SMEs, self-employeds become victims of intensive tax investigations

Company A, a middle-size manufacturer located in the Seoul metropolitan area, is a strong exporter garnering more than half of its revenue from outside Korea. Despite a significant drop in net profit due to the global economic downturn, its annual revenue has been around 40 billion won (35.2 million U.S. dollars). However, the company recently faced a huge obstacle. The employees of the National Tax Service raided the head office and started a tax investigation.

“Tax officials mentioned our revenue and pressured us that we should pay an additional one billion won (882,200 dollars) of taxes for the past three years,” said a senior management executive of the company. “We managed to survive the economic downturn, but if we pay an additional one billion won, our company will turn into deficit and cannot run factories due to a lack of working capital.” He sighed and said, “When the government said it would increase support for small and medium-size export-driven companies, we expected it would be a help to us. But a tax bomb has fallen on us.”

Complaints are growing as the Park Geun-hye administration starts to come through potential tax bases to bring out the underground economy in the open, which is a key national agenda of the administration, and find financial sources for increased welfare programs. The National Tax Service’s efforts to increase tax revenue are affecting small and medium-size companies and self-employed businesses. Businessmen and tax accountants say, “Regardless of the business size and whether one evaded taxes or not, tax officials start a tax investigation in everywhere that money gathers.”

Unlike what the government says, businessmen express strong grievances and concerns. “The number of tax investigation cases is a problem but the increasing number of “carefully choreographed tax investigations” is a bigger problem. Moreover, the intensity of the investigations is said to be increasing, which makes taxpayers carry a heavier burden,” said a tax accountant in Gyeonggi Province. “Although the government encourages companies for more investment, few could make an investment in such circumstances.”

Economic experts warn that though the intention of eradicating tax evasion would be right, economic recovery could be weakened if the tax authorities stick to achieving the target tax revenue amid the prolonged economic downturn, and excessively suppress companies and self-employed businesses.

“When the economy is not good and cannot raise taxes, the government should reduce tax investigations. Now, it is moving in the opposite direction,” said former Finance Minister Kang Bong-kyun. “If the government intends to increase tax revenue (for welfare programs), it should adopt policies to reform tax system such as increased taxation and to boost corporate investments.”