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[Contribution] June is time to report your overseas financial accounts

National Tax Service Vice Commissioner Mun Hee-chul (NTS)
National Tax Service Vice Commissioner Mun Hee-chul (NTS)
It has been a long time since the hide-and-seek of foreign property by some wealthy people has become a serious problem worldwide. As most of them aim not to pay taxes, tax authorities around the world are focusing their capabilities on finding foreign hidden properties of tax evaders. The representative case took place in Switzerland in 2009.

In 2009, the US Internal Revenue Service found that UBS Bank had concealed assets of wealthy Americans in secret accounts and helped tax evasion. The US government pressed the Swiss government to provide a list of UBS Bank’s American accounts and eventually succeeded in obtaining it the following year.

As a result, the US introduced the Foreign Account Tax Compliance Act (FATCA) in 2010, giving not only taxpayers but also foreign financial institutions a reporting obligation to provide US taxpayer account information to the IRS. With the end of Switzerland’s financial secrecy, major countries around the world are actively seeking to secure their citizens’ overseas financial information.

In line with this global trend, Korean government also introduced the “Overseas Financial Account Reporting System” at the end of 2010 as an institutional infrastructure to induce voluntary reporting of overseas income and to curb offshore tax evasion psychology in advance, and it was first implemented in June 2011.

The overseas financial account reporting system obligates a resident or a domestic corporation holding overseas financial accounts exceeding 500 million won ($443,000) on any of the last days of each month of the relevant year to make a report to authorities. And a person obligated to report must report account information such as personal information of the account holder, the account number, and the maximum amount of the remaining account balance to the head of the tax office having jurisdiction over the place of tax payment from June 1 to 30 of the following year.

If a borrowed account is held, not only the nominal holder, but also the actual holder of the account are obligated to report, and if the account is held jointly, each of the nominal holders are obligated to report.

The National Tax Service of Korea is working closely with the international cooperation by expanding the countries subject to automatic exchange of financial information (AEOI) every year to enhance the effectiveness of the overseas financial account reporting system. One can no longer hide your account in Switzerland or the Bahamas like the main character of a movie. This is because both countries have become financial information exchange countries.

In practice, the NTS has unveiled a non-reported foreign bank account of a company owner through AEOI where he received his company’s transaction commissions to his private account in a foreign bank. This sort of case, which leads to additional taxes over foreign incomes and penalty payments on the failure of reporting overseas financial accounts (10-20 percent of undeclared amounts), continue to be detected. Recently, the NTS imposed a large corporate tax and relevant penalty fee on an entrepreneur who failed to disclose his personal bank account in Hong Kong, where his company deposited sales payments remitted from its business partners.

Since the introduction of the overseas financial account reporting system in 2010, many improvements have been made in line with environmental changes, such as demands to eradicate offshore tax evasion.

At the time of introduction, only bank and stock accounts were subject to reporting, but from 2014, it was expanded to all financial accounts such as derivatives, bonds, funds, and insurance. In 2019, the reporting threshold was reduced from 1 billion won to 500 million won. As the system improved and stabilized, the number of accounts subject to reporting and the number of reporting obligations gradually expanded.

As a result, in 2011, the first year of implementation, 525 people reported a total of 11.5 trillion won. In 2020, 2,685 people reported a total of 59.9 trillion won. Ten years after the implementation of the system, the number of reporters increased 411 percent (2,160), and the reported amount also surged 421 percent (48.4 trillion won).

Such achievements seem to be the result of high public interest in offshore tax evasion, voluntary cooperation of taxpayers, and an effort to improve the system and publicity of the NTS.

In the future, the NTS will do its best to increase the transparency of offshore tax sources by continuing to actively guide reporting and improve the system to increase the effectiveness of the reporting system. The NTS plans to cope with violators of reporting obligations by carrying out proper measures such as penalties, criminal charges and disclosure of lists.

It will be June soon. In order to avoid disadvantages due to non-reporting of overseas financial accounts at a difficult time when economic activities are pressured by the lingering COVID-19, those who own an overseas financial account with more than 500 million won are urged to faithfully report it. We believe that voluntary reporting is the best option.

By Mun Hee-chul

Mun Hee-chul is vice commissioner of the National Tax Service. Views reflected in this article are his own. -- Ed.