1.1. Government revenues can be divided into two groups: tax revenues and non-tax revenues. In Korea, tax revenues accounted for about 96.3% of the total revenues in 1995, while non-tax revenues for just 3.7%. When people refer to "government revenues", they usually understand them to be "tax revenues".
1.2. The current Korean tax system consists of national and local taxes. National taxes are collected by the central government and can be divided into internal taxes, customs duties, the defence tax and the transport tax. Internal taxes include six (6) direct and seven (7) indirect taxes, and the special tax for rural development. Local taxes are classified into provincial taxes and county taxes. Local taxes also can be classified into eleven (11) ordinary taxes and four (4) earmarked taxes.
(Table 1)
Central Government Revenues in 1995 (Unit: %)
| Tax Revenues as percentage of total revenue | Non -Tax Revenues as percentage of total revenue |
||||
| Total | Internal Taxes | Customs Duties | Defence Tax | Transport Tax | |
| 96.3 | 82.2 | 6.9 | 0.1 | 7.1 | 3.7 |
1.3. The Minister of Finance and Economy (MFE) is responsible for policy making and coordination for national tax administration. The Tax and Customs Office of the MFE is in charge of working out national tax policy, and drafting and interpreting tax laws. The National Tax Administration (NTA), which is headed by a Commissioner, is responsible for establishing basic policies and plans for tax administration, and for directing, supervising and controlling Regional Tax Offices (RTOs) and District Tax Offices (DTOs). The NTA is charged with the administration of internal taxes (including the defence tax and the education tax) such as assessment, collection, reduction, exemption, etc. The NTA is composed of the Planning and Management Office, the Collection and Appeal Bureau, the Direct Taxation Bureau and the other six (6) bureaus, and seven (7) regional tax offices (RTOs) and 134 district tax offices (DTOs). The RTO is responsible for direct guidance and control over the activities of the DTOs. The DTO is the frontline organization responsible for assessment and collection of internal taxes.
1.4. The Customs Administration is the government agency responsible for establishing basic policies and plans for the administration of customs duties. The Customs Administration is headed by a Commissioner and is composed of four (4) bureaus, the Planning and Management Office, the Inspector General, and the Information Management Office. Twenty two (22) custom houses comprise its regional network.
1.5. As for local taxes, the Local Tax Bureau of the Ministry of Home Affairs is responsible for the drafting and interpretation of laws and regulations, and the assessment, collection, reduction and exemption of taxes. Tax divisions of local governments such as provinces/metropolitan cities and cities/counties are frontline offices responsible for the assessment and collection, and reduction and exemption of local taxes.
1.6. The major revenue sources of the central government are consumption and income taxes while those of local governments are property related taxes. Since its introduction in Korea in 1977, the VAT has been one of the most important sources of government revenues. As shown in Table 2, the VAT accounted for 24.3% of the total tax revenues including national and local tax revenues in FY 1995. The VAT was the largest source of government revenues.
1.7. Taxes on wealth at the central government level in Korea, such as the inheritance tax, gift tax, assets revaluation tax, and securities transaction tax, are hardly significant in terms of their amount. Revenues from the above taxes constitute only 3.4% of the total tax revenues for the central government.
1.8. Taxes on wealth at the local government level such as the acquisition tax, property tax, registration tax, city planning tax, community facility tax and automobile tax are the major fiscal resources for local governments, accounting for 59.7% of their total tax revenues. Revenues from taxes on wealth, both national- and local combined, however, are about 15.9% of the total national and local taxes, which is not very high by international standards.
1.9. Korea depended heavily on indirect taxes on goods and services which accounted for up to 52.4% of the total tax revenues of the central government in the 1980s. In the 1990s, however, the share of indirect taxes was drastically reduced to around 38%. On the other hand, the share of taxes on income and profits has reached 36.0% of the total national tax revenues, compared to 25% in the late 1970s.
1.10. Though income taxes have recently begun to play an important role, they do not comprise the largest share in the revenue structure of Korea. The share of taxes on international transactions, composed entirely of customs duties on imports to Korea, has been gradually reduced to 6.7% in 1994 from 17% of central government revenues in 1970.
(Table 2)
The Tax System in Korea (1995)
| % of total | % of national taxes | "/,, of total | % of local taxes | ||
| National Taxes | Local Taxes | ||||
| 1. Internal Taxes | 68.4 | 86.8 | 1. Ordinary Taxes | 19.1 | 89.8 |
| Personal income tax | 20.2 | 25.6 | Acquistion tax | 3.6 | 16.7 |
| Corporation tax | 12.5 | 15.9 | Registration tax | 4.7 | 21.8 |
| License tax | 0.3 | 1.4 | |||
| Inheritance and gift tax | 1.7 | 2.2 | |||
| Assets revaluation tax | 0.2 | 0.2 | Inhabitant tax | 2.2 | 10.5 |
| Tax on excessive increase in value of land | - | - | Property tax | 0.8 | 4.0 |
| Value added tax | 24.3 | 30.9 | Automobile tax | 2.3 | 11.0 |
| Farmland tax | - | - | |||
| Special consumption tax | 3.9 | 4.9 | |||
| Liquor tax | 2.5 | 3.2 | Butchery tax | 0 | 0.2 |
| Telephone tax | 0.7 | 0.9 | Horse race tax | 0.3 | 1.3 |
| Stamp tax | 0.5 | 0.6 | Tobacco sales tax | 3.1 | 14.3 |
| Aggregate land tax | 1.8 | 8.6 | |||
| Securities transaction tax | 1.3 | 1.6 | |||
| Carry-over | 0.6 | 0.7 | |||
| 2. Customs duties | 5.5 | 7.0 | 2. Earmarked taxes | 1.8 | 8.6 |
| City planning tax | 1.0 | 4.7 | |||
| Community facility tax | 0.3 | 1.5 | |||
| Workshop tax | 0.4 | 1.9 | |||
| Regional development tax | - | 0.4 | |||
| 3. Surtaxes | 4.9 | 6.2 | 3. Earmarked taxes | 1.8 | 8.6 |
| Defense tax | 0.1 | 0.1 | |||
| Education tax | 4.8 | 6.1 | |||
| 78.8 | 100.0 | 21.2 | 100.0 | ||
Source : Bank of Korea, Economic Statistics Yearbook, 1995
1.11 One of the characteristics of the Korean tax structure is that government revenues rely heavily on indirect taxes. More than 70% of the total tax revenues, national and local, came from indirect taxes until the mid-1980s, though the share decreased to a low of 64% in the 1990s. Many people mistakenly believe that the overall tax burden and share of indirect taxes in the total revenues increased with the introduction of the VAT. The truth is, however, that the introduction of the VAT in 1977 led to neither an increase in the overall tax burden nor a heavier reliance on indirect taxation for government revenues. The share of indirect taxes in the total tax revenues exhibited only a minor increase after the introduction of the VAT.
2.1.1. The Board of Audit and Inspection (BAT) is the Supreme Audit Institution of Korea in accordance with the provisions of Article 97 of the Constitution. It is responsible for examining and confirming the final accounts of revenues and expenditures of the State, auditing the accounts of the State and entities designated by statutes, and inspecting the duties of government agencies and government officials. Based on this mandate, BAI has the responsibility to audit all kinds of government revenues and inspect the duties of government revenue agency officials.
2.1.2. The Budget and Accounting Act provides basic provisions concerning the budget and accounting of the State and related matters. Heads of central government agencies prepare reports on the final accounts of revenues and expenditures, reports on the final accounts of continuing expenditures, and statements on the accounts of obligation of the State for submission to the Minister of Finance and Economy. In accordance with the Act, Minister of Finance and Economy submits to the Chairman of BAI his report on the final accounts of revenues and expenditures of the State together with the afore-said reports submitted by the heads of government agencies. BAI examines them and sends its report on the results of the examination to the Minister of Finance and Economy. The Government submits, in turn, to the National Assembly the final accounts of revenues and expenditures examined by BAI.
2.1.3. According to the BAI Act, it may, if it is necessary for audit and inspection, take the following measures :-
2.1.4. BAI may also ask financial institutions subject to its audit and inspection to submit information or statements describing the financial transactions of persons whose personal information is available, and persons working at the financial institution shall not refuse this.
2.1.5. Therefore, BAI has access to all kinds of individual assessment files which NTA has for taxation. Individual tax files are examined by BAI to evaluate the adequacy of systems and procedures of tax assessment and collection. BAI also has access to the records of tax payers. Other data and information on tax payers collected by the tax authorities may be verified against other independent sources available.
3.1. There is a difference in the scope of tax audit between BAI and other SAIs. BAI can audit and inspect all kinds of official activities of the auditees including not only financial matters such as tax assessment, collection and reporting, but also non-financial matters such as organization and personnel management of the auditees, while most of the other SAIs' mandate is limited to only financial matters. Generally, the scope of audit, in the case of BAI, extends to what has happened in the auditee from the time the previous audit was concluded to the time the current audit begins. If auditors find an illegal or unfair case, they trace the case up to five (5) years as the prescription of tax collection is five (5) years. A general audit of the District Tax Office (DTO) is carried out by BAI or the internal audit organization every year, but a general audit may be conducted every two or three years in case of small DTOs.
3.2. BAI's tax audits may be divided into two kinds: desk audit and field audit. The BAI Act and Regulation provides that tax collection officers periodically submit to BAI financial statements and related documents, such as tax revenue statements, evidences and bank statements. The EDP Division of BAI performs desk audit by examining the afore-said documents submitted by DTOs. BAI's tax audit relies chiefly on field audit activities. BAI performs field tax audits according to the annual audit plan and quarterly audit plans.
3.3. BAI's field audits may be divided into three categories: general audit, performance audit, and mobile inspection.
4.1. The Annual Corporate Plan of BAI is drawn up before the end of the previous year. Based on the Annual Corporate Plan, Quarterly Plans are written to reflect changes in available resources, circumstances, and environment of auditees. The tax audit plan is finalized as part of the Annual Corporate Plan. For the tax audit plan, BAI gathers and analyzes information on the business of recent years of audited entities and major works of tax agencies through the General Information System (GIS) and the Integrated Information System (IIS).
4.2. The GIS collects and arranges information on the background, functions, duties, organization, major activities, personal data, major tax payers, and internal audit reports of the auditees. The IIS is a database management system which deals with previous audit results, audit information civil petitions, newspaper clippings, and controversial issues at the National Assembly.
4.3. The head of a tax audit division takes into consideration information stored in the GIS and IIS, and audit cycles in selecting auditees for general audit. For selecting auditees for performance audit, auditors also take into account auditability which may mean high probability of the presence of problems or structural vulnerabilities in taxation.
4.4. BAI operates the Audit Coordination System (ACS) to prevent duplication or omission of audits. Under the ACS system, BAI adjusts internal audit plans to avoid audit overlappings and to ensure that areas of importance are not left unaudited for a considerable period of time. Generally, BAI carries out general audits of NTA, RTOs and some DTOs, while the remainder of DTOs are audited by NTA's internal auditors. Based on the Annual Corporate Plan and the relevant Quarterly Plan, a field audit plan is established.
5.1. Upon returning to the office from the field audit and inspection trip, the head of audit team submits a first-instance brief report on the field audit and inspection to the Chairman of BAI.
5.2. This report contains audit findings and a brief introduction to the field audit activities. With regard to any irregularities found, BAI requests the authorities concerned to take necessary actions as stated in the resolution of the Council of Commissioners of BAI.
5.3. BAI communicates tax audit reports to the Minister of Finance and Economy. BAI sends to the Minister separate reports on its judgement on the liability for compensation, requests for disciplinary action and requests for correction especially when they are thought to affect the right of property of the people and the status of public office holders. Separate reports are also made on what should be improved especially when BAI finds practicable alternatives.
5.4. The Annual Report on the Final Accounts of the State, which includes the results of tax audits, is submitted to the President and the National Assembly in the following fiscal year pursuant to Article 99 of the Constitution.
6.1. NTA has studied the use of computers to rationalize and improve its operations since 1967. As at 1995, NTA's headquarters has mainframe computers for processing tax materials and its 134 District Tax Offices (DTOs) have 542 computer terminals. NTA's computer system is connected to DTO's terminals for on-line processing. Individual tax information is collected and put into the National Tax Data Base of NTA. Clerical works for assessing income taxes, corporate taxes and VATs are done by DTO computers. To support tax investigation activities, data and information on transactions, payment of interests, etc., are collected and put into the computer.
6.2. NTA is now developing an entirely new computer system by the name of TINS (Tax Integrated Network System), making use of the latest technologies. The system's aim is to make tax administration work better as well as to raise its overall efficiency in response to the rapidly changing environment.
6.3. The TINS is designed to (1) integrate data processing for the assessment and collection of income taxes, and property taxes, which have lagged behind other areas of tax administration in computerization, (2) provide an integrated information processing environment where users can easily operate the system, and (3) structure the whole system in such a way that it may serve requirements for administrative services which are expected to become increasingly diversified in the future. The TINS project is nearing completion. The system will be fully operational in 1997.
6.4. The BAI auditors select or modify known techniques for their own needs since they have different audit objectives and audit environments. Frequently used techniques are as follows :-
(i) Relevant data comparison method
This is to compare the audit target data with the relevant data bases of other organizations which contain common records. This method is useful when it is difficult to determine whether the target data omit relevant records or contain erroneous data.
(ii) Program checking method
This is to check whether the target program fairly reflects the legal provisions on which the authority of computer processing is based. Special attention is paid to see if the program reflects constraints and exceptions in the law, or if it has been revised in time together with the revision of laws and regulations. Auditors analyze flow charts for reviewing the main logic of the program or run the test data to confirm the integrity of the program. This method is a combined application of the test data method, the base case system evaluation method, and the control flowcharting method.
(iii) Parallel simulation method
The auditor himself writes the program with the basic logic, runs the program with the original data and compares his results with the original results. This method can be employed in a situation where a certain condition produces a certain range of results consistently as opposed to the expectation of random output. For example, a lottery program to select prospective apartment house owners was found to be written to produce a fixed, not a random, result at a particular number entry.
7.1. The Audit and Inspection Training Administration of BAI provides tax audit programs for both BAI auditors and internal auditors. Computer training is offered to help BAI personnel develop new audit techniques, and have access to and use data and information in an accurate and efficient way. Tax auditors of BAI are also sent to special tax education institutions such as the Tax Officials Training Institute to improve their knowledge and skills in tax audit. Whenever changes are made in tax-related legislation, outside experts are invited to address BAI staff on the matter for a field audit and a couple of members of the audit team are asked to conduct pre-audit research and to brief the field audit team on the results so that the whole team can be better prepared for the field audit.
8.1.1. The Constitution of Korea prescribes that all citizens have the duty to pay taxes under the conditions as prescribed by law, and that taxes can be levied only when they are created by law.
8.1.2. Presidential Decrees are enacted to enforce tax laws, and the Minister of Finance and Economy issues his orders to execute the Presidential Decrees. The Minister also makes authoritative interpretations of the laws and decrees. The Minister's interpretations are, however, overridden by the rulings of the Court of Justice. The NTA Commissioner issues instructions and rules for uniform application of the legislation on taxation.
8.2.1. It is very important to ensure that the assessment and collection of taxes are implemented and controlled strictly in accordance with the laws. When BAI performs general audits of the Ministry of Finance and Economy and the National Tax Administration, it carefully reviews the statutes, rules, regulations and guidelines.
8.2.2. If BAI finds inconsistencies in legislation, or possible improvements in tax laws, rules and regulations, it may request the Prime Minister, the Minister of Finance and Economy, and the NTA Commissioner to take proper action for the enactment, revision, or abolition of the laws, rules and regulations, or for institutional or administrative improvement.
8.2.3. When BAI and tax authorities differ in the interpretation of tax laws, external professional consultants are invited for legal advice.
8.3.1. The Court's interpretations and cases on tax laws are available to tax auditors in the form of books, CD-Roms or electronic database. Electronic law reports, in which cases are arranged by the order of legal provisions or by word, make it easy for auditors to interpret legal provisions when auditing. Legal precedents are one of the important standards for auditors to interpret tax laws.
9.1.1. It was frequently reported that delinquent taxes were often written off mistakenly on the ground of non-existence of properties though delinquent taxpayers actually had properties. BAI's tax auditors made preliminary studies by analyzing the procedures of writing off delinquent taxes and collecting related materials.
9.1.2. Before writing off delinquent taxes, the National Tax Administration (NTA) should make a complete search for the delinquent taxpayers' assets through the NTA database system. The database system, however, was not complete and fully reliable because it was built in 1981, and information about properties transactions before 1980 has been stored only in the database of the Ministry of Home Affairs (MHA). Analyzing the write-off procedures, the BAI auditors found that even though the NTA headquarters distributed necessary MHA data to DTOs, tax officers were sometimes careless, and did not refer to them in writing off the delinquent taxes.
9.1.3. Comparing the data of NTA with those of MHA, auditors could identify taxpayers whose delinquent taxes were mistakenly written off. Auditors, however, were not certain of the reliability of data retrieved from the databases and the priority of national taxes. In conclusion, BAI decided to conduct a field audit, and 15 auditors were sent to the court registry offices to see if delinquent taxpayers owned properties or not.
9.2.1. Through the field audit, auditors found that:
9.3.1. BAI requested NTA to take requisite actions to invalidate the inappropriately written-of taxes which amounted to 14 billion Korean won (or about US$17.5 million) and to study how to make NTA and DTOs have direct access to the MHA database. In addition, BAI also requested NTA to take disciplinary action against tax officials who were negligent in using MHA data and who wrote off delinquent taxes mistakenly. As a result of the audit, arrangements have been made for NTA and DTOs to have direct access to the MHA database from 1997.
10.1. The Tax Reduction and Exemption Regulation Act is the most important statute governing tax incentives in Korea. It was enacted in order to enhance equity in tax burden and to contribute to a sound development of the national economy by regulating matters pertaining to tax reduction and exemption. NTA ensures that the conditions for tax reduction and exemption are strictly applied. BAI always puts its audit emphasis on such tax expenditures as exemptions, deductions, credits, reduced tax rates, and deferred payment of taxes when auditing NTA and its regional and district offices. The following is a brief introduction to an audit case of tax exemptions which was carried out by BAI in 1994.
10.2. As the result of the audit, the following problems were identified :-
11.1. One of the internal controls in tax collection in Korea is the separation of the collection function and the assessment function in DTOs. Tax assessment officials can not be in charge of collecting taxes while tax collection officials are not allowed to assess taxes. The Collection Division of a typical DTO is divided into three sections: VAT Section, Income Tax Section, and Corporation Tax Section. This internal control has been proved successful in preventing tax frauds but it has been inconvenient for taxpayers to fulfill their tax obligations. NTA has been considering a reform of DTOs' organization and responsibilities. It plans to reorganize DTO responsibilities according to functions: examination, assessment, and collection.
11.2. NTA and seven (7) RTOs have internal audit units which serve as an important post-control system of tax administration. NTA and the seven (7) RTOs have about 350 internal auditors. Audit of DTOs is usually carried out by internal auditors.
11.3. BAI submits the results of tax audits to the National Assembly. Because BAI has the right to request the tax authorities to take requisite action, most of the problems pointed out by BAI are usually resolved before they are reported to the National Assembly. The National Assembly, independent of BAI audit, ensures legislative accountability by performing parliamentary inspection of NTA and the seven (7) RTOs.
12.1. BAI is responsible for examining and confirming the final accounts of revenues and expenditures of the State. When auditing District Tax Offices (DTOs), BAI auditors usually focus on revenue accounting. Procedures of tax collection and accounting of DTOs may be summarized as follows:
Notes
12.2. The best way to ensure the integrity of tax revenue accounting is to examine the totality of transactions one by one. It is, however, impossible for auditors themselves to examine such a myriad of transactions in a short time. To solve this problem, BAI auditors have made great efforts to develop audit methods and techniques for revenue accounting. Recently they are developing and testing a standard audit method and checklist for revenue accounting.
12.3. BAI tax auditors should evaluate the internal control system of the auditee before starting the field audit. Based upon the evaluation, the scope of audit is determined. If the internal control system is found to be weak, the scope of audit is widened. A typical checklist of areas examined by auditors is as follows :-