NTS push for ‘honest’ tax filings sparks unlikely rise in collections
But this year, the National Tax Service (NTS) began offering a new service on their website where taxpayers can check personal expenses on their corporate credit cards while being informed of what to include or exclude on their corporate tax filings.
In January, a businessman received in the mail a statement from the NTS detailing the personal purchases he charged at small stores and restaurants. The statement included establishments with annual sales of less than 48 million won ($41,000).
By using this statement, he was able to properly file for value-added tax refunds. Last year, he had to pay additional taxes on credit card purchases he made at small stores, as they are not included in the annual tax refunds.
“This year, I was able to make an accurate tax filing because I was able to know exactly which purchases I have made in such small stores,” the businessman said.
When Lim Hwan-soo was appointed commissioner of the NTS in August 2014, the institution began implementing a new “honest tax report and payment” system, adding that excessive intervention by the tax agency would have negative effects on business and, in fact, would reduce tax collection.
His position came as a shock considering his specialized experience in tax investigation at the NTS.
Lim said that he believed that 90 percent of the taxes collected come from voluntary tax reporting. He turned his focus to ensuring that taxpayers voluntarily file accurate returns.
To help taxpayers fill out their tax returns accurately, the NTS began demonstrating to taxpayers where errors are frequently made, while warning high-income earners of the consequences of submitting fraudulent returns. His move also reduced the possibility of corporations and individual businessmen using loopholes to avoid paying taxes.
His efforts paid off. For the first time in four years, the tax shortfall ended. Last year, the government collected more than 200 trillion won in taxes.
In the first four months of this year alone, the government has collected 96.9 trillion won, 18 trillion won more than the same period last year.
The tax collected is 43.5 percent of the government’s yearly target, which is 7 percentage points higher than last year’s 36.5 percent.
Considering that tax collection is usually strongly connected to the strength of the economy, a high collection rate is considered unusual as the economy this year has been in a slump.
There are several reasons to explain the exceptional results in tax collections.
As economic growth has slowed, companies have focused on increasing their profits rather on their size.
As a result, their operating profits have risen, resulting in a larger collection in corporate taxes. The tax agency’s cutback on tax exemptions as well as the newly levied individual consumption tax on cigarettes in 2015 contributed to the larger tax collection.
However, these reasons alone are not enough to explain the rise in collected taxes.
“We have found that other than the tax reform and the changes caused by the economic situation, the increase in the number of voluntary honest tax reports is highly connected to the improved tax revenue,” an NTS official said.
The NTS tax guidelines are becoming more detailed. Through its website, the agency provided guidance on 20 corporate tax-related categories to 110,000 corporations in March.
This is a marked improvement from 15 categories to 60,000 corporations last year.
The guidelines not only included information on the companies’ tax returns for the past three years but also overdue payments as well as details on cautions that taxpayers need to consider when submitting their filing, including personal expenses on corporate cards, excessive purchases of gift cards and examples of falsifying labor expenses.
The detailed guidelines are designed to prevent errors or intentional falsification on tax returns.
The guidance includes value-added tax. In January, 700,000 taxpayers received guidelines detailing value-added tax refunds broken down to 75 categories.
It paid special attention to large business and high-earning business owners who have the tendency to file inaccurate tax reports.
It gave specific examples of sales omissions and unfair refunds. The guideline is seen as a warning to those who are thinking of defrauding the tax agency.
To reduce the tendency of small-scale businessmen making errors due to a lack of knowledge about taxes, the NTS sent a list of expenses that cannot be deducted. In May, the NTS distributed information regarding financial statements and 60 tax categories to 580,000 individuals who owe general income taxes.
The guidelines came after the agency updated a national tax administrative system that has been in place for more than 20 years.
The next-generation system used big data in securing tax data and analysis. The use of such big data through an integrated system has also given the public a perception that dodging and manipulating tax loopholes is impossible.
“The NTS’s efforts to encourage sincere filings of tax reports have reduced taxpayers’ urge to avoid taxes,” said Kim Ji-hoon, who works at a tax accountant office. “Tax agents, who used to advise clients on tax evasion through irregular methods, are now advising clients to file their tax reports accurately.”
To further enhance its policy moves, the NTS has moved more than 200 employees working on planning and investigation to departments that are more centered on redirecting taxpayers to file honest returns.
Tax auditing cases have dropped from 18,000 in 2013 to about 17,000 in the last two years. The government is planning to maintain the number of cases it audits at the same level this year.
Audits have dropped 53.5 percent from 71,277 cases in 2014 to 33,130 last year.
“The voluntary tax payment rate has gone up, while post-verification investigation has dropped as the NTS’s taxation infrastructure has expanded and the public’s mood on voluntary sincere reporting has started to spread,” a government official said.
However, despite such efforts, the conditions in which the government is able to rake in more taxes are expected to worsen, especially as the economy continues to struggle amid a rapidly aging population.
“It is true that accurate tax reporting has contributed to an increase in tax revenue,” said Park Hyung-soo, head of the Korea Institute of Public Finance. “However, considering the bleak economic situation, it is going to be difficult to maintain high levels of tax revenue, and economic difficulties may have an adverse effect on a taxpayer’s willingness to file tax reports honestly.”
“Tax authorities should encourage honest filing of tax reports,” said Ahn Chang-nam, a Kangnam University professor who specializes in tax accounting. “There are still some high-income private entrepreneurs who are evading taxes, and the authorities need to concentrate on building a system that prevents such actions.”
BY HA NAM-HYUN [firstname.lastname@example.org]