Tuesday, April 19, 2011

Interview: Mr. Lee Hyun-dong, Commissioner, National Tax Service

Last year, Korea marked its highest level in foreign direct investments since the financial crisis, which is close to $12.8 billion, despite of instability in the financial market and the geopolitical security crisis. Korea also achieved the growth rate of 6.1% last year thanks to foreign investment, even amid a global trend of a decline in foreign direct investments.
Though the number of foreign and foreign invested companies in the Korean market takes up only 2%, their contributions to Korean tax revenue is significant, reaching up to 18% of the national revenue.
At the pan-governmental level, Korea is making every effort to attract foreign investment. Starting this year, the National Tax Service started issuing statements in English to help non-Korean speakers. Taxpayers are also now able to choose an English-language option for statements from as far back as the 2006 fiscal year. Previously, taxpayers paid fees to translate and notarize financial statements, which were only available in Korean.
Beginning June 24, the agency will also issue statements via its Web site (www.hometax.go.kr). The tax agency will open an English-language Web page to improve services for foreigners and foreign companies seeking to verify documents. These are just some of the proactive steps that the agency is taking under Commissioner Lee Hyun-dong. In an interview, he explains more:

In your view, what is currently the most important challenges and objectives of National Tax Service?
The reality faced by National Tax Service in 2011 is characterized by challenges of weakened tax base, more aggressive tax evasions and opportunities such as strengthened trust for tax administration, more transparent society and international cooperation among tax authorities.
Under these circumstances, National Tax Service's objective for this year is "fair and trustworthy tax administration respecting our clients" so that it can be one of the world's best tax authorities.
To achieve this goal, we will first make efforts to create a social environment in which honest tax payers are truly respected. We'll lend support so that sincere small businesses won't have to worry about how to pay tax. We'll also minimize the amount of notices reminding them of reporting income so that everyone can pay tax in an autonomous manner. Moreover, those who continue to pay tax honestly will be exempt from tax investigations or benefit from simplified investigations. To help Korean businesses operating overseas, we'll strategically consider the preliminary approval of previous prices and a mutual agreement between Korea and the country where the Korean business is run. If necessary, we'll strengthen the bilateral cooperative network through, for example, the national tax service commissioners' meetings.
Second, we'll strengthen our system preventing tax evasion by further encouraging citizens to pay tax honestly. Doing this will require us to clearly identify tax evasion cases and to select those subject to tax investigation in a rational way. Moreover, to eradicate new types of tax evasion based on financial derivatives or e-commerce, we'll develop and support investigation techniques at the Forensic & Anti Tax-evasion Center (FAC) which was established this February. In addition, we'll continue to ensure transparent transactions by firmly establishing the system of e-tax invoice and by strengthening the monitoring of business types eligible for issuing cash receipts.
Third, we'll continue our efforts to find hidden sources of taxation. A case in point is prevention of offshore tax evasion. Last year, we worked hard on developing the infrastructure designed to prevent offshore tax evasion. Base on this infrastructure, we'll focus on blocking such evasion. Meanwhile, we'll try to strengthen the tax base by cracking down on those who don't respect the basic tax order. Examples of such cases that are to be eradicated would be politicians who violate law to evade tax, those who avoid paying overdue taxes, those who carry out transactions without issuing tax invoices and those who don't register their business.
Are there any measures in place designed to help foreign investors pay tax easily in Korea?
What is the most necessary for a business operating overseas would be a transparent and predictable tax code and a strong taxation system.
To enhance the transparency and predictability of taxation, we make efforts to improve our current Q & A system to give accurate answers more promptly. Moreover, we introduced a system meant to help interpretation of the tax law in 2008. This system allows tax payers to ask more specific questions about their everyday tax paying practices and to receive applicable answers from National Tax Service.
Furthermore, National Tax Service reached "gentleman's agreements" with businesses. This agreement allows businesses to communicate their tax-related issues to the Service whose special team answers their questions in real time. Up until last year, we conducted a pilot project to test this system on 15 businesses and this year, the Service signed this agreement with 70 businesses. The companies that sincerely respect the clauses of the agreement will be exempt from the regular tax investigation.
This agreement enables the businesses to predict their tax amount before reporting their revenue and it also removes unnecessary uncertainties regarding taxation. The agreement is thus expected to contribute to enhancing the transparency of business management, a factor that is particularly emphasized these days.
Second, there are many easy ways to report income and pay tax. Our Hometax-service, which allows tax payers to report their income and pay tax without visiting the tax office, would be one of the best services in the world. More than 96% of the corporate tax is reported and payed through this service. In addition to reporting and paying tax, other major affairs such as business registration may also be done online thanks to the "Paperless-e" office whose functions have been expanded.
National Tax Service has recently revealed its willingness to eradicate offshore tax evasion. Could you specify?
Offshore tax evasion triggers unfair taxation in that such tax payers mostly possess a great amount of income and property and in that they give unnecessary tax burdens to honest tax payers. Moreover, illegal capital flight preceding such evasion also chips away domestic consumption and investment resources, damaging the domestic economy. That is why such evasion needs to be eradicated.
In an attempt to alleviate their financial deficit and to secure tax revenues in the post-recession era, countries around the world engage in a war to fight against such evasion mainly by creating new domestic systems and by allocating more budget. International cooperation is also strengthened in this matter in the framework of the OECD or G20. Meanwhile, countries traditionally known as tax havens have recently agreed to ensure their financial transparency, contributing to the creation of an international environment favorable for the eradication of offshore tax evasion.
Since last year, National Tax Service has also concentrated on eradicating such evasion. This endeavor has drawn attention not only form the Korean media and National Assembly but also from all Korean citizens who have actively supported us.
Last year, we focused on establishing a system designed to respond to offshore tax evasion. To be more specific, we adopted a system which requires those who have more than one billion won in the account of an overseas financial institution to report the transactions of the account. We also created an organization specializing in dealing with such evasion and secured a budget to eradicate such practices. These are our tangible results.
This year, we'll redouble our efforts to secure a tax revenue of at least one trillion won in the tax investigation on offshore tax evasion. To do so, we have increased the number of those who participate in this investigation and only highly competent people can be the members of our investigation team. In addition, our agents will be dispatched to the cities where tax evasion is the most frequent or to those that are included in the itinerary in order to ensure onsite data collection. Moreover, we'll strengthen the simultaneous tax investigation with other countries including the United States, while making the best use of the simultaneous information exchange agreements signed with tax havens, in an attempt to find domestic property that is hidden overseas.
Our biggest priority for now would be the successful implementation of the overseas account report system which was launched this year.
Foreigners who work for foreign companies in Korea live in the country according to the domestic tax code but if they lived in Korea for less than five years over the last ten years, they don't have to report their income.
Many SMEs are worried about frequent tax investigations. Do you have any solution to ease their concerns regarding such investigations?
In Korea, the percentage of SMEs that undergo tax investigation is lower than that of large businesses. As of 2009, only 0.83% of Korean SMEs were subject to such investigation. It is thus difficult to say that Korean SMEs undergo frequent tax investigation.
Nevertheless, National Tax Service is making administrative efforts to minimize SMEs' burden when they become subject to such investigation.
First and foremost, if a relatively honest SME has to undergo an investigation, the investigation period becomes shorter and simpler. Such "simplified tax investigation" is focused on management consulting in the area of accounting and tax, rather than on taxation itself.
As for very small businesses which don't have its own office or whose office is too small, their representatives may also visit the investigation authorities to undergo investigation. This "out-of-office investigation system" enables such businesses to save their taxation-related expenses.
Furthermore, to remove the uncertainties faced by tax payers before undergoing such investigation, we provide them with an orientation course before the investigation and explain the process during the investigation period. At the end of the investigation, a special day is in place to answer the tax payer's questions.
Lastly, if an investigation infringes on the tax payer's rights, he or she can ask a "tax payer protection agent" for help. Through this system, we're doing our best to make sure that each tax payer's rights are protected.
Although it is true that the measures mentioned above greatly help small businesses alleviate their economic or psychological burdens, what is more important would be the mutual trust between National Tax Service and tax payers. Such trust can be formed when both respect the mutually agreed-upon rules. To win trust from Korean citizens, National Tax Service will conduct tax investigation based on the laws and rules and it will do its best to prevent any misunderstanding that may arise from its investigation.

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