Firms Cook Books to Avoid Tax Audits

One CEO of a chemicals company worth billions of won a year located in the metropolitan area “cooked” the books a bit so that it seems as if the company was in the black, although it in fact generated deficits last year worth about one hundred million won.

He explained, “True, generating surpluses requires the corporate tax, a burden for a company, but only by reporting with somewhat bloated records compared to the year before, a company may avoid the tax probe.”

Kim Ae-sil, proportional representative in the Grand National Party, released a document on the Ministry of Finance and Economy (MOFE)’s “Records Vis-à-vis the Total Tax Revenues” on October 24. According to the document, as for the 2002 to 2006 total tax revenues, the economic situation led to a smaller amount of revenues than expected by the minimum 3.5 percent and a bigger amount by the maximum two percent.

During the period, other tax items including the income tax and the inheritance/gift tax were collected either to a greater or a smaller extent, similar with other items. However the corporate tax was always collected more than the tax revenues by 4.5 to 19.2 percent regardless of the economic circumstances.

At the end of every September, MOFE releases a “tax revenue report” based on the expectations on the possible tax amount to be collected in the following year. That is, to guesstimate how much will be collected from each tax item based on the expectations of the tax budget.

With the actual tax collection, a margin of error is inevitable based on the economic circumstances – some items have a higher volume while others do not. But the corporate tax is always collected more, which is to impose tax on corporate earnings. In particular, in 2004 and 2005 when the tax revenue records were poor, the total tax revenues were minus 4.2729 trillion won and 3.1475 trillion, but the corporate tax was excessively collected – 1.703 trillion and 3.4691 trillion won, respectively. This year, about 2.2001 trillion is expected to be additionally collected.

Representative Kim said, “The corporate tax on companies tends to be collected more, regardless of the economy,” adding, “Excessive collection of the corporate tax from companies could reduce their investment appetites, so accurate predictions on tax revenues are a must to prevent excessive collection.”

On this, Park Hyung-soo, a fellow at the Korea Institute of Public Finance (KIPF), said, “The budget related to the corporate tax has so many external variables, so the budget tends to be set in a conservative manner. Therefore, unintended excessive collection could happen.”

However company officials said that companies go for a bloated reporting on the corporate tax compared to the year before to avoid the tax probe in the name of “estimated taxation,” and this has also got to do with the fact that the tax authorities somewhat stifle the companies that would easily pay taxes in times of tax revenue shortages.

smhong@donga.com sanjuck@donga.com