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Tax authority to toughen regulations on offshore tax evasion

The National Tax Service’s task force on Monday released a final report of recommendations on reforming the national tax system that include tougher regulations against offshore tax evasion and closely looking into the creation of borrowed-name accounts or corporate foundations to curb the abuse of power by chaebol.

“Despite continued investigations on offshore tax evasion, the practice has not been rooted out and it is becoming more intelligent under the surface,” said the task force in the report released five months after its launch.

The special team urged the tax authority to require companies to prove unreported sources of funds in foreign financial accounts. Currently, only individuals are required to prove the unreported sources.

If the authorities catch unreported overseas assets, the companies should be levied with a fine and be forced to prove the origins, the report said. If they fail to prove the sources, they should be imposed with additional penalties.

These and other recommendations were made with an aim to overhaul the taxation system that is often politically swayed or criticized. Based on the report, the NTS will select plans that they can autonomously push to implement from this year. For tasks that need long-term review or a law revision, the tax authority will work with related ministries to reflect the recommendations as much as possible.

The task force, in the report, also urged the NTS to expand the exchanges of information with tax haven nations and cooperate with international bodies, such as the Joint International Taskforce on Shared Intelligence and Collaboration for joint response.

According to government data, the amount of offshore tax evasion last year stood at 1.1 trillion won, a 3.6 percent rise from a year earlier, and the figure is expected to rise this year.

The National Tax Service’s task force chief Kang Byeong-koo (second from left) announces its recommendations on reforming the national tax system on Monday.
The National Tax Service’s task force chief Kang Byeong-koo (second from left) announces its recommendations on reforming the national tax system on Monday.

Among business moguls, CJ Chairman Lee Jay-hyun was sentenced to 2 1/2 years in prison in 2015 for tax evasion. Out of a total of 26 billion won, he hid 4 billion won in the Virgin Islands through a paper company.

The task force also urged the government to toughen regulations on borrowed-name accounts of conglomerates.

“Large companies’ illegal transfer of inheritance is becoming more intelligent under the surface. In order to prevent illegal management succession, the government should widen the range of the investigation of borrowed-name accounts from families into relatives and employees,” the task force said.

Borrowed-name accounts, for instance, have long been an issue for Samsung Chairman Lee Kun-hee.

In December, the National Police Agency said it found additional slush funds of Lee worth 200 billion won in around 20 borrowed-name accounts of Samsung’s former and current employees.

In total, the authorities say they have so far found more than 4 trillion won of funds allegedly belonging to Lee saved under the firm’s employees since 2008.

To curb a conglomerate from illegally strengthening its ownership, the task force also advised the government to impose tougher regulations on corporate foundations.

The corporate foundations are mostly set up with the aim of contributing to society through scholarships or research funds. The subsidiaries donating money to the foundations are thus given various tax benefits. Some families are reported as having used the foundations to reduce inheritance and gift taxes or strengthen the family’s power rather than spending for those in need.

“As for the corporate foundations having more than 5 percent stock of conglomerates or hiring employees close to owner families, the investigation should be tougher,” the special team said.

In October, the ruling Democratic Party unveiled the expenditure of 10 corporate foundations of the nation’s top eight conglomerates over the last three years. The spending in proportion to income was found to be less than 50 percent on average. In particular, Samsung Life Public Welfare Foundation and Hyundai Heavy Industries’ Asan Foundation spent 0.69 percent and 1 percent respectively in proportion to income.

Other recommendations in the report included strengthening external control of the NTS with regard to occasional tax investigation that is criticized as politically influenced. The task force said when tax officials are unduly asked by authorities such as the Blue House to make tax investigation on certain individuals or companies, they should report to audit body to prevent power abuses of authorities and politics.

As for imposing tax related to new tech platforms, the team recommended the government revise related laws to respond to new tax sources such as e-commerce using social networking services and virtual currencies.

The NTS was also recommended to reinforce the capacity to deal with suits involving aggressive tax planning and to actively reflect guidelines set by the Organization for Economic Cooperation and Development in local regulations with regard to preventing tax evasion by multinational companies.

The task force’s recommendations were initially to be released in December but it was delayed for reasons including the latest cryptocurrency craze and the government toying with the idea of levying tax for investment gains.

The recommendations will be reported next month to the NTS’ advisory body, the National Tax Administrative Reform Committee, which will periodically monitor whether the NTS carries out the recommendations.

By Shin Ji-hye (