The unprecedented development of the Internet and growth of electronic commerce have added more interdependency in the global economy. At the same time, some international conflicts for taxation, especially for sales tax, are created. This paper analyzes the taxation system of the Republic of Korea whose economy depends heavily on developed countries. Also, it evaluates Korea's Value Added Tax, which is equivalent to the U.S. sales tax with a view towards coping with the global electronic commerce market.
The explosive growth of electronic commerce is expected to continue along with the development of the Internet. Traditionally, all commercial transactions have been carried out by means of physical exchange. However, information technology and the unprecedented development of the Internet have made traditional trade possible through electronic networks. So it is obvious to see electronic commerce through the Internet mainly driven by private sectors will be expanded without limit in cyberspace. However, in cyberspace the system of taxation, an exclusive authority vested in governments, may remain in a gray zone where the highest probability of tax evasion is most likely to occur.
The unprecedented development of the Internet and growth of electronic commerce have added more interdependency in the global economy. Concurrently, some international conflicts for taxation have been created. Much of the past research on the subject of electronic commerce has been superficial. When problems were found with electronic commerce taxation, some analyses have been presented, but no appropriate taxation model has been suggested and developed. The motivation of this study is to analyze the taxation system of the Republic of Korea whose economy depends heavily on developed countries, especially on the Unites States, and to evaluate Korea's taxation system with a view towards coping with the global electronic commerce market.
Electronic Commerce and Value Added Tax in Korea
As presented in Exhibit 1, the number of Internet users has been increasing rapidly in recent years. The International Internet Society estimates that the global number of users will increase to 709 million by the year 2004 (from a mere 120 million in 2000). In Korea there were approximately 731,000 Internet users in 1996, but the number has already reached more than 25 million by June 2002. Electronic commerce using the Internet will rapidly increase in scale and will occupy more than 30% of consumption expenditure in private sectors within the next 30 years.
Taxation Structure of the Value Added Tax
Exhibit 2 depicts the current Korean Value Added Tax (VAT) payment system by self-assessment. The periods that tax is imposed in a calendar year are divided into two segments, the first half (January 1st to June 30th) and the second half (July 1st to December 31st).
The Korea Value Added Tax Law 18-1 requires one estimated tax return for the first three months (equivalent to the U.S. monthly remittance) of every six-month period and a self-assessment return (equivalent to the U.S. quarterly return) for the six-month period. A taxpayer must report the total amount of receipts and tax due or tax refund to the head of the regional tax office within 25 days after each three-month period and pay the amount due.
It might vary state to state, but in general in the U.S., the sales and use tax statutes require four quarterly and eight monthly filings. The monthly filings are for the first and second months of each calendar quarter (January, February, April, May, July, August, October, and November). A monthly remittance must be filed for each of these months in which the amount of tax due exceeds $500 (the state of New Jersey case). When the amount due for any of these months is $500 or less, payment for that month may be remitted with the next quarterly return.
The March, June, September, and December quarterly returns must be filed whether or not there is any tax due for that particular quarter. The total amount of any quarterly sales and use tax due (after taking credit for monthly payment(s) for the quarter) must be remitted with the quarterly return.
Tax System Affected by the Internet Technology
The Organization for Economic Co-operation and Development (OECD) describes the tax system affected by the features of Internet technology as follows:
1. Absence of Central Regiment: Basically, there are no physical whereabouts in the Internet. So it is almost impossible to control circulating channels that Internet users employ to communicate with each other.
2. Absence of Central Registration: There are no major obstacles to change one site operator to another because the conditions to register are not strict and generally the conditions required over personal identity to use the Internet are so far insignificant.
3. Traceability: Once a site operator gives permission, it's easy to take action to avoid traceability of his site. For example, an English licensed tax accountant manages an Internet site with a computer in Canada for American clients while the English licensed tax accountant can easily control the Canadian computer using a series of software programs, which cannot be traced.
4. No Correspondence of Computer Domain Name and Real Name: It is possible to know who's who in the Internet address (domain name). However, we don't know anything about computers connected to the Internet addresses, let alone their locations.
Basic Premises of Tax System on Electronic Commerce
The Internet has a great impact on conventional tax administration. If taxes are collected in a traditional manner, potential tax havens will be numerous. To solve this problem, new information technology applicable to tax administration must keep pace with the development of the Internet. Exhibit 3 depicts the impact of technology on tax administration and solution courses as investigated by OECD.
Premise of Planning Taxation Architecture. To study methods of taxation in this electronic commerce era, the tax architecture should be considered and planned because taxcollecting methods can vary with the tax architecture. The following is the premise of planning the tax architecture.
First, all people concerned carry out transactions in forms of electronic commerce through the Internet. In the real world, both traditional and electronic commerce co-exist. For the purposes of this discussion, let's assume that customers utilize a web browser in the cyberspace shopping mall of a taxpayer's website with a priority assigned.
Second, income tax for individuals and corporations, consumption tax, and property tax on an information system can be considered as sources deriving from electronic commerce (but this article focuses only on VAT which is a consumption tax).
Third, the scope of taxation is limited to transactions with the final consumers. The main reason is because electronic commerce basically eliminates the middleman.
Fourth, the tax software for electronic commerce must include regulations. The government should approve the tax system, and a standard protocol must be included in the information systems of the concerned parties.
Fifth, the government tax office must control and supervise cyberspace shopping malls to prevent tax evasion by electronic commerce participants.
Sixth, small amounts of electronic transactions are the main focus in this article. Relatively small payments that are suitable to credit cards in dealing with retailers are in focus.
Seventh, a payment system to find tax sources is also in focus. It is difficult to identify and trace dealers to find tax sources in electronic commerce. It is easier to focus on catching the moment a payment is being processed. No matter what the nationality of financial institutions or whether or not they are multi-national, the tax point of the VAT related to consumption can be traced by working on a plan of the tax system that connects settlement of accounts with tax payment. In this discussion, tax sources can be traced from the point of settlement of account.
MODEL BUILDING FOR ELECTRONIC COMMERCE
A Taxation Model
The VAT system has contributed much to Korea's national tax revenue since it was adopted on July 1, 1977. But investigation still proves that many people defraud the revenue system because a considerable number of people think the chance of being caught is very slim. So a new method needs to be invented to improve the current tax system and to prevent tax evasion. In building a taxation model in electronic commerce, tax payments can be divided into two main tax paying groups, consumers and cyberspace shopping mall owners.
Due to many inherent difficulties in identifying consumers over the Internet, the discussion here will be limited to collecting taxes from the cyberspace shopping mall owner, or the proprietor. Therefore, we will consider only the case where the proprietor (the tax imposer) is the taxpayer. The instruments of payment considered will be limited to credit cards, debit cards and electronic money.
Proprietor's Integrated Taxation Model
As shown in Exhibit 4 the A) consumer, B) proprietor, C) proprietor bank and D) the National Tax Administration are the principal players in the Integrated Taxation Model. The model requires the following:
Payment Application Program. A consumer needs an electronic purse, which makes purchasing through the Internet safe. At present, the software is only applied to credit but in the future it will be applied to other types of payment like debit card, electronic cash, electronic checks, and the like. The electronic purse maintains cardholder information and connects the proprietor's payment program. It also manages multiple users and their information, and it manages purchasing histories.
Management Software for Proprietor's Payment and Sales. Software is needed to handle business transactions and exchange information with authenticity and credit-checking institutions after receiving orders and payments from consumers. It should supply payment interface with a consumer and perform the function of issuing receipts to the consumer by handling the tasks of verifying credit information, transaction cancellation, invalidity, settlement and adjustment. It also has to perform functions of recoding sales information and checking transaction details.
Software Supporting Tax Reporting. A proprietor does not need to follow the conventional manner of summing up all details on documents for reporting business transactions to the National Tax Office because a simple tax report is possible--as long as software that contains digitized electronic commerce information is available to arrange and total all the transactions. (Therefore, the National Tax Administration needs a standard protocol for supporting the dispatch of the proprietor's tax report and the bank's transaction details.)
C. Proprietor Bank
Payment Gateway. Software is needed to handle every task regarding settlement of accounts connecting a card company and a proprietor. Detailed transaction information is stored and managed in a database. Except for representation attestation and funds settlement, all Internet protocol and Internet particular security protocol, transaction transfer, message protocol conversion, and so forth must be handled by the software.
Tax Report. In the case of credit card settlements, the company reports the transaction details to the National Tax Administration twice a year (August and February). But if electronic commerce is very active, it is better for the proprietor bank to report the business transaction details instead of a conventional card company. The reason is that the proprietor bank can easily grasp the fund settlement flow of credit card companies and all other means of payment.
D. The National Tax Administration
Setting Up the Standard Protocol Supporting Tax Statement and Tax Report. The National Tax Administration receives tax statements from proprietors for all transactions. The National Tax Administration must specify which protocol is to be used by the proprietor or his bank for reporting tax statements.
Putting Tax Patrol Power in Motion. Digitalized transaction information may be misused. To address this problem, the National Tax administration must implement tax patrol methods and investigations.
A lot of attention has been paid to electronic commerce through the Internet along with the explosive use of the Internet and the development of information and communication technology. The main usage of the Internet has shifted from academic and research purposes to business purposes; that is, as a means of global marketing and commerce.
The Internet is not only an international communication channel but also a cyberspace market eliminating time, space, and physical boundaries. Super powers like the U.S. are taking the initiative in its development. The U.S. proclaimed its intention to take a leadership role in international discussions related to electronic commerce by announcing "A Framework for Global Electronic Commerce" on July 1, 1997. Meanwhile the EU adopted the Bonn Declaration in July 1997 addressing the "Global Information Network," and the OECD financial committee issued a report regarding electronic commerce during their November 1997 meeting.
The Internet electronic commerce discussion will emerge as a new Trade Round or the Internet Round in the future. Many nations agree on the principles of Internet electronic commerce, but there are also many different opinions on regulations addressing contents, duty free and internal tax issues, protection of intellectual property, opening the coding technique and other important issues.
To cope with the new challenges deriving from electronic commerce, it will be an urgent task to develop systematic and overall nationwide policies.
The following suggestions are offered to identify new tax sources while maintaining the current conventional tax system of Korea. First, the National Tax Administration should issue the registration certificate of business to an electronic commerce business proprietor in the same way it does conventionally. The only difference should be that electronic commerce proprietors should indicate their specific status so that their type of business can be recognized easily.
Second, the proprietor's bank is a suitable institution to report the details of business dealings to total all different means of funds settlements. Therefore, the National Tax Administration can reconcile the details of business dealings that the proprietor's bank identifies for cross-checking with the proprietor's tax report.
Third, traded commodities or labor through the Internet must have a standardized code system because the efficiency of taxation services for the National Tax Administration may not be at its best if there is no code unification on the same item.
Fourth, the following ideas for intensifying the legal system as outlined in the 1996 United Nations Commission on International Trade Law (UNCITRAL) should be implemented:
* Any information in forms of data messages should be valid.
* In case information needs to be in "writing" by regulations and the data messaged information is to be opened later, no more conditions should be required.
* The model law of UNCITRAL recognizes that an electronic signature is as good as a general signature.
Fifth, Korea needs to make a Korean Payment Option (KPO) that is a new and different type of funds settlement compared to that of America and Japan.
Sixth, the last idea to be suggested is that a system to tax electronic commerce is to be built. Taxation software will promote the efficiency of tax collection and prevent tax evasion through automated tax services among consumers, proprietors, their banks and taxation offices that participate in electronic commerce. Tax laws should be translatable into taxation software, and governments must approve the software for this purpose.
Of course potential negative side effects include a danger that the National Tax Administration may hinder private enterprises from improving electronic commerce by limiting the types or number of permissible changes (for the purpose of limiting the need to change the taxation software) and the possibility of threatening enterprises' privacy from software-driven tax investigations.
EXHIBIT 1: THE NUMBER OF INTERNET USERS IN KOREA Year 1996 1997 1998 1999 2000 Number of 731,000 1,634,000 3,013,000 10,860,000 19,040,000 Users Year 2001 June, 2002 Number of 24,380,000 25,650,000 Users Data: The Chamber of Commerce and Industry, "Introduction and Promotion Strategy of Electronic Commerce," June 30, 2002.
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Yeong C. Choi, The Peter J. Tobin College of Business, St. John's University Hi-youl Suh, Kangnam University, Korea…