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April 2011

Modernization of Korean Tax Administration. Prepared for the first Joint ATAF-Korea Conference On Domestic Resource Mobilization. April 2011. National Tax Service. Contents. Overview of NTS History of Tax Administration Development Major Challenges and Responses

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April 2011

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  1. Modernization of Korean Tax Administration Prepared for the first Joint ATAF-Korea Conference On Domestic Resource Mobilization April 2011 National Tax Service

  2. Contents Overview of NTS History of Tax Administration Development Major Challenges and Responses Enhancing Tax Resource Management(TRM) Lowering Compliance cost : Hometax service Policy Implications

  3. Overview of NTS I

  4. 1. Role and Functions • Brief structural overview • - Office of Tax and Customs, MOSF: Coordinates tax & customs policies • - Taxation Bureau was moved out of MOSF in 1966 to form NTS • Main functions : Administration of national/internal taxes • - Direct taxes: Personal income tax, corporate income tax, inheritance tax, gift tax, comprehensive real estate holding tax • - Indirect taxes: VAT, individual consumption tax, liquor tax, stamp tax, securities transaction tax • Non-tax functions • - Welfare functions: Administration of Earned Income Tax Credits (EITC) • - Liquor license control

  5. 2-1. Organizational Structure (1) H.R office Information System Bureau Audit and Inspection Bureau Taxpayer Advocacy Bureau International Taxation Bureau Planning & Coordination Bureau • Human Resources • Policy Coordination Office • Planning & Finance Office • Statistics Planning Team • Emergency Plannign Office • System Planning Office • System Operation Office • Information SystemDevelopment Office #1 • Information System • Development Office #2 • Audit Office • Taxpayer Advocate Office • Tax Appeals Office #1 • Tax Appeals Office #2 • International Cooperation Office • International Tax Resource Management Office Collection & Legal Affairs Bureau Individual Taxation Bureau Property Taxation Bureau Investigation Bureau Earned Income Tax Credit Bureau Corporate Taxation Bureau • Earned Income Tax Credit Operations Div. • Income Source Management Div. #1 • Income Source Management Div. #2 • Tax Collection Div. • Legal Affairs Div. • Tax Ruling Div. • Public Relations Div. • Value Added Tax Div. • Individual Income Tax Div. • Electronic Tax Resource Div. • Real estate Transaction Management Div. • Property Related Tax Div. • Comprehensive Real Estate Holding Tax Div. • Investigation Planning Div. • Investigation Div. #1 • Investigation Div. #2 • International Investigation Div. • Investigation Intelligence Div. • Corporation Tax Div. • Withholding Tax Div. • Excise Tax Div. NTS Commissioner • Customer Satisfaction Center • Tax Officials Training Institute • Technical Service Institute Seoul Regional Tax Office Jungbu Regional Tax Office Daejeon Regional Tax Office Gwangju Regional Tax Office Daegu Regional Tax Office Busan Regional Tax Office 24 District Tax Offices 26 District Tax Offices 14 District Tax Offices 14 District Tax Offices 13 District Tax Offices 16 District Tax Offices

  6. 2-2. Organizational Structure (2) • < Main Organizational Reform (1999-2001) > • From geographical area-based to functions-based • From vertical command-based to horizontal cooperation-based • - HQ: Planning body • - Regional tax offices: Auditing body • - District tax offices: Taxpayer servicing body • First government agency to adopt taxpayer’s ombudsman system

  7. II History of Tax Admin. Development

  8. 1-1. History : 1960s ~ 70s 1960s • Established NTS in 1966 President Park : “A Belief that higher tax revenue is possible by enhancing tax admin. without raising tax rate” • Achieved a goal of 70M USD tax revenue • Focused on increasing tax revenue by intensive tax audit 1970s • Built a data processing room in 1970 • the number of tax data (million) : 450(‘65) 1560(‘69) • Introduced VAT in 1977 • Internal tax revenue over 1B USD in 1975 ratio of internal tax revenue to annual revenue : 64%(‘66 : 45.5%)

  9. 1-2. History : 1980s ~ 90s 1980s • Efforts to improve taxpayers service : central counseling center, mobile counseling • Endeavor to eliminate the underground economies • Enforcing tax admin. in metropolitan area intensively • Development in International Taxation 1990s • Reformed Organizational structure to function-based • Launched Tax Integrated System (TIS) in 1997 • Strengthened taxpayer’s rights : Taxpayer Advocacy Bureau, legalization of appeal before assessments

  10. 1-3. History : From the 2000s 2000s • Enhance Tax Resource Management • Build the basis of e-Tax admin. : Hometax service • Enlarge taxation infrastructure : Cash Receipt System, etc • Increase the capability to prevent offshore tax evasion The main factor in modernization of Korean Tax Admin. (internal)Efficiency, Specialization, Transparency, Taxpayers Convenience, etc (external) Mature socio-economic circumstances, IT infrastructure, Proliferation of the legitimacy of taxation

  11. 2. Relevant Statistics : Tax Revenue ‘08 ‘08 ‘08 ‘08 125% 315% 145% 147% 43.8 ‘97 39.1 157.5 36.3 ‘97 ‘97 ‘97 19.4 14.8 9.4 Income Tax (Unit : Billion USD) VAT (Unit : Billion USD) Corporate Tax (Unit : Billion USD) 63.6 ‘86 10.0 Revenue by NTS (General+ Special Account) (Billion USD) • The Growth of GDP : 532.3 Billion USD(‘97) ⇒ 930.9 Billion USD (‘08) : up 75 % • Ratio ofRevenue by NTS(151 Billion USD) to Annual Revenue(172 BillionUSD, ‘08) is87.7% (General Account)

  12. III Major Challenges and Responses

  13. Major Challenges and Responses To Secure tax revenue 1 • Tax revenue = (tax base) x (tax rate) • The role of Tax Office is to broaden tax base by taxing the informal sector • Enhancing Tax Resource Management (TRM) To Lower Compliance cost 2 • Compliance cost is additional burden to taxpayers • Consider how to increase revenues without raising compliance cost • E-filing service, simplified tax forms, e-tax invoices, etc

  14. IV Enhancing Tax Resource Management

  15. 1. Structure of Tax Resource Management Tax Information Mgt. Registration Mgt. • Tax invoice data mgt. • Credit card data • Data from audit, etc • Preliminary checkup • Follow-up mgt. • Suspension & Closure mgt. Filing & Audit Mgt. • Guidance for Filing • Follow-up inspection & • Mgt. for non-reporters • Individual mgt. for vulnerable • business Efforts to elevate the systematic connection between Registration, Tax Information and Filing & Audit Mgt.

  16. 2-1. Registration Mgt. - Preliminary checkup Flow chart Sorting of preliminary checkup (Service div.) Designating an official (VAT, income tax div.) Application for Registration Indirect Inspection On-site Inspection Issuance ▣ Objects of pre-checkup • Pre-searchingsystem : Applicants involved in document frauds, disguised credit card issuance, unlicensed liquor trade, etc • Specific business needed to be under control (ID in disguise) : entertainment business, jewelry retailer, money lending, etc

  17. 2-2. Registration Mgt. - Follow-up Mgt. 1. Follow-up mgt. • Objects : Applicants before business commencement and suspicious of identity disguise and disguised issuer, etc • On-site inspection within 2 months after registration • Filing (orpayment) twice in normal : finish the follow-up mgt. • Confirmed as wrong issuance : eliminate a registration 2. A general inspection • Objects: Informal businesses rarely registered • When: Within 4 months after final filing • How to address - non-registered trader : registered by authority, impose taxes - disguised trader : correct ID, impose taxes on real trader - closed trader : eliminate a registration

  18. 3-1. Tax Invoice Data Mgt. ▣ What is a tax invoice? • A receipt given to a purchaser from a supplier to prove collection of VAT, when the supplier provides goods or services

  19. 3-2. Tax Invoice Data Mgt. ▣ How to file a tax invoice? • Taxpayers have the original TIs and submit the sum table of TIs when filing VAT

  20. 3-3 . Tax Invoice Data Mgt.– Mis-matching Data ▣ Computerize tax filing, examine sum table of TIs (between purchasers and suppliers) Type of data : Mis-matching tax invoices, Suspicious sum table of TIs(different from real trade) 1. Mis-matching tax invoices - 2 type: turnover(under-reported), purchases (over-reported) - impose penalty taxes and readjust 2. Suspicious sum table of TIs (wrongfully deducted input tax) - wrongful transaction data: transaction with simplified· VAT-exempt · closed traders

  21. 4. Filing & Audit Mgt. ▣Compliant filing is a key to expose tax base (transformed into fully self-assessment filing system) ▣ Inducing compliant filing • Provide individual & customized guidance to taxpayers • Follow-up inspection and auditing to insincere taxpayers • Offering convenienceof filing (e-filing service, etc) ▣Filing Management Model • Filing guidance beforehand → Follow-up inspection after filing → Correction of filing → Adjustment & auditing • Enhancing connection between filing and auditing

  22. 5-1. Cash Receipt System - Relationship Chart Register as member 9 9 8 7 3 6 2 1 5 4 Build DB Inform receipt of data Customer Store Purchase in cash Issues Cash Receipt Check cash purchase history Transmit sales data (real time) Approve Issuance Checks cash revenue NTS CRSO Send sales data (daily batch) CRS: Cash Receipt System CRSO : Cash Receipt System Operator

  23. 5-2. Cash Receipt System - Results Successful results of the Cash Receipt System Issuance Amount Issued Taxable revenue exposure 2.89B 61B USD 65.0% 58.5% 50B USD 1.49B 52.2% 31B USD 46.6% 0.74B ’05 ’06 ’07 ’08 ’06 ’08 ’07 ’06 ’07 ’08 ※ Measured as percentage of credit card/Cash Receipt usage in consumer spending

  24. V Lowering Compliance cost : Hometax

  25. 1. What is Hometax? • Comprehensive on-line tax-related service (www.hometax.go.kr) • At home or office over the Internet without visiting tax office! • (1) e-tax filing & payment • (2) e-issuance of tax-related certificates • (3) Filing record and Tax calculator

  26. 2. Registered Users Registration rate (Registered business/Total business) Registered users (10K people) 70.0% 66.8% 1000 59.8% 60.0% 59.2% 981 55.7% 50.0% 800 45.3% 40.0% 600 610 29.1% 30.0% 505 400 414 20.0% 294 200 10.0% 171 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Dec 08

  27. 3. Key Statistics 96.9 96.9 96.1 96.0 88.4 97.1 92.7 93.3 93.3 81.2 80.7 80.1 80.0 78.9 78.9 75.1 74.3 75.4 74.1 60.3 Usage on a Steady Increase • About 70% of tax-related certificates issued online a month on average : equivalent to 8M annual tax office visits • Most of tax filing has been done electronically (2008)

  28. 4. Benefits of Hometax Benefits • Cost-effectiveness : cost cut by about 442M USD annually - Local tax offices : 126M USD a year (in printing and postal service) - Taxpayers : 316M USD (in transportation and labor) • Improved date accuracy • Administrative transparency

  29. VI Policy Implications

  30. Policy Implications Both internal & external conditions need to be improved in a balanced way for modernizing tax admin. Tax Resource Management Approach - Earlier days : dependent on Administrative power - Nowadays : Systematic Approach & Building Tax Infrastructure Values in Tax Administration - Efficiency, Specialization & Transparency, Fair procedure, Taxpayer’s rights improvement

  31. Thank you!

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