[Editorial] Shadow economy

This year promises to be a tough year for the National Tax Service as it faces the challenge of reining in the underground economy to maximize tax revenue and help President-elect Park Geun-hye finance her welfare pledges.

Park’s welfare projects call for a total of 134 trillion won ($126 billion) during her five-year term. She promised to secure the necessary funds without raising tax rates or creating new taxes.

She said she would secure 81 trillion won by reforming the budget and the remaining 53 trillion won by shining a light on the shadow economy and reducing tax exemptions and deductions.

The ruling Saenuri Party estimates the size of Korea’s underground economy at 372 trillion won, larger than one-fourth of its gross domestic product.

According to news reports, the tax agency’s first target is vendors of fake petroleum products. They are a worthy target as tax revenue lost to their illegal business exceeds 1 trillion won a year. The tax office expects crackdowns on sales of fake gasoline and diesel oil to boost its revenue by 500 billion won a year.

To eradicate the lucrative underground business, the Korea Institute of Petroleum Management is set to establish a system that can monitor transactions at oil stations across the country in real time.

The tax agency’s second target is offshore tax evaders. In 2011, it declared war against unscrupulous entrepreneurs who diverted company profits earned overseas to secret foreign bank accounts using paper companies set up at overseas tax havens.

The NTS needs to make more systematic efforts to tackle offshore tax evasion by both Korean and multinational companies. For this, it will have to beef up its investigation team and strengthen cooperation with foreign tax authorities to facilitate information exchange.

The tax office’s fight against the shadow economy will also focus on uncovering black market deals. For this, accessing financial transaction information compiled by the Korea Financial Intelligence Unit is essential.

Yet the tax agency is currently denied access to data on cash deposits and withdrawals exceeding 20 million won a day, although transactions involving such a large sum of money in cash could include many underground deals.

According to the tax office’s estimate, tax revenue could increase by up to 5 trillion won a year should it be allowed to access FIU cash transaction data.

Given the urgent need to increase tax revenue, the projected revenue increase is just too large for the new government to ignore.

But it should be cautious in promoting the opening of FIU data to the NTS as such a measure could trigger a backlash from the public.

FIU data is kept confidential to protect the privacy of financial service users. If the tax office is allowed to look into every cash transaction, people would feel they are under constant monitoring by Big Brother.

The presidential transition team will have to think hard how to balance the two goals: increasing tax revenue and protecting the confidentiality of personal financial information.