December 12, 2024

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National Tax Service Vice Commissioner Choi Jae-bong

By Choi Jae-bong

The presence of global brands, such as for automobiles, footwear and food products, has become an inseparable part of our daily lives. From consumer goods to global platform corporations, multinational enterprises have firmly embedded themselves into the global economy, which is now entirely ordinary to us living in this era.

MNEs play a pivotal role in the global economy, driving technological innovation, creating jobs and fostering industrial development across various sectors. While their contributions have positively impacted global economies, they also stand at the center of debates over environmental concerns, labor exploitation and other social issues.

A notable issue surrounding some multinational corporations is their strategy of “global tax burden optimization.” Expert-designed business structures and strategies enable these corporations to minimize tax obligations. In response, the Korean National Tax Service has conducted rigorous tax inspections related to transfer pricing, permanent establishment and other issues. The NTS has also worked hard to address gaps in existing laws and enhance international cooperation so as to secure their taxation authorities.

However, the complex corporate structures and business models of multinational corporations make it difficult for tax authorities to grasp their exact revenue scales. Critical data necessary for audits is often inaccessible, as MNEs frequently claim that such information resides with their parent companies abroad. Some even refuse to submit the required documents, asserting that there is no legal obligation to do so. Despite existing tax laws allowing penalties ranging from 5 million won to 50 million won ($3,600-$35,800) for nonsubmission of data, these measures are relatively ineffective against MNEs with annual revenues in the trillions of won.

For example, a well-known global IT firm completely ignored requests for data submission during an audit, demonstrating a persistently uncooperative stance from the outset of the tax audit. In response, the audit team promptly imposed fines, yet the company showed little reaction. Left with no alternative, the authorities proceeded to levy taxes based on the limited data available. The corporation, as if it had anticipated such a move, promptly filed an objection to the administrative court. During subsequent litigation, it selectively submitted a large volume of overseas documents previously withheld during the audit -- choosing only those favorable to its position. This tactic significantly increased the likelihood of a court ruling in the company's favor, undermining the fairness and effectiveness of the investigative process.

Domestic firms, whose critical data is typically housed within the country, rarely face such disputes. In contrast, certain multinational corporations exploit their international structure, obstructing precise revenue analysis and complicating tax assessments. This unequal footing places additional tax burdens on domestic firms, often leading to unfair competition within local markets.

In response, the NTS has actively pursued legislative amendments to enhance the effectiveness of tax inspections. One such initiative includes the introduction of a “compliance penalty,” which imposes fines until data submission is complete. This system has already been implemented by other Korean regulatory bodies including the Fair Trade Commission.

Considering that larger corporations are more inclined to refuse data submission to evade taxes, the compliance penalty – calculated relative to corporate revenues -- is expected to serve as a more effective deterrent compared to standard penalties.

Should the proposed tax amendment pass, it would likely foster cooperative participation from corporations, ensuring fairer taxation practices. Also, the mere implementation of new measures will send a clear signal that such an uncooperative refusal of data submission cannot be a measure to avoid taxes any longer, contributing to creating a more equitable market environment for both domestic and international firms.

Moving forward, the NTS must continue to fulfill its role of securing national financial resources. Also, in order to meet the public’s heightened expectations for fair taxation, the NTS aims to establish a tax administration system that aligns with the principles of equity and transparency demanded in the era of the global economy.

Choi Jae-bong is vice commissioner of the National Tax Service. The views in this piece are his own. -- Ed.