Mr. Sang Ryule Han, the Commissioner of the National Tax Service ("NTS"), announced a plan for the NTS to newly introduce the "Horizontal Monitoring System" in 2009 during an award ceremony held by the EU Chamber of Commerce in Korea on December 10. Under the proposed Horizontal Monitoring System, a taxpayer and tax authorities will enter into a gentlemen's agreement, not as an official relationship between a taxpayer and tax authority but rather as a relationship of equals, wherein the taxpayer promises to faithfully comply with tax payment obligations and the tax authorities accepts the tax return filed by the taxpayer without any tax audit so long as the taxpayer is compliant with the promise made.
The NTS explained that the Horizontal Monitoring System is designed to further develop its current policy of respecting faithful taxpayers as very important customers of the NTS. The NTS further indicated that a taxpayer equipped with tax control framework whereby faithful tax compliance can be secured may consult any controversial tax issues with the tax authorities in advance and be relieved of any tax audit if the taxpayer follows the advice given by the NTS in regards to tax and accounting, which means that the advance consultation has a binding effect from a practical perspective. Although we need to wait and see further details of the Horizontal Monitoring System, a taxpayer subject to this system will likely be required to disclose all major tax issues to the NTS and the NTS should provide authoritative response promptly.
The NTS expects the Horizontal Monitoring System may serve as a valuable supplement to the current "Vertical Monitoring System" under which the tax authorities are required to implement tax audits to review the contents of the tax returns filed.
This new system planned by the NTS will likely be modeled after a similar system which has been adopted by the Netherlands and Ireland.
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