Combating VAT Fraud: Lessons from Korea?

Abstract

Adopted a decade after the commencement of VAT in the UK, the Korean VAT was largely modelled on the European precedent and most features of the tax have parallels with the traditional VAT. In two significant aspects, however, the Korean VAT diverges from its European counterparts. The first aspect is the collection of comprehensive data on sales and purchases by the revenue authority, along with the administrative practice of comprehensive matching of supplier and customer invoices. This approach has been a feature of the Korean system from the time of its adoption. The second aspect is the more recent creation of a “cash receipt” system that rewards final consumers paying by cash if they insist on a cash receipt that automatically reports sales to the revenue authority. The latter system appears to have achieved some positive results in terms of reducing non-disclosure of cash sales. The benefits of the first initiative, comprehensive data collection and matching, are, however, questionable. It has not been shown that the additional administrative and compliance costs achieve results which are markedly better than competent targeted auditing systems under more conventional VAT administration systems. Recent moves by Israel and Portugal to adopt administrative processes similar to the Korean model may yield limited benefits.

Keywords: Comparative law, Deterrence, Fraud, South Korea, Tax administration, VAT