Headquarters of National Tax Service in Seoul

Top companies to file complaints against tax agency

By Kim Jae-won

About 20 major Korean companies with global networks will file tax complaints to the Tax Tribunal next month, protesting the tax agency’s decision to impose fines related to trade with their offshore subsidiaries, tax authorities and sources said Friday.

According to the National Tax Service (NTS) and industry observers, a score of Korean multinationals, including Hyundai Motor and LG Electronics, will take up the issue of a “del credere” commission with the state-run tribunal.

Del credere refers to an agreement in which an agent or a company guarantees to repay another firm’s loans by receiving a commission for doing so.

In this case, the companies were accused of taking little or no commission from their overseas subsidiaries, which the tax authorities argue, was to evade corporate tax by reducing profit earned through the payments.

Experts say the dispute will worsen the relationship between big companies and the Lee Myung-bak government. The two parties have been in conflict over a “shared growth” policy, which forces large firms to give some of their profits to small- and medium-sized suppliers.

“Companies should have paid more corporate tax as they could make more profit if they had received the appropriate commission from their offshore subsidiaries,” said a director of the NTS on condition of anonymity.

The director argued that parent companies in Seoul provided del credere for their foreign subsidiaries when they borrowed from local financial companies. As the subsidiaries have lower credit ratings, the parent firms provided guarantees for their affiliates’ loans.

The problem is, according to the NTS, the parent companies took little or no commission from the subsidiaries, which reduced their profits and corporate tax.

The tax authorities calculated profit based on its own model and has imposed billions of won in fines on each company. The NTS said it applied the rule retroactively from 2006.

But the companies oppose the idea. They say it is unfair that the tax agency imposes fines based on its own model because it violates the principle that taxation should be based on general and normal information.

Some of the firms point out that the tax authorities should be prudent in calculating profit and commission because it depends on each company’s specific situation.

The companies’ move is gaining attention as it comes after the tax agency tightened its examination of big firms. It recently imposed 470 billion won ($416 million) in back taxes and fines on Samsung Electronics as the technology giant allegedly dodged corporate tax by manipulating prices when trading with overseas subsidiaries.

Samsung was accused of lowering profits by selling products lower than market price to subsidiaries abroad, where lower corporate taxes than Korea are imposed.

Investigators with the tax authorities looked into Samsung for seven months from July, and wrapped up the investigation recently. A regular audit usually takes three months, but the agency extended the term twice to probe it thoroughly.

The agency also raided SK Shipbuilding last month, taking accounting documents from the company. The raid drew attention from observers as the special tax audit team became involved in the investigation. LG Electronics is also being audited by the agency.

Meanwhile, major law and accounting firms are competing to become legal advisors to the companies as the total fines have reached around 1 trillion won. Among accounting firms, SamilPwC, Deloitte Anjin, Samjong KPMG and Ernst & Young Han Young are all eager to capitalize on opportunities created by the tax dispute.