Tax audits sow terror in companies big and small

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Tax audits sow terror in companies big and small

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Heads of the National Tax Services’ regional operations gather for a meeting at the tax agency’s headquarters in Jongno, central Seoul, in April. The tax agency vowed to intensify its crackdown on the so-called underground economy, which involves tax dodging. [JoongAng Ilbo]

These are unhappy times for the bean counters in the accounting department of one conglomerate. Since May, seven agents from the National Tax Service have been going through their files day and night.

No one in the department has been able to leave the office before 9 p.m. since the tax men work late. And they have to be given whatever document they ask for.

So far the accounting team has handed in 20,000 pages of documents.

“Five years ago when the tax agents came for their regular check-up, the mood was much looser and we even exchanged jokes,” said one employee of the accounting department.

“But this time it’s different and we get this determined vibe, which makes it difficult to strike up a conversation.”

Companies big or small are all quaking over the aggressive tax auditing that started since President Park Geun-hye took office earlier this year.

Usually, the names of companies under tax investigations are not revealed while they are in process. This year, the names of 20 or so conglomerates being probed have been revealed. Since April, LG International has had tax agents going through its files and they plan to stay at the company for a total of 120 days.

Other companies being audited include SK Networks, Shinhan Bank, Standard Charted Korea, KB Kookmin Bank, GS Caltex, E1, Hyosung and Hanwha Life Insurance.

Following ‘principles’

The intensity of the audits is obvious from the length of time they’re taking.

An average tax audit takes two to three months. Currently, there are several companies that have been under audit for nearly half a year.

The National Tax Service (NTS) claims it’s just going about business as usual following the rules and principles.

“Many believe the tax agency is trying to collect more taxes through audits because the economy is struggling and fewer taxes are expected to be collected but that’s not true,” said an official at the NTS.

The official said only 1 percent of the total number of companies operating in the country are under audits, which is far less than in other countries.

The business community laughs at those disavowals and strongly believes that the Park administration is using the audits to fill up the coffers to pay for the President’s pledges in last year’s presidential campaign of more welfare spending.

In fact, the tax office has acknowledged that as of the end of April, its tax collections were 8.7 trillion won ($7.6 billion) less than a year earlier.

The tax agency has definitely beefed up its audit personnel. In April, the NTS said it added 400 additional tax agents specializing in auditing. Additionally 1,400 or so tax agents underwent an intense training program of how to sniff out the so-called “underground economy,” economic activity that happens off the books and therefore is not taxed. That includes offshore tax evasion.

The Korea Customs Service is also increasing its tax investigations. This year it has boosted the number of companies found eluding customs payments to 130 from last year’s 80.

“The NTS is saying they are investigating accordingly to principle,” said a high-ranking official at a conglomerate. “But there is nothing scarier than a government agency allegedly following ‘principles.’

“All these initiatives for ‘economic democratization,’ ‘shared growth’ and ‘coexistence’ [with small businesses] - on top of tax auditing - is making business really hard,” the official added.

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Influencing businesses

A conglomerate that is currently under audit was planning on expanding businesses through a merger or acquisition or beefing up its overseas operations in the second half. All of those expansion plans have been put on hold because of the audit.

The conglomerate was having no trouble getting the finance for its expansion. What it feared was the tax audit that would follow.

“Our business partners are requesting that we quickly go ahead with our business expansion,” said an official at the conglomerate. “But we explained to them the situation in the country and asked for their patience. We might lose our overseas partners but we came to the conclusion that it is better to lose a partner than to give the tax agency a new opportunity to audit.”

The only people not complaining are the accountants.

Tax accountants say they haven’t seen business this good since the dawn of modern Korea.

After rumors started to spread that the tax agency was stepping up its audits, any company of a decent size has been scrambling for counsel.

“Compared to the first half of last year, counseling requests have nearly doubled this year,” said an accountant.

Hiring former tax agents

One midsized company is planning to hire former tax agents from the NTS through a head hunter.

Although the company is not currently under investigation, it is taking action just in case.

The company was crystal clear on who they wanted to hire: The applicant needed to be in their early 40s with a history of working in the auditing department of the Seoul Regional Tax Office or Jungbu Regional Tax Office. The company is looking for someone with experience of at least 10 years, but not anyone who reached a high level as that could spark unwanted attention.

A company official said it wanted someone who knows the mood within the NTS.

“We’re just preparing in case a situation arises,” the official said.

Another high-ranking official at a company that is under audit said its accounting team complained that under such intense investigation it is inevitable that the NTS will dig up at least one past wrongdoing.

Some argue that the tax agency is even going after small entrepreneurs, who were asked to resubmit their income tax reports.

“Business could be good or could be bad,” said Kim Seon-taek, Chairman of the Korea Taxpayers Association. “It’s not right to require a refilling of an income tax report just because a business’s revenue is reported to be lower than a neighboring store or because payments made by credit card are less than those paid in cash,” Kim added.

An NTS official said the number of people who received notifications to resubmit their income tax reports hasn’t changed much from the previous years.

“If they have no readjustment to make all they have to do is clarify by turning in related documents,” the official said.

What are solutions?

Market analysts all agree on the need for tax audits. But they say it’s wrong to intensify tax auditing for the sole purpose of collecting more taxes. Audits should be to uncover tax evasion.

They say the government should change the tax levels if it needs to collect more taxes.

“The credibility of tax investigations will undoubtedly fall if the public sees them as a way of collecting more taxes to pay for campaign pledges rather than believing in them as a clampdown on tax dodging,” said Hyun Jin-kwon at the Korean Association of Public Finance.

“If tax auditing is overly used, its power could, on the contrary, weaken,” said Lee Yong-sup, a Democratic Party lawmaker who was once the head of NTS.

“It’s also not a right move to intensify tax auditing at a time when the economy is struggling, making it difficult to collect taxes.”

He said although there is a need to investigate cheating or delinquent taxpayers, it is equally important to push for a tax policy that could help improve companies businesses because more taxes can be collected when businesses are thriving.

Some argue that the president should climb down from her campaign pledges on welfare.

During the campaign last year, Park frequently promised to secure 40 percent of the 135 trillion won needed to pay for her pledges by attacking the underground economy.

“To keep her promise, she has to push forward with tax auditing,” said Kim Kwang-doo, who heads the Institute for the Future of Korea. Kim, an honorary economic professor at Sogang University, is an advisor to President Park. His institute is widely known as the President’s think tank.

“The government won’t be able to raise the tax rate since this is the first year for the administration,” said Kang Bong-gyun, a former finance minister. “But it will be difficult to meet the targeted tax collection just by squeezing and it will be costly when the [promised] welfare programs starts.

“A year after [starting the welfare program], even the public will realize it would be impossible [to maintain the welfare program] without actually raising taxes,” the former finance minister added. “Then the government will be faced with two choices: Either reduce the welfare pledge or raise taxes.”

BY YUM TAE-JEONG, LEE SU-KI [ojlee82@joongang.co.kr]

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