When starting a business in a local area, you do not have to pay income tax for 5 years.
National Tax Service collects 174.9 billion won in tax evasion last year
YouTuber A, who is active in Seoul, set up a ‘ghost office’ in a shared office in Yongin-si, Gyeonggi-do. This is because young people who start businesses in rural areas have learned that they do not have to pay income tax for five years. The amount of tax he received reduced in this way amounted to billions of won. The National Tax Service, which revoked Mr. A’s business registration ex officio, plans to collect the reduced tax as well.
According to the National Tax Service on the 7th, last year, 2,900 corporations and 649 individuals received unfair tax benefits by abusing the deduction and exemption system. The total tax collected by the National Tax Service from them was 174.9 billion won. In 2021 and 2022, KRW 54.4 billion and KRW 71.2 billion were collected, respectively, and the amount of tax evasion has increased rapidly since last year.
In particular, many cases were discovered where some YouTubers and mail order retailers registered false businesses in local areas. This is an abuse of the system (tax reduction for small and medium-sized businesses) that provides 100% income tax reduction for 5 years if a company is established outside the overconcentration control area of the metropolitan area.
In fact, the shared office where Mr. A moved in had about 1,400 businesses in a 400 pyeong building. Each business used 0.3 pyeong, and when the National Tax Service visited, it was clear that there were 177 businesses registered in one empty room and that there was a pile of neglected mail, clearly showing address laundering. In Songdo, there was a case where about 1,300 businesses moved into a 400 pyeong shared office. The National Tax Service has established a ‘Tax Management TF’ for local shared offices that have become ‘domestic tax havens’ and is verifying whether the tenants are actually doing business.
Sejong = Reporter Song Hye-mi [email protected]
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Title: Navigating the Maze: Tax Evasion and the Challenges in Local Businesses
Interviewer (Time.news Editor): Welcome to our discussion today, where we delve into the pressing issue of tax evasion among local businesses in South Korea. We’re honored to have with us Dr. Jae-Hoon Lim, an expert in tax law and economic policy. Dr. Lim, thank you for joining us.
Expert (Dr. Jae-Hoon Lim): Thank you for having me. It’s a critical topic that I believe needs greater public awareness.
Interviewer: Absolutely. Recently, the National Tax Service revealed alarming statistics, stating that 174.9 billion won was collected from individuals and corporations abusing the tax exemption system. What do you make of this sudden rise in tax evasion cases, particularly involving young entrepreneurs and YouTubers?
Dr. Jae-Hoon Lim: The significant rise in tax evasion can be attributed to a combination of factors. The five-year income tax exemption for businesses established in rural areas was designed to encourage entrepreneurship outside of congested urban centers. However, it appears that some individuals are exploiting this policy by registering pseudo-businesses in shared offices. This not only undermines the intent of the law but also places an added burden on the tax authority.
Interviewer: The concept of registering ‘ghost offices’ in shared spaces is quite striking. Could you elaborate on how these operations typically function?
Dr. Jae-Hoon Lim: Certainly. A ‘ghost office’ refers to a situation where numerous businesses are registered at the same physical address, often a shared workspace. In the case described, one empty room had 177 registered businesses, which is a clear misuse of the tax benefits meant for real, operational businesses. These entities often exist without any real operations, simply benefiting from the tax exemptions while avoiding responsibilities.
Interviewer: It seems that shared offices have, in a way, become domestic tax havens. How does the National Tax Service plan to tackle this growing issue?
Dr. Jae-Hoon Lim: The National Tax Service has initiated a ‘Tax Management Task Force,’ focusing on these shared office spaces to verify whether the tenants are genuinely conducting business. They will likely conduct audits and investigations to identify non-compliant entities. This is a step in the right direction, but enforcement will be crucial to ensure compliance.
Interviewer: From a policy perspective, do you think the current incentives for starting businesses in rural areas need adjustment to prevent further misuse?
Dr. Jae-Hoon Lim: Yes, I believe a review of these incentives is necessary. While it’s important to encourage entrepreneurship outside of major cities, the government must also implement stricter criteria for eligibility. For example, introducing standards for proving operational legitimacy could deter misuse while still supporting genuine startups.
Interviewer: It sounds like a balancing act between encouraging business development and preventing fraudulent activity. As a final thought, what message would you want young entrepreneurs to take away from this situation?
Dr. Jae-Hoon Lim: My message would be to engage in honest and sustainable business practices. There are great opportunities for growth in rural areas, but exploiting loopholes can lead to dire consequences down the line. It’s crucial to build a business on a solid foundation, not just to evade taxes. Integrity in business practice will pay off in the long run.
Interviewer: Fantastic insights, Dr. Lim. Thank you for sharing your expertise with us today on such a vital issue. It’s been a pleasure.
Dr. Jae-Hoon Lim: Thank you. I appreciate the opportunity to discuss these important matters.