As Tax Revenues Fall Short, Government Targets Small, Midsized Firms

Mr. Kim protested to the authorities that because of the practice among small-scale retail and wholesale businesses of mediating financial transactions by lending GIRO forms to other businessmen, his income appears to be far higher than what it actually is.

But all he heard in reply was the firm injunction that he had to pay additional taxes of 36 million won as a result of his failure to declare his full income. This was on top of the 50 million won or more he owed in comprehensive income tax.

I Have to Pay Four Years’ Worth of Taxes at Once?-

“If I pay three years’ worth of VAT as well as the comprehensive income tax, I’ll have to close shop altogether,” Kim lamented.

In order to boost its insufficient tax revenue, the National Tax Service (NTS) is following up its tax audits on prosperous large corporations by strengthening taxation on small and midsized companies and the self-employed.

An NTS representative said Thursday, “We compared the materials we received from the Korea Financial Telecommunications and Clearings Institute (KFTC) with the income declaration forms submitted by companies in order to expose cases of tax evasion using the GIRO system. We’ve sent the results down to the relevant tax offices.”

The inspection spans the four-year period from 2001 to 2004. When an attempt at tax evasion is verified, the perpetrator is charged with a supplemental tax amounting to 10 percent of his or her income, and an additional tax of 20 percent of the regular taxes due.

Although the NTS has not revealed the names of those under inspection, the list is likely to include a substantial number considering the fact that over 30,000 companies use the GIRO.

One local tax inspector noted, “Because the payment deadline for the principal taxes, including the income tax and corporation tax, fall during the first half, individual tax offices have no choice but to focus on the VAT, which is due in October, in order to fill their target revenue.”

Starting on October 18, the NTS has also embarked on a separate tax audit of all midsized construction firms and restaurants.

On Tuesday, one construction company was raided by inspectors from the Seoul Regional Tax Office (SRTO), who confiscated all of the company’s account books. The inspectors were from a division of the SRTO that specializes in in-depth investigations based on tips and independent data.

The local tax offices are stepping up their taxation policies as well.

The chairman of Textiles Company B located in Daegu said, “We were slapped with a substantial amount in taxes after a recent audit,” adding, “We were taken completely unawares, since we weren’t expecting the regular audit until next year.”

The voices of complaint are growing with the increase in taxation.

Mr. Chung (60), who ran a wholesale concern in Seoul which failed in 2003, remarked, “I can’t believe they’re demanding taxes from a company that has already gone out of business.”

In response, the NTS explained, “The reason we’re collecting several years’ back taxes at once is because the inspection data has only recently been completed. The construction company audits are unrelated to a shortage in tax revenue.”

Ki-Jeong Ko Eun-Woo Lee koh@donga.com libra@donga.com