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[Contribution] Building trust with foreign taxpayers

April 26, 2023 - 17:53 By Im Eun-byel
National Tax Service vice commissioner Kim Tae-ho (NTS)

By Kim Tae-ho

National Tax Service vice commissioner

In March, the National Tax Service held an official gathering with the European Chamber of Commerce in Korea for the first time in 12 years. This event, along with a similar engagement with the American Chamber of Commerce last year, highlights our commitment to improving communication with foreign investors and building mutual trust. Trust between the revenue agency and the taxpayer promotes voluntary and honest tax filing and payment, while preventing undue compliance costs. This mutual trust is particularly important in our interactions with foreign enterprises as they navigate an environment with a different language and culture.

Fairness, transparency and communication are the three keys to building this trust. Fairness means that all taxpayers are treated equally. Transparency is achieved when the agency adheres to a consistent set of taxation rules, such as tax laws and agreements reached with the taxpayers on issues of concern. Communication involves understanding the challenges taxpayers face and making it easier for them to do business. The NTS is strategically focused on enhancing all three elements to strengthen trust in our administration.

First, to ensure fairness, the NTS treats both local and foreign companies equally in all that we do, including tax audits. In recent years, we have scaled back the audit volume to help the economy recover from the impact of COVID-19. Foreign-invested enterprises (FIEs) may have concerns that fewer local companies are audited, and FIEs are targeted more aggressively. However, a better understanding of NTS audits may dispel such notions.

There are mainly two types of audits: periodic audits, which are conducted on a select number of companies that meet certain criteria, and non-periodic audits, which are triggered by suspected tax avoidance. For periodic audits, which account for 63 percent of total caseload, the same percentage of local and foreign companies are selected. When there is a disagreement over the audit outcomes, corporate taxpayers regardless of their nationality have an equal right to appeal or seek a case review.

The fairness of our tax administration was confirmed by the well-publicized Lone Star ISDS award. The hedge fund had filed a suit to ICSID against the Korean government for alleged unfair treatment. The tribunal, however, dismissed the claim against the NTS, concluding that "the tax treatment violated neither national nor international standards" and that NTS had acted "within the legal boundaries of internationally accepted tax policy." It recognized that the NTS had not treated the claimant in any arbitrary or discriminatory manner.

Secondly, the NTS places great importance on the transparency and predictability of tax administration. Through our discussions with foreign companies, we have learned that they are more concerned about uncertainties in tax matters than they are about tax audits or tax rates themselves.

To address this, the NTS has implemented the advance pricing agreement (APA) program, which allows participating taxpayers and the revenue agency to agree on an arm's length price range applicable to transactions between the taxpayer and its controlled foreign companies. This provides early visibility into tax liability and removes uncertainties around transfer pricing.

Our data shows that taxpayers who have completed the APA process in the last five years will be able to avoid the risk of being subject to transfer pricing audits for an average of six years and four months. In cases when the risk of double taxation has materialized as a result of an audit, businesses may rely on the mutual agreement procedure (MAP) to have the tax authorities work through the dispute and alleviate the tax burden.

The NTS launched the MAP division in 2018, and since then, the annual case resolution rates for APA and MAP have increased by 27.4 percent and 94.6 percent, respectively. The NTS is also strengthening the advance review process to address issues such as transfer pricing, which are most likely to result in disagreements between the taxpayer and the revenue agency. Through these efforts we ensure consistency, predictability and accountability in the enforcement of tax laws.

Last but not least, the NTS is actively communicating with the FIEs. We have resumed the face-to-face meetings with chambers of commerce that were put on hold during the pandemic. Through these meetings, we strive to gain better understanding of the challenges foreign companies face in Korea and tailor our services accordingly. To address the language barrier, the NTS has published an English tax guidebook as well as a multilingual manual in English, Chinese and Vietnamese. We also provide call center services for foreign language speakers and have established service desks for foreigners in our tax offices.

At the NTS, we are dedicated to upholding the values of fairness, transparency and communication in every aspect of tax administration. Our goal is to provide FIEs with seamless access to our services, ensuring that they face no undue obstacles. We strive to be a world-class tax administration, always committed to serving our taxpayers with excellence. Count on us to ease your tax concerns and enjoy the opportunities of investing in the Korean economy as our valued partner. Together, we can embark on a fruitful journey toward success.

Kim Tae-ho is vice commissioner of the National Tax Service. Views in this column are his own. – Ed.