Vol. 2 [Bae,Kim&Lee] Korea Technology Sector Legal Developments

관리자 | 2019.04.27 | Hits 651
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Korea Technology Sector Legal Developments

Kwang Hyun RYOO


Minwoon Yang

1. Regulatory “sandbox” expanded; first exceptions granted in February 2019

January-February: New rules have been introduced to expand the regulatory “sandbox” in Korea, a framework for temporary permits and exemptions to enable testing and introduction of innovative businesses, amid an otherwise restrictive or murky regulatory environment. In communications and information technology, the Special Act on Promotion and Convergence etc. of Information and Communications was amended to allow regulators more latitude in granting temporary permits. Among the many applications that followed, a first wave of permits and exemptions was granted on February 14, 2019, including for example a healthcare app service to help coordinate clinical trials. Previously under the same law, regulators could grant a business a temporary permit for a 1-year period, but this was changed to a 2-year period (with a possible one time extension). Also newly added, regulators may grant a “special regulatory exemption for demonstration purposes”, to allow limitedscope testing.

For other industries generally, amendments to the Industrial Convergence Act, likewise taking effect in January 2019, instituted a similar framework of permits and exemptions, to facilitate innovative services and products. The first approvals granted under this regime, on February 11, 2019, included for instance an app-based electrical vehicle charging service using regular 220V outlets. (Korean news reports included this one.) In the financial sector, the new Special Act on Support for Financial Innovation, passed at the end of 2018 and set to take effect on April 1, 2019, will allow regulators to exempt selected businesses from certain financial industry rules. Already, according to reports (such as this one in English), over 100 applications have been filed, in advance of the effective date, for an array of new financial services, such as QARA, an AI-based provider of private financial data management.

2. Frontier technology R&D tax credits extended

December: The tax credit framework for frontier (or “new growth area”) technology R&D, which had been set to expire at the end of 2018, was extended through 2021 (i.e. available in respect of R&D through 2021), and there were notable additions to the types of eligible technology. The possible tax credit, under the Special Tax Treatment Control Act, is in an amount based on R&D expenditures (RDE) as a percentage of total revenues (RDE%Rev): credit = RDE x [N% + 3 x (RDE%Rev)], where N% is from 20% to 30%. Extended to December 31, 2021, the tax credit applies to R&D in areas such as autonomous vehicles, electric vehicles (EVs), AI, IoT, cloud systems, Big Data, biotech and so forth. Newly included from 2019, however, is R&D in technologies such as blockchain, quantum computing, various sub-areas of automotive technology (cordless EV charging, advanced vehicle displays, and so on), augmented reality, and other areas. 

The tax credit can include part of a company’s investments in facilities for commercializing eligible technology, subject to certain conditions, including the condition that the proportion RDE%Rev has to meet a certain threshold, but from 2019 this need only be 2% instead of the previous 5%. (Among other conditions, which remain the same, RDE in frontier technology has to be 10% or more of total RDE, in the preceding year.)

3. Certain online services will be required, from 2021, to supply business data to regulator

December: Under amendments to the Telecommunications Business Act (TBA) adopted on December 24, 2018, online service providers satisfying some threshold or other standard will be required, starting in January 2021, to supply to the Ministry of Science & ICT (MSIT) some scope of annual business information, for market evaluation purposes. Standards and particulars are to be later determined by regulation. There was already in place a requirement, for “core” carriers like KT, of providing annual data relating to market share, profitability and other matters, for the MSIT’s use in preparing a yearly analysis of the “competitive situation”. However, driven by concern about the local dominance of global services like Google and Facebook, the amended TBA will subject some scope of “value added telecommunications businesses” – which includes most online services – to a similar requirement of cooperating with MSIT market surveys. What profile of online businesses, and what types of data, will be affected is to be settled later, probably in 2H 2020.

This will not necessarily be confined to Korean businesses: An extraterritoriality clause was added to the TBA in late 2018 (so that it can apply to offshore businesses having an “impact on the Korean market or Korean users”), and thus the information requirement could extend to some range of foreign online services. In that case, the requirement might, among other things, facilitate enforcement of regulations that rely for their “bite” on potential penalties based on revenues.

4. Important online sector council outlines solutions for “reverse discrimination”

December: In late December 2018, the Internet Co-Development Council – a 48-person group assembled by the Korea Communications Commission (KCC, the main online services regulator) and including representatives from government, industry, research institutions and consumer groups – submitted recommendations aimed at “leveling the playing field” for domestic online businesses as compared to offshore competitors.

Among the recommendations, it is suggested that an extraterritoriality provision (similar to the one added to the TBA in late 2018) might be added as well to the IT Networks Act, a key data regulation for the online sector. Further, where offshore conduct would implicate a license under Korean law, the thinking is that the offshore company should itself obtain the license directly, rather than through a local subsidiary (as commonly done). Other recommendations call for an overhaul of various aspects of the regulatory framework, inspired by a sense that it has failed to keep pace with innovation. There is a significant possibility of the KCC embracing policies more or less in line with these recommendations.

5. Developments in network usage arrangements for foreign content providers

December: Following Facebook’s signing of a network usage fee contract with SKB in January 2019, there has been speculation regarding prospects for similar network usage arrangements by major foreign content providers (Netflix, Google etc.) and domestic online service providers. According to reports on the Facebook-SKB contract (such as this report in Korean), Facebook is to pay rent for the data center that will house cache servers, as well as usage fees for the network connecting to the server. The term is said to be 2 years, extendable. (Facebook has indicated that at least some reported details are incorrect.) Facebook is said to also be negotiating a network use contract with LGU+ (per Korean news report). Till now, Facebook operated in Korea only through domestic cache servers maintained with KT, and it was in that context that, last year, Facebook was hit with sanctions for re-routing SKB subscribers offshore – see BKL update of March 28, 2018.)

Netflix has had a contract with LGU+ alone, for use of its cache servers, and is not believed to be pursuing other tie-ups. However, Netflix’s ballooning popularity among users has been accompanied by a deterioration, in video speed and quality, for users who access through the SKB and KT networks. In response, SKB has reportedly expanded its network capacity, and KT is mulling similar steps. (Related Korean news reports include this one.)

The main telecom networks in Korea have cache servers set up specifically for Google in their respective data centers, and they assume the corresponding rent, electricity and interconnection charges. These accommodations were criticized in the National Assembly, during its audit of October 2018, as amounting to reverse discrimination against domestic providers Naver and Kakao. The Internet Co-Development Council, assembled by the Korea Communications Commission (also see item 4 above), has mooted the possibility of businesses like Google being required to bear costs of setting up 5G networks (per Korean news report such as this one.)