The
National Tax Service announced its plan to introduce a “horizontal monitoring”
program which involves the conclusion of a “Compliance Agreement” with compliant
taxpayers. Under the so called “gentlemen’s agreement”, the NTS will not
audit the taxpayer’s tax return, as long as the taxpayer has fulfilled what
had been agreed upon.
The
new program is in line with the NTS goal of serving honest taxpayers as its
“most valued customers.” In the previous vertical monitoring program, verification
and audit of tax returns began only after a tax return was filed. Under the
horizontal program, however, companies with a tax control framework (TCF) effective
enough to guarantee self-control over tax compliance will be invited to enter
into a Compliance Agreement, which entails holding regular discussions with
the NTS with the mutual objective of settling tax issues in advance of tax return
filings.
The
Dutch and Irish tax administrations have also begun pursuing similar programs,
acting in accordance with the spirit of the Seoul Declaration announced during
the third OECD Forum on Tax Administration meeting held in 2006.
After
conducting pilot runs to companies with a high level of business transparency
and ethics as well as a strong internal control system, the NTS will gradually
apply the program to a wider taxpayer base depending on the result of the pilot.
Horizontal
monitoring provides a win-win for taxpayers and revenue bodies alike: Compliant
companies are able to minimize tax uncertainties by having their tax issues
settled upfront, whereas tax authorities can maximize administrative efficiency
by shifting audit resources away from compliant taxpayers and concentrating
instead on those less compliant.
Under
the Compliance Agreement, a company agrees to disclose all its tax issues on
a voluntary basis. In return, the NTS has the obligation to provide binding
answers on a timely basis.
Questions
and Answers on Horizontal Monitoring
1.
What is the difference between horizontal monitoring and the current system
of advance ruling or APA?
Horizontal
monitoring is similar to advance ruling or APA in that they all concern resolving
tax issues in advance.
However,
while advance ruling is applicable to all taxpayers, horizontal monitoring is
only applicable to the companies which concluded a Compliance Agreement with
the NTS with a premise that they have a sufficiently strong internal control
system. While advance ruling is confined only to issues of tax law interpretation,
horizontal monitoring concerns all tax issues facing companies.
APA
is more similar to horizontal monitoring than advance rulings are, given that
it is an arrangement between the NTS and companies. However there is a difference
in that APA is limited to transfer pricing, which involves the determination
of whether or not a related entity transaction is arm’s length.
2.
Which companies are applicable for horizontal monitoring?
Specific
application standards are currently under development but, largely, companies
with management transparency and sound business ethics are eligible for horizontal
monitoring. As far as tax matters are concerned, companies with a sufficiently
strong internal control system are perfect candidates for entering into a Compliance
Agreement with the NTS.
