The Effects of the RCS’s Application in the Value Added Tax Collecting Process on the Perception of SME Taxpayer in Korea’s Trade Activity: Transparency and Fairness in Trade

Abstract

Value Added Tax (VAT) is the largest source of global tax revenue. However, it faces issues of tax avoidance, such as the black-market and missing trader intra-community fraud. Many studies have postulated that the introduction of the Reverse Charge System (RCS) will contribute to the enhancement of transparency and fairness in trade for small and medium enterprises (SMEs) that supply goods or provide services. This study analyzes SME taxpayers' perception of transparency and fairness in trade resulting from the introduction of the RCS into the South Korean VAT system. In B2B transactions that handle gold, copper, and steel scrap, large companies often abuse their bargaining power over smaller firms by not paying VAT with their purchase or reducing the prices to equal VAT, leading to low trade transparency. When it comes to gold, copper and steel scrap trading, the imbalance in bargaining power results in one of the parties being unable to reap maximum benefits because of unfairness. SMEs with relatively weak bargaining power suffer from unfair trading practices such as price cutting and the imposition of VAT by their counterparts. Since the introduction of the RCS, however, SME taxpayers appear to believe that trade fairness has improved. This study's findings reveal that SMEs are more likely to perceive improvement in trade transparency and fairness since the implementation of the RCS, indicating that the RCS has exerted a positive influence on SMEs. This study provides important policy implications for countries that intend to implement the RCS by offering empirical evidence of its benefits. fraud in which VAT is evaded by means of actual transactions without records such as credit card or cash receipts [1,3,5,6]. The VAT collection system is generally divided into two types. First, in Korea, the final VAT has the form of subtracting the input VAT from the output VAT. At this time, the input VAT becomes the seller's output VAT in the immediately preceding transaction step. Second, as with some European countries, the final VAT is the output VAT and later the input VAT is the return from the tax authority. In short, the above two ways to determine the final VAT are the difference between gross or net approach. In the case of the gross approach, additional VAT and refundable VAT exist at the same time, but when the net approach is applied, only one additional or refundable VAT exists. However, in both of the above forms, deductible and return are all possible in the normal state of the supply chain. If any one trader in the trade chain evades tax, deductible or return becomes impossible. Therefore, the cases presented in this study are notions that apply in most countries.Despite numerous revisions of the VAT system in an effort to combat the aforementioned problems, tax avoidance continues to be a prominent and ongoing issue in South Korea. It first introduced the reverse charge system (RCS) for gold trade in 2008. It has now expanded to include trade in copper and copper scrap since 2014, and then all metal it...

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