ΆΓ  [Tax tips]Why is tax planning important?   

Korea Herald 2001.1.20

Recently foreign companies have taken a more active role in the Korean market, as evidenced by their investment in Korea and the increased inflow of overseas capital. This is a result of not only of the continued effort by the Korean government to attract foreign investment, but also the change in the views of foreigners towards the Korean market.

As part of its efforts for restructuring and reform, Korea has recently implemented various policies in the financial sector, including the privatization of several companies owned by the government. Although internal conflicts such as labor unrest continue, these reform policies have been one of the reasons for foreign businesses' renewed interest in the Korean market.

It is true that many foreign investors feel insecure about the uncertainty of the Korean market, while at the same time believing that the series of reforms will strengthen the competitiveness of the market. Such a belief will be the driving force in bringing even more foreign investment into Korea.

Under such circumstances, there is one thing that all business decision makers should keep in mind - tax planning and related issues. It is surprising that even some of the top CEOs have a conservative, or even worse, a close-minded attitude, toward taxes.

Most well known foreign corporations at the beginning of every year re-examine and search for the most appropriate tax structure, even employing outside specialists. But most Korean CEO's and even some foreign business people in Korea are not successful in their yearly tax planning, due to the complexity of Korean tax laws and the lack of communication with the tax authorities But tax planning is more than a simple planning scheme.

In the past, unreliable and often fabricated financial reports were one of the reasons that Korean companies lost credibility with foreign investors.

The balance sheet and income statement, despite its importance, were especially a subject of distrust among foreign investors.

As a result, cash flow statements have been deemed a more reliable source than tradition statements, like the balance sheet and the income statement.

The reason for this is not because those two statements were of little importance, but because of the prevalent thinking among investors that, from the point of view of the investors, the flow of cash is more important than the flow of income. This type of thinking can be dubbed as "cash-ism".

Then what is cash flow? The largest cash flow is that related to sales return. Simply put, it is the money made out of selling merchandise.

The second is cost. Because inevitable costs are generated, it is the principal item that falls under cash expenditure category. What I hope to convey to the readers today is about the third cash expenditure, which is tax.

Companies tend to think that once tax is paid, they have done all there is to do. But of all the cash flow categories mentioned above, the third category presents companies with the best opportunity to reduce costs.

But many businesspeople are not aware of that, and the reason could be this: One cannot curb tax expenses just by knowing the current tax laws - it is something that can be attained only by an overall structure re-allocation.

That is, even if tax laws provide tax exemptions of benefits for different types of companies or transactions, it is not something that can be applied overnight. A company needs a general and overall tax plan.

The benefits from the tax plan for the current fiscal year may not be realized in three to 10 years. Companies should understand that the distinctive feature of tax planning is that it is a long-term endeavor.

If tax litigation or tax investigation is a diagnostic response, then, tax planning is a preventive one. Therefore it may not be a quick fix solution to improve cash flow. However, it must be noted that the company that conducts tax planning has a competitive edge over a company that fails to do so.

Inevitably, there are numerous costs associated with running a company. For example, wages are an indispensable cost. There is a limit to curtailing such costs without the implementation of effective tax planning. Effective tax planning will cut down costs by generating a new form of company structure, forming a more efficient shareholder relations and reforming the company's financial status.

The writer is a certified public accountant with the law firm of Kim, Shin & Yu. He can be reached at yslee@ksy.co.kr - Ed. By Lee Young-suk