Each year, the National Tax Service launches a special tax probe on self-employed professionals suspected of underreporting their incomes. In 2010, it zeroed in on 150 luxury businesses, such as plastic surgery clinics, skincare clinics and beauty parlors.
Wrapping up its two-year-long probe, the tax office announced on Tuesday it has collected a total of 100.2 billion won in back taxes from the businesses. The investigation result is disturbing as it suggests rampant tax evasion among people engaged in luxury businesses.
In one example cited by the tax office, a female doctor operating a woman’s aesthetics clinic in the posh Gangnam area of southern Seoul underreported 4.5 billion won of her income. She encouraged her customers to pay in cash but did not record cash receipts in her accounting book.
Tax officials found wads of 50,000 won bank notes totaling 2.4 billion won at her house. After collecting 1.9 billion won in arrear taxes, they referred her to the prosecution on charges of breaching tax laws.
In another case, a well-known plastic surgeon practicing also in Gangnam understated his income by 11.4 billion won using a similar method. He illegally modified his clinic building to create some space to store cash and the records of the patients who paid in cash. He was forced to pay 8.9 billion won in back taxes.
According to the Korea Institute of Public Finance, as of 2008, self-employed professionals and entrepreneurs underreported their income by 30 percent on average and thereby evaded taxes amounting to 7 trillion won a year.
The tax office should step up crackdown on tax evaders as the nation’s underground economy remains huge despite an increased use of credit cards. According to the National Assembly Budget Office, Korea’s shadow economy takes up 27.6 percent of the nation’s gross domestic product.
Given that Korea’s GDP totaled 1,237 trillion won in 2011, its underground economy can be roughly put at 340 trillion won. If a 20 percent tax is levied on all the transactions taking place in black markets, the tax office would be able to boost its tax revenue by some 70 trillion won.
Widespread tax evasion not only reduces tax revenue but undermines efforts to establish fairness and justice in taxation. The nation faces a need to increase tax rates to meet growing demands for welfare services. But any attempt to collect more taxes could face resistance from taxpayers if the government lets high-income professionals dodge taxes.
The tax office said it would follow up its recent campaign against luxury businesses with a new one, focusing on 30 establishments and 10 big businessmen. The targets include skincare clinics and beauty parlors whose annual memberships cost tens of millions of won.
Tax officials will also investigate importers of luxury furniture and watches valued at several tens of millions won per piece; operators of spas that charge more than 10 million won a year for their beauty services; and members-only hostess bars that charge millions of won per visit.
These efforts are all well and good. Yet few would bet that the tax office would be able to curb tax evasion with such a small-scale, once-a-year campaign. It needs to increase the frequency of its tax probes and expand their scale.
As information technology advances, tax evasion techniques become more sophisticated. The NTS also needs to be prepared to clamp down on intelligent tax dodging tricks.
Starting this month, the tax office can access information on cash transactions exceeding 20 million won collected by the Korea Financial Intelligence Unit. This should come in handy for tax officials in cracking down on tax evaders.