RED FLAG #1
What: Businesses showing constant deficits and not paying any tax for more than 1 or two years.
Why: Around the 1 or 2 year mark, the Korean Tax Office might consider that the startup phase of your business is over, and can suspect that you are over-reporting your expenses. If they believe this, they may try to investigate and seek out for more information.
How to avoid: Usually the tax office will contact you, or your tax agent, by phone. If they cannot communicate with you, they may become suspicious and request more information, or even visit without notice.
If you have a Korean tax agent, they can usually explain the state of your business. Alternatively, a Korean speaking staff member may be able to help explain what is happening in your business to the tax office.
RED FLAG #2
What: Most freelancers and contractors have 3.3% removed from their earnings by their employer. However, sometimes this amount of tax is not sufficient to cover your entire tax bill. You may not be notified that you owe more to the tax office until it is too late.
How to avoid: Too many people come to me after receiving the bill, so the best cure is preparation! Get a consultation with a tax advisor with your company paperwork to make sure you understand your expected tax obligations with your contract or job.
RED FLAG #3
What: VAT in Korea applies differently to the export of products and services, and often exempt, meaning that 0% VAT rate will be applied to those sales by a VAT refund.
However, some businesses and services may not be able to claim the VAT exemption, or not for all of their sales. If your VAT refund is too big, the tax office may ask for further explanation and investigate. It is over 10 million KRW, they will almost always ask. If you are unable to answer correctly, it may escalate to a tax investigation.
How to avoid: Make sure you understand which products or services are VAT exempt, and when. Be careful in reporting your VAT to make sure you are not accidentally misreporting your VAT.