Korean Versus U.S. Tax Controversy Practice.

• Author: Quigley, Michael

The Expert: Michael Quigley

There are key differences between South Korean and U.S tax practices, which all professionals involved in a Korean subsidiary's tax audit should note.

Question: What's the best way to manage your Korean subsidiary's tax audit while avoiding frustration and surprise?

After leading the tax controversy groups at two outstanding global law firms for more than twenty years, I left Washington, D.C., to join Kim & Chang's tax department in Seoul, South Korea. My expectation was to spend a year or two with my esteemed co-counsel firm and then to return home with a deeper understanding of tax controversy practice in Korea and Asia. Now, more than five years on, I have come to realize that obtaining that "deeper understanding" is a complex and long-term undertaking I surely could not have achieved in a short stint. This brief article compares tax advocacy practices in Korea and the United States. My hope is that these observations can illuminate successful tax advocacy strategies that may be of use to TEI members confronting tax disputes in Korea and, more broadly, throughout Asia.

As a threshold matter, tax executives with experience in Korea and other Asian tax jurisdictions often use adjectives such as frustrating, aggressive, and obstinate to describe tax auditors here; indeed, it's almost a cliche to do so. To be sure, many companies have experienced extreme exasperation with tax audits in this part of world. Let us now briefly compare the Korean tax dispute system with the parallel and differing procedures in the United States to aid in understanding some of the root causes of--and potential remedies for--this frustration.

Principal Characteristics of the National Tax Service

Much like the Internal Revenue Service, Koreas National Tax Service (NTS) has a national headquarters and seven regional enforcement offices typically referred to by an acronym whose first letter is the city or region covered by that regional office. Thus, the Seoul Regional Tax Office or SRTO is the principal enforcement arm of the NTS in Seoul. Likewise, the tax law is administered and enforced in Busan (BRTO), Daegu (DRTO), and other major cities and regions in Korea by separate regional offices. Each regional office has an important internal hierarchy including one presiding commissioner, two or more assistant commissioners, and other senior, mid-level, and working-level personnel.

Admission to Korean government employment (within the NTS or any other agency) requires an applicant to pass a rigorous civil service examination. This examination is typically taken immediately following graduation from college or university or military service (Korea imposes two years of mandatory military service on all males). The year a government employee passes the civil service examination denotes his or her class, and this designation stays with the individual throughout his or her tenure with the NTS.

Performance at every level within the NTS is examined and graded scrupulously. In contrast with the IRS, at the NTS the great majority of employees stay with the agency for the long term. It is rare, for example, for a person to work for the NTS for a few years and then move to the private sector and then return to the NTS in the revolving-door manner that prevails in the United States. Employment with...