An independent internet media “Newstapa” revealed list of Koreans who avoided tax, taking advantage of ‘tax haven’ over three times of announcement. This “disclosure” became a big issue, because it turned out that there are some of Korea’s major companies and even government enterprises on the list. For their secret tax avoidance, media and public opinion is leaning toward severe criticism. As the related authorities are taking action, the Financial Supervisory Service launched an investigation.
What is tax haven anyway? And how could they avoid tax with it? Tax haven means a country of a region that imposes tax under 15% or nothing on the profit a company earns. Types of tax havens can roughly be classified into four different types; low-tax havens, tax shelters, tax resorts, and tax paradises. Low-tax havens are countries such as Singapore and Bahrain, which literally impose low-taxation on one’s profit. It can be considered as a weak type of tax haven, because they usually signed a tax treaty with many other countries. Tax shelters are regions like Hongkong and Liberia, which don’t impose tax on income from an overseas source. Similarly, tax resorts such as Swiss and Luxembourg impose especially low tax rate on certain types of companies. Tax paradise regions like Bahamas and Virgin islands don’t impose tax on any types of economic profit.
The ways companies avoid tax are easier than we think. Especially in the disclosure, it turned out that many of the tax-avoiding company used paper company. Paper Company is a company that only exists on papers, without any office or factory. Using paper company the owner can accumulate secret fund which would have been a source of income tax. For example, let’s say a company earned 10 million dollars from exporting goods. The owner can establish a paper company in Virgin Islands, which imposes no taxes. And the owner opens a deposit in Virgin Island, using the name of paper company. When the owner sends revenue to his own country, he sends only 8 million dollars, making the rest 2 million dollars remain as secret fund. That means he or she burdens domestic tax only worth of 8 million dollars.
This type of tax avoidance is truly a social issue, because it reduces tax revenue of a country and it can be a serious problem when the loss becomes a huge amount. The loss can be a burden of the government creating budget deficit. Therefore, it is not a surprise that the disclosure became social issue and the authorities are taking serious action about it. Since this tax avoidance scandal is sensitive issue to everyone in this country the response of the authorities toward the offenders are receiving great attention.