Global Tax Alert | 19 June 2013

Korea's recent tax audit trend focuses on specific targets

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Executive summary

Korea’s National Tax Service (NTS) announced that their future audit efforts will focus on specific targets, including but not limited to multinational and large enterprises and issues associated with the violation of tax laws and social orders. The NTS also networks with the Financial Supervisory Services and other government agencies and foreign jurisdictions through its treaty network or tax information exchange agreements (TIEAs) to obtain sufficient information, in particular on taxpayers involved in offshore transactions.

Detailed discussion

The Korean government’s announcement to implement various social welfare policies is creating a large gap between an expected increase in the government’s spending and offsetting revenue. Coupled with the stagnant economic situation in Korea, the NTS is under pressure to collect more tax revenue through means other than a tax rate increase, such as tax audits. To accomplish such revenue raising efforts, the NTS announced its intent to focus on specific targets, including multinational and large enterprises and high income individuals, involved in offshore and other transactions for tax evasion motives and/or violation of tax laws and social orders.

In addition, the NTS has increased its number of tax auditors and has created new investigative teams, which will enable the NTS to expand its audit activities particularly with respect to large and groups of companies. The percentage of large companies1 selected for tax audit has increased by 4% to 20% from the prior year. Further, a significant emphasis is being placed on cross-border and intercompany transactions to evaluate potential inappropriate arm’s length principles.

Additional areas of focus for multinationals and large enterprises may include the following:

  • setting up slush funds;
  • unfair trade practices;
  • unlawful donations;
  • manipulation of share prices;
  • illegal loan transactions.

The NTS has also expanded its information exchange network, either through amendments to existing income tax treaties or entering into new TIEAs, strengthening information exchange cooperation with Japan, and entering into information sharing agreements with the US, UK and Australia.

This new tax audit trend and the recent Board of Audit and Inspection’s broad audit of the Ministry of Finance and the NTS is expected to increase more scrutiny and challenges from the NTS and the Tax Tribunal to grant refunds and credits to taxpayers.

Endnotes

1. With gross sales of over KRW 50 billion (US$44 million).

For additional information with respect to this Alert, please contact the following:

Ernst & Young Han Young, Seoul
  • Jaewon Lee
    +82 2 3787 4601
    jaewon.lee@kr.ey.com
  • Jeong Hun You
    +82 2 3770 0972
    jeong-hun.you@kr.ey.com
EY Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Bee Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM3544