South Korea: South Korea Revises Forex Regs To Prevent Tax Avoidance
29 August 2013
Posted by: Author: Mary Swire
Author: Mary Swire
Following a sharp rise in the value of both individual and corporate foreign exchange transactions, the South Korean Government is revising cross-border foreign exchange regulations to make transactions more convenient by streamlining reporting processes, but also to prevent tax avoidance by strengthening supervision and encouraging interested agencies to share information more extensively.
There have been a number of disclosures recently that well-known South Korean individuals and families appear to be using companies set up in offshore jurisdictions to avoid taxes, while, to counteract a shortfall in tax revenue, the Government has been looking to reduce the size of the underground economy in the country by sharply increasing the penalties for tax evasion.
Under the new regulations, net settlements worth USD1,000 or less, as well as payments to third parties, will be exempt from reporting duties, as will settlements usually used in the global financial market. Corporate credit cards for travel purposes will be allowed to be issued, which will make accounting for overseas payments more convenient, while small transactions and transactions that are difficult to report, such as rent payments by those working overseas and transfers of investment due to bankruptcy, will also be exempt.
However, in an effort to prevent the tax evasion methods that take advantage of foreign exchange transactions, capital increases and the sales of overseas subsidiaries, as well as their establishments, will have to be reported. Holding companies are required to report their investments in all their subsidiaries.
Foreign residents will be obliged to report their real estate sales tax payments when they send revenue abroad after real estate sales in South Korea; and the Government will also remove the reporting exemption given to those with permanent residence rights overseas, as those with such rights have been able to avoid paying taxes on their overseas direct investment by avoiding reporting duties.
Furthermore, information regarding foreign exchange transactions will be shared extensively between the National Tax Service, the Korea Customs Service (KCS) and the Financial Supervisory Service (FSS). This kind of cooperation among government agencies is expected to help prevent overseas tax evasion and illegal foreign exchange transactions.
Currently, the investigation of Foreign Exchange Transactions Act violations depends on the characteristics of each transaction. Transactions related to imports and exports are entrusted to the KCS, and transactions related to capital and services belong to the FSS. From now on, in those cases where trade and capital transactions are mixed, which could previously have "fallen through the cracks," the Government will grant joint inspection authority to the two agencies in order to boost the effectiveness of foreign exchange transaction controls.
The Government will complete writing the regulation revision by the end of this year.