April 2011April 2011

Modernization of Korean Modernization of Korean

Tax AdministrationTax AdministrationPrepared for the first Joint ATAF-Korea Conference

On Domestic Resource Mobilization

National Tax ServiceNational Tax Service

Contents Contents

I.I. Overview of NTS Overview of NTS

II.II. History of Tax Administration DevelopmentHistory of Tax Administration Development

III.III. Major Challenges and ResponsesMajor Challenges and Responses

IV.IV. Enhancing Tax Resource ManagementEnhancing Tax Resource Management(TRM)(TRM)

V.V. Lowering Compliance cost : Hometax serviceLowering Compliance cost : Hometax service

VI.VI. Policy ImplicationsPolicy Implications

I.I. Overview of NTS Overview of NTS

II.II. History of Tax Administration DevelopmentHistory of Tax Administration Development

III.III. Major Challenges and ResponsesMajor Challenges and Responses

IV.IV. Enhancing Tax Resource ManagementEnhancing Tax Resource Management(TRM)(TRM)

V.V. Lowering Compliance cost : Hometax serviceLowering Compliance cost : Hometax service

VI.VI. Policy ImplicationsPolicy Implications

I I Overview of NTS Overview of NTS Overview of NTS Overview of NTS

1. Role and Functions

1. 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

2. 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

3. Non-tax functions

- Welfare functions: Administration of Earned Income Tax Credits (EITC)

- Liquor license control

1. 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

2. 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

3. Non-tax functions

- Welfare functions: Administration of Earned Income Tax Credits (EITC)

- Liquor license control

2-1. Organizational Structure (1)

Seoul RegionalTax Office

24 District Tax Offices

Jungbu RegionalTax Office

26 District Tax Offices

Daejeon RegionalTax Office

14 District Tax Offices

Gwangju RegionalTax Office

14 District Tax Offices

Daegu RegionalTax Office

13 District Tax Offices

Busan RegionalTax Office

16 District Tax Offices

NTSCommissioner• Customer Satisfaction Center

• Tax Officials Training Institute• Technical Service Institute

• Human Resources

H.R office

• System Planning Office• System Operation Office• Information System

Development Office #1• Information System Development Office #2

Information System Bureau

• Audit Office

Audit and Inspection Bureau

• Taxpayer Advocate Office• Tax Appeals Office #1• Tax Appeals Office #2

Taxpayer Advocacy Bureau

• International Cooperation Office

• International Tax Resource Management Office

International Taxation Bureau

• Policy Coordination Office• Planning & Finance Office• Statistics Planning Team• Emergency Plannign Office

Planning & Coordination Bureau

Collection & Legal Affairs Bureau

• Tax Collection Div.• Legal Affairs Div.• Tax Ruling Div.• Public Relations Div.

Individual Taxation Bureau

• Value Added Tax Div.• Individual Income Tax Div.• Electronic Tax Resource

Div.

Corporate Taxation Bureau

• Corporation Tax Div.• Withholding Tax Div.• Excise Tax Div.

Property Taxation Bureau

• Real estate Transaction Management Div.

• Property Related Tax Div.• Comprehensive Real

Estate Holding Tax Div.

Investigation Bureau

• Investigation Planning Div.• Investigation Div. #1• Investigation Div. #2• International Investigation

Div.• Investigation Intelligence

Div.

Earned Income Tax Credit Bureau

• Earned Income Tax Credit Operations Div.

• Income Source Management Div. #1

• Income Source Management Div. #2

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

< 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

II II History of Tax Admin. DevelopmentHistory of Tax Admin. DevelopmentHistory of Tax Admin. DevelopmentHistory of Tax Admin. Development

1960s1960s

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

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

1970s1970s

1-1. History : 1960s ~ 70s

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%)

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%)

1980s1980s

1990s1990s

1-2. History : 1980s ~ 90s

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

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

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

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

2000s2000s

1-3. History : From the 2000s

(internal) Efficiency, Specialization, Transparency, Taxpayers Convenience, etc

(external) Mature socio-economic circumstances, IT infrastructure, Proliferation of the legitimacy of taxation

(internal) Efficiency, Specialization, Transparency, Taxpayers Convenience, etc

(external) Mature socio-economic circumstances, IT infrastructure, Proliferation of the legitimacy of taxation

The main factor in modernization of Korean Tax Admin.The main factor in modernization of Korean Tax Admin.

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

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

2. Relevant Statistics : Tax Revenue

‘97

‘08

63.6

157.5

147%

Revenue by NTS(General+ Special Account)

(Billion USD)

‘97

‘08

14.8

36.3‘97

‘08

19.4

43.8

‘97

‘08

9.4

39.1

145%

125%

315%

Income Tax(Unit : Billion USD)

VAT(Unit : Billion USD)

Corporate Tax(Unit : Billion USD)

Ratio of Revenue by NTS(151 Billion USD) to Annual Revenue(172 Billion USD, ‘08) is 87.7% (General Account)

The Growth of GDP : 532.3 Billion USD(‘97) ⇒ 930.9 Billion USD (‘08) : up 75 %

‘86

10.0

III III Major Challenges and Responses Major Challenges and Responses Major Challenges and Responses Major Challenges and Responses

Major Challenges and Responses

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 Secure tax revenue

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

To Lower Compliance cost

1

2

IV IV Enhancing Tax Resource Management Enhancing Tax Resource Management Enhancing Tax Resource Management Enhancing Tax Resource Management

1. Structure of Tax Resource Management

Registration Mgt.Registration Mgt.

• Preliminary checkup

• Follow-up mgt.

• Suspension & Closure mgt.

• Preliminary checkup

• Follow-up mgt.

• Suspension & Closure mgt.

Efforts to elevate the systematic connection between Registration, Tax Information and Filing & Audit Mgt.

Efforts to elevate the systematic connection between Registration, Tax Information and Filing & Audit Mgt.

Tax Information Mgt.Tax Information Mgt.

• Tax invoice data mgt.

• Credit card data

• Data from audit, etc

• Tax invoice data mgt.

• Credit card data

• Data from audit, etc

Filing & Audit Mgt.Filing & Audit Mgt.• Guidance for Filing

• Follow-up inspection & Mgt. for non-reporters

• Individual mgt. for vulnerable business

• Guidance for Filing

• Follow-up inspection & Mgt. for non-reporters

• Individual mgt. for vulnerable business

2-1. Registration Mgt. - Preliminary checkup

ApplicationforRegistration

ApplicationforRegistration

Sorting of preliminary checkup (Service div.)

Sorting of preliminary checkup (Service div.)

Designating an official

(VAT, income tax div.)

Designating an official

(VAT, income tax div.)

Indirect InspectionIndirect Inspection

On-siteInspectionOn-siteInspection Issuance Issuance

Flow chartFlow chart

Pre-searching system : 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

Pre-searching system : 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

▣ Objects of pre-checkup▣ Objects of pre-checkup

2-2. Registration Mgt. - 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 (or payment) twice in normal : finish the follow-up mgt.

Confirmed as wrong issuance : eliminate a registration

Objects : Applicants before business commencement and suspicious of identity disguise and disguised issuer, etc

On-site inspection within 2 months after registration

Filing (or payment) twice in normal : finish the follow-up mgt.

Confirmed as wrong issuance : eliminate a registration

1. Follow-up mgt.1. Follow-up mgt.

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

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

2. A general inspection 2. A general inspection

3-1. Tax Invoice Data Mgt.

A receipt given to a purchaser from a supplier to prove collection of VAT, when the supplier provides goods or services

A receipt given to a purchaser from a supplier to prove collection of VAT, when the supplier provides goods or services

▣ What is a tax invoice?▣ What is a tax invoice?

3-2. Tax Invoice Data Mgt.

Taxpayers have the original TIs and submit the sum table of TIs when filing VAT

Taxpayers have the original TIs and submit the sum table of TIs when filing VAT

▣ How to file a tax invoice?▣ How to file a tax invoice?

3-3 . Tax Invoice Data Mgt. – Mis-matching Data

1. Mis-matching tax invoices

- 2 type: turnover(under-reported), purchases (over-reported)

- impose penalty taxes and readjust

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

2. Suspicious sum table of TIs (wrongfully deducted input tax)

- wrongful transaction data: transaction with simplified· VAT-exempt · closed traders

▣ Computerize tax filing, examine sum table of TIs (between purchasers and suppliers)▣ 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)

Type of data : Mis-matching tax invoices, Suspicious sum table of TIs(different from real

trade)

4. Filing & Audit Mgt.

▣ Compliant filing is a key to expose tax base (transformed into fully self-assessment filing system)▣ Compliant filing is a key to expose tax base (transformed into fully self-assessment filing system)

▣ Inducing compliant filing▣ Inducing compliant filing

Provide individual & customized guidance to taxpayers

Follow-up inspection and auditing to insincere taxpayers

Offering convenience of filing (e-filing service, etc)

Provide individual & customized guidance to taxpayers

Follow-up inspection and auditing to insincere taxpayers

Offering convenience of filing (e-filing service, etc)▣ Filing Management Model ▣ Filing Management Model Filing guidance beforehand → Follow-up inspection after

filing → Correction of filing → Adjustment & auditing Enhancing connection between filing and auditing

Filing guidance beforehand → Follow-up inspection after filing → Correction of filing → Adjustment & auditing

Enhancing connection between filing and auditing

Store

CRSONTS

Purchase in cash1

Issues Cash Receipt4

Send sales data(daily batch)

5

Inform receipt of data6

Transmit sales data (real time)

2

ApproveIssuance

3

Build DB

7

Register as member8Check cash purchase history

9

Checks cash revenue9

Customer

CRS: Cash Receipt SystemCRSO : Cash Receipt System Operator

5-1. Cash Receipt System - Relationship Chart

31B USD31B USD

61B USD61B USD

’06 ’07 ’08

0.74B0.74B

2.89B2.89B

’06 ’07 ’08

※ Measured as percentage of credit card/Cash Receipt usage in consumer spending

52.2%52.2%

65.0%65.0%

’06 ’07 ’08

1.49B1.49B

58.5%58.5%50B USD50B USD

5-2. Cash Receipt System - Results

Successful results of the Cash Receipt SystemSuccessful results of the Cash Receipt System

46.6%46.6%

’05

V V Lowering Compliance cost : Hometax Lowering Compliance cost : Hometax Lowering Compliance cost : Hometax Lowering Compliance cost : 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

1. What is Hometax?

45.3%

55.7%59.2%

59.8%

29.1%

200

400

600

800

Jan 04 Jan 05 Jan 06 Jan 07 Jan 08

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Registered users (10K people)

Registration rate(Registered business/Total business)

Dec 08

100066.8%

2. Registered Users

171

294

414

505

610

981

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)

3. Key Statistics

Usage on a Steady IncreaseUsage on a Steady Increase

'04 '05 '06 '07 '08

VAT Income tax Corporate tax Withholding tax

4. Benefits of Hometax

BenefitsBenefits

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

VI VI Policy Implications Policy Implications Policy Implications 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

Policy Implications

Thank you!