A Study on the Issues and Improvements of Tax Avoidance Schemes through Residency of Offshore Investment Company and Individual
Asian Tax Journal Vol. 14 No. 1 (2013), pp. 93-127
Abstract
With the increasing number of Korean companies entering the overseas markets, this research paper considers the types of tax avoidance or evasion through offshore companies and Korean residency test for companies and individuals doing business overseas. This research paper considers the tax avoidance cases that may arise by adopting residence approach and related interpretational issues in determining residency. To determine how the residency was determined in practice, a survey was undertaken of the three groups comprising of (1) academia including universities and research institutes, (2) Korean tax officials and (3) tax professionals such as lawyers, certified public accountants and tax agents. Based on the survey result, a difference existed in the interpretation of the residency tests among the different survey groups. Firstly the Korean tax officials considered the scope of individual and corporate residency broader than the academia and professional groups. Secondly the tax officials deemed residency based on other factors (family ties, assets etc) even if the days of stay were less than 183 days. Such differences in interpretation reveal the deficiencies in the rules relating to residency tests and lead to potential tax disputes. In light of the interpretation issues related to residency tests, the following amendments to the rules and regime were proposed. Firstly, the residency concept for individuals must be clarified in light of the global economic environment. In order to eliminate uncertainty, the meaning of “permanent address” must be revisited and clarified as “home”. In order to clarify the meaning of “abode”, a “substantial presence test” should be introduced along with the “183 day test”. Secondly, the meaning of “effective place of management” of a company should be updated to reflect the globalization of business operations through developments in tele communications and modes of travel. As there is no clear interpretation of the phrase “effective place of management” introduced in 2005, there is a lack of predictability which may result in tax avoidance. Accordingly, further detailed rules should be provided in determining “effective place of management” based on the notes to the OECD Model Tax Convention. Furthermore, a new anti－avoidance measure should be introduced to prevent cases where a foreign holding company is incorporated over a local holding company structure to avoid paying Korean tax on income from business carried on overseas. Thirdly, the residency regime needs to be strengthened in order to prevent tax avoidance around residency tests that may arise despite changes to the current legislation. In this regard, introduction of exit tax should be considered to improve the administration of tax and encourage compliance by the taxpayers.
Keywords
- residence approach
- effective place of management
- substantial presence test
- OECD Model Tax Convention
- prevention of tax avoidance