A Study on the Improvement of Tax Return by Estimated Income in Korea
Asian Tax Journal Vol. 16 No. 1 (2015), pp. 67-98
Abstract
Individual income tax return should be based on double－entry bookkeeping or simplifiedbookkeeping. However, Tax Return by Estimated Income (“TREI”) is still permitted in Korea. This paper reviews the current practices on TREI system and introduces an improvement plan. This study examines the legal aspects of TREI system；its problems and solutions of TREIthough case study and tax credit for bookkeeping. The suggestions are summarized as follows：First, a short－term treatment to TREI implications is twofold. TREI should be defined in theclause of final tax return in Income Tax Law. TREI should be reduced gradually to reinforce taxreturn by bookkeeping and appropriate documentary taxation. In a long－term perspective, TREIbe repealed and a basic (simple) ratio method be used only under estimated taxation by taxauthority. Second, under current Income Tax Law, estimated expense in TREI should be deducted inproportion to additional income assessed by tax authority unless tax authority prove taxpayer’sintentional TREI rather than tax return by bookkeeping or find most of critical evidence in TREI. However, the effect of TREI should be voided when the tax authority find the omission of taxableincome by more than 20% during tax audit. Taxpayers should provide their own proof of expensein accordance with the additional gross income assessed by tax authority. Third, ‘taxpayers with double－entry bookkeeping requirement’ should be included in the poolof special audit when they report TREI. Tax authority provide simplified or double－entrybookkeeping guidelines to new business owner and continuous publicity on bookkeeping. Fourth, double－entry bookkeeping tax credit for taxpayers with simplified bookkeeping shouldbe increased up to 60% of the related expense incurred. I expect this study to ensure the expansion of ‘tax return by bookkeeping’ and secure equityamong taxpayers as well as appropriate documentary taxation.
Keywords
- tax return by estimated income(TREI)
- estimated taxation by tax authority
- basic(simple) expense ratio method
- tax credit for bookkeeping