Legislative Loopholes Help Distort the Gold Market

The way gold is taxed, coupled with special regulations and provisos, has distorted the gold market and given a rise to a black market.

Taking advantage of loopholes, some jewelry deals involve illegally collected tax returns with false tax reports.

Rampant Illicit Dealings—

Export of gold was $2.55 billion during the first half of the year, a four-fold increase year-on-year, Korea Customs Office said on July 8. Import of gold during the same period rose three-fold to $2.7 billion.

This is because the government placed a two-year moratorium on value-added taxes on gold bullions and gold bars in July of last year, with an amendment of the special law on moratorium aimed at under-the-table dealings of gold.

However, it brought about freak results in the gold market.

Some big hands of the gold market have hired ethnic Koreans in China, whose identifications are hardly tracked by regulators, for 100 to 200 million won to use them as “tax data dealers” for the massive issuance of tax reports,” dealers and customs official said.

They are using the false tax documents to turn smuggled or duty-free exported gold into taxed gold in a multi-staged process and then export it as a way to collect tax rebates.

Although taxes are not collected, they commit embezzlement and collect tax rebates. The average overseas shipment of gold is 50 kilograms, which nets 10 million won including tax rebates.

Customers Starts Probes—

The Customs Office believe there is a breakdown in the circulation structure of the jewelry industry and, on July 7, started an audit of 13 gold dealers in Seoul’s Jongro district for their involvement with “tax data sellers.”

Prior to this, Investment 4 of the Seoul Bureau of the Customs Office, which specializes in duty evasion, conducted private investigations into the Jongro gold deals in March and April.

However, the authorities are criticized as playing catch-up.

The data dealers are ethnic Koreans who are not easy to be tracked. Once they begin to hide, it is hard for the government to collect penalties.

Regulations Encourages Illegalities –

The special law, which aimed at curbing illegal dealings in gold, also adversely affects gold deposits in banks.

Under the law, banks are exempted from value-added tax when they purchase gold, but they are not when they sell. This in turn undermines the competitive edge of banks in the gold market and depresses their gold accounts

This gives a rise to a voice in favor of a complete repeal of value-added taxes on gold or a drastic reduction in tax rates. Close to a 10 percent value-added tax on gold, which is almost treated as cash, will cause many problems

“The local gold market is very backward,” said Kang Young-jin, assistant director of Commodity Development at Shinhan Bank. “ The special law has many loopholes.” He added, “The government should take the initiative and come up with an advanced dealing system based in the banking sector.”

“We are in the stage of an anti-illegal dealings campaign where what’s been hidden begins to surface,” said Kim Nak-hoe, Consumer Taxation director at the Ministry of Finance and the Economy. “We will let the customs office study the strengths and weaknesses of the taxation system for the gold market and fix what should be fixed.”

Ji-Wan Cha cha@donga.com