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Status Report on Transnational Tax-Crime and Its Criminal Justice Manuevers
December 01, 2017


Since the global financial crisis in 2008, governments of developed countries initiated a comprehensive review of the domestic and international tax systems. As a result of analyzing, it became necessary to prevent tax crime and tax avoidance of large multinational corporations around the world. In addition, it must be considered to introduce unified international countermeasures for transnational tax crime. Major Korean companies accounted for 48% of overseas sales in 2013 and the size of international transactions is increasing day by day. As a result of these changes, strategies for avoiding taxes through international transactions between companies and individuals are becoming more intelligent and advanced. For example, according to a report on offshore economies(2012) published by the Tax Justice Network (TJN), South Korea holds about 779 billion US-Dollar in offshore tax havens. This means that S. Korea is the third largest country, followed by China and Russia. Currently, the Korean government recognizes the seriousness and necessity to deal with offshore tax evasion. There are various laws and regulations related to transnational tax crime. In particular, [Adjustment of international taxes act] provides countermeasures to prevent transnational tax avoidance. In addition, some tax related acts provide criminal sanctions for tax offenses, such as Article 3 of the [Punishment of tax offenses act], Article 29 of the [Foreign exchange transactions act], Article 4 of the [Act on the aggravated punishment, ect. of specific economic crimes] and Article 8 of the [Act on the aggravated punishment, etc. of specific crimes]. In order to cope with the diverse and complex forms of tax crimes, it is necessary to identify the current situation and prepare countermeasures to legalize offshore tax revenue and to raise tax equality. In this study, we examine the actual situation of various policies and the related laws and regulations, and finally suggest countermeasures against tax crimes. 1. First of all, the improvement of substantive law should be considered. (1) Legislations, which are listed in the sixth clause of Article 3 of the [Punishment of tax offenses act] (1. A false book entry, such as double bookkeeping; 2. Preparation and receipt of false evidence or a false document; 3. Destruction of books and records; 4. Concealment of property, fabrication or concealment of income, earnings, acts, transactions; 5. Not preparing or keeping books intentionally, or fabrication of bills, tax invoices, a sum table of bills or a sum table of tax invoices; 6. Fabrication of facilities for enterprise resource planning or electronic tax invoices under subparagraph 1 of Article 5-2 of the Restriction of Special Taxation Act; 7. Other acts by a deceptive scheme or improper acts.), are intended to control domestic tax evasion. Thus it is difficult to apply directly to the transnational tax crimes. Therefore, it is necessary to include in the list the important issues, such as a hiding taxable benefit or disguise of taxpayer’s name, nationality or residence. By doing this, the object of punishment can be clarified. Furthermore, transnational tax evasion is difficult to accomplish without the help of specialists in international taxation as well as domestic tax laws. Therefore it should be effective for the eradication of tax crimes, if an assistant could be punished as the principal offender, such as the first clause of Article 217 of the [Customs Act]. (2) It is obligated to report if the balance of all overseas account “at the end of the month” exceeds one billion won. The regulations can be intentionally misused in a way that adjust the balance at the end of each month to below the limit. So it must be considered, that amendment the rule as “retained account balances for any day in the year.” In addition, the amount of obligational reporting (one billion won) needs to be lower, considering the size of the economy of Korea. Meanwhile, it is difficult to get the effectiveness of the overseas financial account reporting system because criminal penalties could be imposed only if the amount of overseas account exceeds five billion won. Therefore, it is worth to consider imposing the criminal sanctions for the amount of less than five billion won. Lastly, it would be also meaningful to charge a fine on the amount multiplied by the fine rate (20%) if overseas account holder does not report or understate the amount of the account. (3) Without voluntary declaration, it is difficult to obtain information on offshore income or property because exchange of information among countries is very limited. So it is necessary to make systematic complementary measures to induce voluntary declaration from taxpayers. In other words, incentives should be strengthened in the case of voluntary declaration so that the fine can be exempted or criminal penalties should be reduced. Here are a few of the ways which could improve voluntary declaration system: First, the legal basis and provision of reduction and exemption system prescribed in the [Enforcement Decree of the adjustment of international taxes act] must be clearly defined in the ‘act’ to ensure certainty and clarity. Second, the incentive should be strengthened so that fine could be reduced or exempted. Third, it is worth to consider to change the article which provides a non-mandatory reduction of criminal punishment as a incentive. In short, criminal punishment should be necessarily mitigated or/and remitted. Fourth, it must be considered that the criminal penalties in Article 27-2 of the [Foreign Exchange Transactions Act] could be exempted or mitigated if taxpayer voluntarily report the source of the offshore assets, etc. Besides, there is a need to discuss about more creative ways to increase sincere reporting such as a particular pardon for a tax crime in the past, because there is a limit to pay taxpayers' voluntary declaration only by reduction of penalties or additional tax, etc. (4) The reward system for the tax evasion can be used as a device to solve the problem of collecting information by encouraging the general public to provide relevant information about transnational tax crimes. However, the current amount of the reward is too small compared to the amount of reported tax evasion, namely the reward rarely exceed 100 million won. Therefore, it is necessary to raise the amount of reward for the encouragement of reporting. (5) In 2013, two legislative bills were submitted to the National Assembly for a comprehensive and systematic response to tax evasion. However, it may cause confusion of law enforcement and can reduce efficiency of the tax-system. It is necessary to pay attention to the enactment of special laws because it is possible to respond to the problem of offshore tax crime by supplementing existing laws and regulations. 2. In addition, the improvement of procedure law can be considered. (1) In the case of transnational tax crimes, it is difficult to collect information and to prove causality. Therefore, it is necessary to lighten the burden of proof during the proceeding. For example, it can be introduced to prove that the taxpayer has paid the tax by law and regulations. When a domestic corporation establishes a paper company in a offshore tax haven, it does not mean that the act itself has the purpose of tax crime. However, the taxpayer could be presumed guilty if the taxpayer fails to explain the reason for establishing the paper company or to submit legitimate transaction details. (2) It is reasonable to extend the statute of limitations of the transnational tax crimes in the view of difficulties by investigating of the tax crime. 3. Lastly, the cooperation among countries must be reinforced for the effective information exchange. (1) It is important to expand agreements among nations for continuous information exchange, especially with so-called tax-haven countries. This agreements can play a key role in preventing transnational tax crimes by solving the difficulties of collecting information. Thus the efforts should be made to expand agreements for ongoing information exchange. Since the assets of taxpayers are outside the country, the effectiveness of the tax administration can not be guaranteed unless the tax collection is properly carried out. Therefore, it is also needed to include the contents of the execution of tax collection and punishment for the purpose in the tax treaties. (2) In addition, specialists regarding tax should be reinforced to collect, analyze and investigate massive tax evasion information from abroad. Since, in many cases, it is based on precise strategies with the help of tax and financial experts. In summary, it is necessary to respond to transnational tax crimes through the improvement on laws, regulations and international cooperation.

Cheonhyun Lee

Criminal Law&Policy, Criminal Justice Reform

Senior Research Fellow

Cheonhyun Lee's picture

Research Interest (Major)

Economic Crime, Corrupt act, Administrative sanctions

Report List

Strengthening the Forensic Science in Korean Criminal Justice System(Ⅳ)

Criminal Policy on Large-Scale Accidents with Multiple Casualties and Injuries

Criminal Sanction on Corporate Activity (Ⅱ) -The Current Practices of Sanctions against Corporate Crime-

Circumstances and Countermeasures of Unlawful Practices of Law (Ⅱ) - Focusing on the Reality of Corruption Committed by 'Attorney-At-Law Retired From Public Office' and Its Countermeasures

Improving the Prevention System of Corruption in the Private Sector

Crowdfunding: The Actual Conditions of Crime Using Crowdfunding and Its Countermeasures Status Report and Countermeasures against Crimes Using Crowdfunding

Status Report on Transnational Tax-Crime and Its Criminal Justice Manuevers

Criminal Policy for Intectious Disease Control and Prevention

A Study on the Criminal Liability of Companies Profiting from Illegal Activities

Strenghtening the Korean Criminal Justice System Applying Forensic Science (V)

Criminal Investigation of Administrative Agencies: Analysis of the Current Status and Improvement Measures

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Korean Institute of Criminology Official Video

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