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LYU Han-Ho

Dealing With Tax Disputes Overseas

LYU Han-Ho

Mar. 15, 2006

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Not too long ago, GlaxoSmithKline (GSK), a leading global pharmaceutical firm, fell under suspicions of failing to report some of its taxes. The US tax officials slapped the UK drug maker with a US$2.7 billion bill for back taxes and interest charges. It demonstrated that nobody, not even a globally powerful organization that operates overseas, can escape the scrutiny of local tax officials.

It's a lesson that Korean businessmen will do well to chew. Korea is about to join a powerful group of international tax officials. According to a statement by the National Tax Service, Korea has been invited to join the Group of Ten tax commissioners' meeting. Besides Korea, this group consists of the US, UK, Japan, France, Germany and Canada besides the newly emerging economic powerhouses like China, India and Australia .

Korea should welcome this invitation, for it means Korean companies doing business in these countries will find a proper hearing on tax troubles arising in these countries. Once this organization is established, they will be spared the trouble of directing big amount of energy for dealing with the foreign tax authorities. They can spend that time improving their competitive edge.

So far, Korean companies doing business abroad have had to cope with a lot of trouble involving tax investigation. Typically, many of these tax probes end without a clear resolution. A variety of disputes can arise even when business is done according to local laws and regulations, a foreign company can unwittingly fall under suspicions of violating the law resulting in an astronomical amount of fines. Sometimes, a verdict involving tax investigation is based on local political or cultural differences, making rendition of a fair deliberation hard to achieve.

In advanced industrialized democracies such as the US, Japan and Germany, it is all the more difficult to avoid tax investigation on cases dealing with transfer prices.

Similar situation arises also in developing countries where new regulations or systems clash with traditional practices of doing business. Tax authorities can sometimes descend on business firms citing new regulations. They waste a huge amount of resources whenever such disputes arise. They must shake in fear of facing an enormous amount of penalty or fine. Sometimes, they have had no alternative but to accept the penalty or fines they consider unjustified.

In the past, Korea's National Tax Service has had to intervene on behalf of Korean companies to resolve tax disputes arising between Korean firms and foreign tax officials in other countries. Whenever these cases erupted, Korean tax officials had to respond on a case by case basis rather than within an institutional framework.

When the G10 commissioners' meeting formally opens, Korean businessmen facing tax troubles abroad can hope to get a systematic and structural support from their government represented at the G10 commissioners' meeting. It means Korean businessmen can expect to be supported by their government in tax disputes involving their business abroad.

We are also impressed by the fact that the G10 tax commissioners' meeting has been convened at the initiative of Korean national tax service. In September, a meeting of the top tax officials from the Organization of Economic Cooperation and Development (OECD) will also be convened.

The nine countries represented at the G10 commissioners' meeting constitute an important market for Korean exports and investment. They collectively take 56% of Korea's exports and 61% of her investments. Korea will undoubtedly benefit a lot if uncertainties were removed from the administration of law, thus enhancing transparency.

For G10 tax commissioners' meeting to be more effective and useful for Korean business overseas, Korea needs to train much more manpower knowledgeable in international tax laws and practices. A continuous supply and training of relevant experts will provide a more practical assistance to Korean companies abroad.

It is hoped that the initiative that went into convening the G10 meeting of top tax officials will lead to more such initiatives in setting the better tax policy for Korea.

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