Netflix Services Korea has begun an administrative lawsuit against Korea’s tax authorities over 78 billion won (US$57 million) in tax imposed on the OTT giant. Much attention is being paid to see how the Korean court will rule on the unfair practice of global platform companies such as Netflix not paying taxes on their earnings in Korea.
According to sources in the National Tax Service and the OTT industry, Netflix filed an administrative lawsuit against the Seoul Administrative Court in 2023. It called tax collected by the Seoul Regional Tax Office in 2021 unfair. The Korean tax office said that Netflix paid too little tax relative to its revenue.
According to sources in the Financial Supervisory Service, Netflix’s revenue was about 415.4 billion won in Korea in 2020 but it paid only 2.18 billion won in corporate tax. That was only 0.5 percent of its revenue. This was possible because Netflix lowered its revenue by reselling its Korean subscription fees to a Dutch entity. The National Tax Service saw this as a violation of law and imposed an additional tax of 80 billion won on the OTT service operator.
Netflix filed a tax appeal with the Tax Appeals Tribunal after the National Tax Service (NTS)’s decision. The decision was sent to Netflix on Aug. 9, 2023. The Tax Appeals Tribunal ruled in favor of Netflix for about 2 billion won, but the remaining 78 billion was was taxed by the NTS. Netflix has decided to follow up with an administrative lawsuit according to some analysts.
Many industry observers believe that Netflix is not the only global platform company that has started similar administrative proceedings in Korea. Google Korea and Facebook Korea were among the companies that were assessed taxes in 2021 and filed tax appeals with the Korea Tax Appeals Tribunal. The two companies reportedly paid additional taxes of 580 billion won and about 250 billion won, respectively. Unlike Netflix, Google Korea and Facebook did not receive a penny back as the tax tribunal dismissed their appeals in full. As a result, analysts expect that both companies are also pursuing administrative proceedings.
Netflix’s administrative case is expected to further fuel a debate on tax avoidance by big foreign tech giants that make astronomical profits in Korea but pay little in corporate taxes. Corporate taxes paid by major foreign platform companies are very small compared to those paid by Korean platform companies. Google paid 15.5193 billion won in corporate taxes in Korea in 2023, according to the National Audit Service. In the same period, Netflix paid 3.61754 billion won and Apple Korea 200.6043 billion won from Oct. 1 to Sept. 30 in the fiscal year of 2022. Combined, the three companies paid only 44.3 percent of Naver’s 49.63 billion won in corporate taxes in 2023.
The low corporate tax burden of these foreign companies is due to the fact that they have no nominally permanent business establishments in Korea. In order for the NTS to tax multinational companies, they must have a fixed business location in Korea and generate revenue from that location. However, global platform companies exploit this as a way to avoid taxes. Google, for example, reports its main revenues, such as domestic YouTube ad revenue and app market commissions, as revenue from its Asia-Pacific entity in Singapore to take advantage of lower tax rates. Netflix does the same thing.
Experts say that the digital tax system should be implemented sooner to block this loophole. The Digital Tax System requires companies to pay taxes in the country where the revenue is generated, regardless of whether or not they have a fixed business location.