
LG Chem’s Pillar Two corporate taxes for the first quarter fell below market expectations, but the total annual amount of the Pillar Two corporate taxes could vary depending on the performance of each quarter in the future. The Pillar Two corporate taxes could significantly increase depending on the period of overcoming the downturn in the electric vehicle sector, known as the “chasm,” and the pace of LG Energy Solution’s battery production growth in the United States.