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Tax authority in tax dispute with Microsoft

Posted September. 22, 2016 07:33,   

Updated September. 22, 2016 07:49

한국어
It has been confirmed that the National Tax Service decided to reject Microsoft’s demand for redemption of corporate tax amounting to 634 billion won (569 million U.S. dollars), which the U.S. tech company made late last month in a bid to “redeem the tax that the Korean tax authority had levied on patent fees.” As a result, a tax dispute suit will be the largest ever, which exceeds the 412-billion won (370 million dollars) tax suit that KB Kookmin Bank filed in 2015.

According to the legal community and taxation community on Wednesday, the National Tax Service plans to inform Microsoft next month of its decision to reject the demand, saying, “It is natural that the tax authority levy tax on transactions conducted in Korea.”

The subject of the dispute is the corporate tax Samsung Electronics directly paid to the tax agency through deduction from its sales. Samsung used Microsoft's patents when producing smartphones and PCs, and paid patent fees amounting to about 1 trillion won (900 million dollars) per year. In the process, Samsung paid the tax in the form of withholding tax, which amounted to up to 15 percent of the patent fees, in accordance with the Korean corporate tax act and the Korea-U.S. tax treaty, before paying the fees to Microsoft. Microsoft said that as the intellectual patent rights are registered with the U.S., the Korean government has no right to collect taxes on it.”

The company has made the request based on the so-called "territorial principle of patent." Under the territorial principle of patent, a patent registered in country A is only effective in country A, and cannot take effect in other countries.

Refuting Microsoft’s claim, the government says, “If we follow Microsoft's logic, Korean companies do not need to pay patent fees in the first place when using patented U.S. technologies.” The government argues when a Korean company uses Microsoft patent, it pays fees irrespective of the country where the patent is registered, and its paying tax for the patent is justifiable. Moreover, under the Korean corporate tax act amended in 2008, when a foreign patent is used in production and sales in Korea, it is construed as having been used within Korea.

However, the national tax agency is concerned that a past ruling by the Korean Supreme Court can be interpreted as being in favor of Microsoft. Back in 1992, the Supreme Court ruled that the tax authority cannot levy withholding corporate tax on compensations for the use of a patent that is not registered in Korea.

People argue that the Supreme Court’s ruling in question needs adjusting. The tax treaty based on the Organization for Economic Cooperation and Development’s model that is applied as the international taxation standard provides that “tax levied on patent fees is irrelevant to the country where the patent is registered.’

The fact that Korean companies are paying a growing amount of patent fees to U.S. companies is another reason that a new ruling is required on the right to levy tax on patent fees in Korea. According to the tax agency, Korea’s deficit in patent fees against the U.S. amounted to 5.82 trillion won (5.22 billion dollars) last year. When the tax rate cap (15 percent) under the taxation treaty is applied, the Korean tax authority can impose about 872.4 billion won (782 million dollars). If Korea follows the Supreme Court’s past ruling, it cannot collect even a single penny of this tax. “The Supreme Court’s ruling is, to some extent, not complying with the international trend that seeks to strengthen taxation on multinational companies,” Prof. Park Jong-soo at the Korea University Law School said.



세종=이상훈기자 january@donga.com