Companies in uproar over local tax audits

Companies are being hounded for taxes by both the central government and local government where their branches or factories are located.

Changes in the tax code from the beginning of this year allow local governments to collect taxes from companies in their local jurisdictions and to launch tax investigations on them just like the National Tax Service (NTS) does.

The revision to the law was made in 2013 and went in effect this year. Previously, the central government’s NTS was the only entity that collected corporate taxes. The tax agency gave 10 percent of corporate taxes to local governments.

With the change, all 226 counties, cities and provinces in Korea obtained the power to independently deal with local income taxes and launch tax investigations on companies.

“How can businesses survive tough economic times if tax investigations are doubled and tripled?” said an executive at a conglomerate that has 10 business units nationwide.

Samsung Electronics has its headquarters in Suwon, Gyeonggi, but has other offices and factories in five other regions: Gumi in North Gyeongsang, Giheung and Hwaseong in Gyeonggi, Onyang-dong in Asan, South Chungcheong, and Gwangju.

Hyundai Motor, headquartered in Seoul, has factories in Ulsan, Asan in South Chungcheong and Jeonju in North Jeolla.

Due to changes in the Local Tax Act, those companies now have to pay local income tax to each local government where their factories are located. Previously, they paid a lump-sum corporate tax to a regional NTS office where the company’s headquarters was located.

If a company has 20 branches or factories nationwide, it has to make separate tax payments to each regional government.

The change was aimed at strengthening local governments’ fiscal soundness by giving them power to independently levy and collect taxes.

From the private sector’s perspective, the hassle quotient is higher, and the absolute amount of taxes being levied are growing.

After a backlash, the Ministry of Strategy and Finance and Ministry of the Interior decided to revert to the old system earlier in the year. Finance Minister Choi Kyung-hwan said there was a need to “unify the tax investigation rights in the NTS, which has more expertise in the area.”

Rep. Cho Won-jin of the ruling Saenuri Party submitted a bill to re-revise the act in July, which reached the parliament’s audit committee. The Interior Ministry demanded each local government postpone all tax investigations to the end of 2016.

But the ministry’s demand didn’t have much power. It was just a recommendation.

Some local governments disregarded it and started their own investigations. Some companies faced a second audit within six months after being audited by the NTS.

An auto parts maker with a factory in Yeongcheon, North Gyeongsang, last week received a second audit from the provincial government following one from August through October by the NTS. The company is also worried that the Yeongcheon city government may hold another audit of its own, the third time in one year.

“If the government can’t get the act back into original shape, we think the audits on national taxes and local taxes should have terms of at least two to three years,” said an executive of a company that has branches in three regions.

Analysts and government officials were concerned about the policy from the start, but politicians knew it would appeal to the regions. The Finance Ministry opposed it from the start, but wasn’t able to stop it.

Local governments are defending their taxation and audit rights ahead of the general election next year.

“Entrusting all taxation and investigation rights to the NTS goes against the initial purpose of strengthening local governments’ taxation rights,” said Yoo Jeong-bok, Incheon’s mayor and acting president of the Governors Association of Korea.

“The NTS is capable of investigating only 1 percent of all corporate bodies in Korea,” said Kim Hong-hwan, a researcher at the Governors Association of Korea. “If local governments hold the investigation power, the nation’s overall tax administration will be a lot more transparent.”

In countries like Japan, Germany and Canada, the taxation standards for local income taxes are unified and set up by the national tax agency.

“Business activities will halt if all the local governments start auditing factories nationwide for taxes,” said a representative of the Korea Chamber of Commerce & Industry.

BY KIM DONG-HO AND SONG EUI-HO [kim.jiyoon@joongang.co.kr]