The Hide and Seek of Tax Evasion

Korean Web users are posting numerous questions on the Internet such as, “Is it better to get a discount of 150,000 won (131.80 U.S. dollars) for paying 2.1 million won (1,840 dollars) in cash for dental treatment than getting a tax benefit after paying the fee with a credit card?” or “What discount can I get if I buy a car with cash?” A friendly reply is posted: “Given your salary, take the discount for paying cash.” This is a de facto suggestion to help tax evasion by businesses. Another answer says, “If you don’t get much of a discount, charge it to prevent the business from evading taxes.” In conclusion, a cash discount encourages tax evasion and is unfair and burdensome to faithful taxpayers.

The National Tax Service, which is cracking down on entrepreneurs who fail to report all of their income, is seeing success after introducing a tax credit in 1999 based on the amount charged on a person’s credit card. The cash receipt system implemented in 2005 is also growing more influential. High-income professionals such as lawyers, accountants and doctors from April have had to issue a receipt for a cash transaction exceeding 300,000 won (262.30 dollars) even if a client does not request one. Consumers have used their credit or debit cards to pay for 55 percent of their purchases, and have gotten cash receipts for 15 percent. The tax watchdog has tracked 70 percent of consumers’ expenditures.

Businesses still offer discounts for cash payments to avoid taxes. Some want to avoid paying credit card fees but most seek to underreport revenues to pay less tax. Tax authorities say a plastic surgeon who did not report one billion won (872,600 dollars) by offering patients a 10-percent discount in return for cash payments. A dentist also tried to cover up 1.5 billion won (1.31 million dollars) in cash revenues by reporting his declared income only. Among 116 professionals, medical service providers, and cash income businesses who underwent tax audits, 31 percent were caught evading taxes. The rate was lower than last year’s 41 percent, but is still high.

In March, National Tax Service Commissioner Baek Yong-ho said in a lecture, “Korea’s invisible trade accounts for 20-30 percent of the economy, and around 200 trillion won (174.9 billion dollars) in revenue goes untaxed every year.” Perfect collection of taxes would add 40 trillion won (34.9 billion dollars) in national tax revenues. Managing the underground economy to the level of the Organization for Economic Cooperation and Development would add 20 trillion won (17.4 billion dollars) to the government’s coffers. To reduce the underground economy, consumers must not demand discounts for paying in cash from businesses.

Editorial Writer Hong Kwon-hee (konihong@donga.com)