In response to a recent report from its tax watchdog, South Korea is exploring revisions to its tax framework to crack down on unreported overseas earnings, particularly in digital currencies, stocks, and other financial assets.
The National Tax Service (NTS) report has revealed that approximately 1,500 individuals and companies have acknowledged holding digital currencies outside of South Korea. The NTS report discloses that the cumulative value of digital currencies held overseas amounts to KRW 130.8 trillion (US$98 billion).
This staggering figure accounts for over 70% of South Koreans’ total financial assets situated abroad, which is estimated at KRW 186 trillion (US$140 billion). The remaining $140 million in foreign jurisdictions is attributed to bank deposits, savings, and stocks owned by South Koreans.
South Korea Considers Tighter Tax Controls on Overseas Digital Assets
While the NTS has historically struggled to tax overseas income effectively, the tax authority has conveyed that individuals will soon be unable to repatriate tax-free earnings into the country.
Since the beginning of this year, the NTS has been progressively working on robust measures to combat the growing problem of tax evasion within the country. It has initiated collaborations with other governmental agencies in this regard. The NTS has acknowledged the need to collaborate with international regulators, given the borderless nature of digital assets.
To address the risk of potential tax base erosion linked to digital assets, tax authorities worldwide, including the National Tax Service, are gearing up to exchange information in compliance with the Information Exchange Reporting Regulations, as outlined in the report.
Despite the challenges associated with taxing earnings from digital currencies, the NTS has succeeded in some instances in cracking down on tax evaders. In 2022, South Korea announced the recovery of unpaid taxes from both private individuals and corporations through digital currency seizures.
Municipal authorities are signaling their intent to emulate the central government’s approach by confiscating digital currencies in cases of tax payment defaults. Cheongju authorities, for instance, have directed local exchanges to furnish data pertaining to the activities of up to 8,000 users with outstanding amounts of KRW 1 million (US$750).
Global Collaboration to Address Tax Base Erosion Through Digital Assets
This development in South Korea coincides with similar actions on the global stage. Indonesia’s Revenue Department, for instance, has unveiled plans to introduce personal income tax requirements for overseas earnings associated with digital currencies and other digital assets. These new regulations encompass trading on foreign stock exchanges and profits from assets earned abroad, with the tax system scheduled to be enforced from the beginning of 2024.
“The principle of tax is that you must pay tax on income you earn from abroad no matter how you earn it and regardless of the tax year in which the money is earned,” asserted an official from the Thai Revenue Department.
However, the new rules have faced criticism for their perceived lack of enforcement measures and the negative signals they might convey to foreign investors and private bankers.
This global shift highlights the increasing importance of ensuring compliance in the rapidly evolving digital asset landscape.