Download 1. Background

VAT Administration in Korea
March 2005
National Tax Service
Value Added Tax Law
1. Background
In 1977, 8 indirect taxes were integrated into VAT in order to
streamline Korean tax system.
2. Tax Rate of VAT
Basic rate : 10% of added value
Zero-rating : Transactions relating to the exported goods
and the services provided in foreign countries.
Exemption : Transactions relating to non-processed foods,
medical service, educational service, financial and
insurance services, and so on.
Value Added Tax Law
3. Suppliers collect VAT
Suppliers(Sellers) add 10% to the price on each
transaction and pay the 10% to tax offices every 3 months.
4. Deduction of VAT collected
Suppliers deduct the amount of VAT that is collected by
another supplier when they purchase goods and services.
It is not applicable to the suppliers who provide the goods
and services under VAT exemption.
Value Added Tax Law
5. Exception : Simplified Taxation
Background : VAT was introduced in order to simplify the
tax reporting procedure of small companies and thus
enhance the level of tax compliance.
Target : self-employeds under 48 mil won ($ 46,600) on
annual sales basis
Taxable Period : every 6 months
Calculation of Tax : Sales during taxable period × Average
rate of added value to the sales in the same business type
× 10% (VAT rate)
VAT Revenue (2003)
1. VAT among other taxes (Billion dollar)
Types
Revenue
Revenue
32.5
Types
Customs Tax
Value Added Tax
Individual Income Tax
20.1
13 other Taxes
17.8
Corporate Income Tax
24.9
Total
101.9
6.6
2. Breakdown of VAT revenue (Billion dollar)
VAT on Domestic Transaction
Collected Refunded
30.5
16.2
Actual
14.3
(1)
VAT on
Imported (2)
Total
(1+2)
18.2
32.5
Infrastructure for Fair Taxation
Tax Invoice
Credit Card
Taxation
Infra
(NTS)
Data from
Public Agencies
Cash Receipt
Self Assessment
Encouraging Taxpayer Compliance
1. Tax Invoice
1st step : Suppliers are obliged to issue tax invoices to
purchasers when they provide goods and services. If not,
1% of non-issued sales shall be imposed as a penalty.
2nd step : Suppliers and purchasers must submit a format
containing details of tax invoices to tax offices.
3rd step : Tax offices type details of tax invoices into the
NTS main computer.
4th step : Computer detects taxpayers who failed to report
or report under their actual sales.
Encouraging Taxpayer Compliance
2. Credit Card Policy
Background : Cash remains no trail and many tax-evaders
would not report their cash sales. So the Korean government
decided to encourage people to use credit cards from 1999.
Incentives : 20% of credit card expenditure can be deducted
from credit card users’ taxable income and $ 17 million was
granted to credit card users by a lottery system in 2000.
Result : credit card expenditure increased sharply
(Billion dollar)
1997
37
1998
30
1999
2000
41
77
2001
131
2002
2003
168
165
Encouraging Taxpayer Compliance
3. Data from Public Agencies
In 1999, National Assembly passed a special law that
orders public agencies to provide 103 tax-related
documents periodically to the National Tax Service(NTS).
Examples of Tax-Related Documents
- details of law suit from the Supreme court
- details of expenditures from insurance companies
- details of business licenses from local government
NTS developed an electronic system analyzing taxpayers
by matching the document with their reported sales.
Encouraging Taxpayer Compliance
4. Cash Receipt System
It is a system recording cash transactions in the same
way as the current credit card system.
① cash and cards
Consumers
Restaurants
④ cash receipt
⑥ document for
income deduction
National
Tax Service
② details
⑤ details
③ approval
Franchised
agencies
Tax Frauds And Regulations
1. Tax-invoice Sellers
Cause : As Korea becomes transparent through the
previous measures, many taxpayers try to reduce tax
burden by increasing fake purchase with fake invoices.
Example : Tax-invoice sellers purchase a corporation and
issue fake tax invoices to the demanders.
Detection method : NTS analyzes the characteristics of
tax-invoice sellers and built an electronic system that
shows the suspects conforming to the characteristics
Penalties : Maximum 3 year’s imprisonment
Seize without prior warrant (From 2005)
Tax Frauds And Regulations
2. Credit-card-striper Lenders
Cause : Credit card policy raised tax burden of the
businesses especially dealing with individual consumers
Example : A person opens a store with only VAT(10%)
obligation, lends his/her card striper to another store with
the obligation of both VAT(10%) and Special Consumption
Tax(10%) and receives commission from the borrower
Detection method : NTS analyzes the characteristics of the
lenders and built an electronic system that shows the
suspects conforming to the characteristics
Penalties : Maximum 1 year’s imprisonment
Tax Frauds And Regulations
3. Illegal-tax-refund Applicants
Example : A corporation imported huge amount of gold
bars, exported it a month later and applied for VAT refund.
It was found later that the corporation put the other cheap
objects in exporting containers and the imported gold
bars to domestic merchants through black market.
Detection method : NTS analyzes the characteristics of the
illegal-tax-refund applicants and built an electronic
system that shows the suspects conforming to the
characteristics. And NTS is strengthening the cooperation
with the Korea Customs Service.
Observation
1. The scale of tax frauds is getting bigger
Most of all, illegal tax refund is complicated and getting bigger in
Korea. The NTS is now preparing a significant measure.
2. The limit in regulating tax frauds efficiently
Korea is making great efforts to prevent illegal tax refund but is
aware that conducting it alone is not efficient because illegal tax
refunds are diverse, intelligent and globalized.
3. International cooperation is necessary
Korea does feel it very important to exchange tax-related
information with foreign countries.