Tax controversy update vol. 13 - Consumption tax examinations: Insights from the latest data

The National Tax Agency has released their findings from the corporate tax examinations conducted during their standard business year running from July 2021 to June 2022. Taking a look at the number of field audits conducted by the NTA this year, it increased by 63.2% compared to the previous business year when there were less examinations due to the pandemic. This is a likely indicator that examinations are on the way to returning to pre-pandemic volumes. One particularly eye-catching component of this year's results is the amount of additional taxes related to consumption tax. The year-over-year increase in additional taxes resulting from this year’s examinations has even exceeded the levels seen in recent years (pre-and post-pandemic).

We can extrapolate from this recent data that additional tax amounts primarily include not only those resulting from the various tax items audited alongside corporate taxes during these examinations, but also include amounts additionally imposed as a result of audits on consumption tax refunds and instances in which duty-free transactions were not properly processed for inbound non-resident consumers. 

In regard to the denial of tax exempt treatment for certain sales, we’re sure many remember the recent media reports on major retailers and IT companies failing to sufficiently document their sales of smartphones and other products. As a result of this non-compliance, the NTA denied these sales tax exempt treatment. 

As for the topic of consumption tax, tax authorities have been recently establishing new departments across the country and bolstering their personnel by equipping those departments with auditing veterans. It is safe to say that the numbers in this latest report reflect the increased build-up of consumption tax know-how being used within examinations, which also hints at the impact these new tax departments and auditing professionals can have once they are fully operational. From what we are currently seeing in our own engagements, the number of overall examinations in and after July 2022 has increased compared to the previous year, and we can confidently project that additional taxes related to consumption tax will only continue to increase.

Another point to note is that consumption tax is likely to be put under more serious scrutiny than it currently is due to the implementation of the qualified invoice system. As always, keep your ears to the ground as this comes hand-in-hand with the adoption of the risk-based approach by the NTA - meaning consumption tax is likely to be a primary factor in how they select their audit candidates.

Our next issue will continue to look at consumption tax by covering tax implications in regard to coalition loyalty programs (point reward programs).