Worldwide VAT, GST and Sales Tax Guide
Reverse charge. Reverse charge generally applies where a business receives a supply of taxable services and intangible properties from a non-established business and uses the services and intangible properties for its tax-exempt business. The recipient of such taxable services and intangible properties must collect the VAT at the time of the payment and pay the amount to the government.
If a business receives a supply of taxable services and intangible properties from a non-established business, and such supplies are used for both its taxable and tax-exempt activities, VAT on the reverse charge is calculated by reference to the ratio of turnover related to exempt supplies for the year compared to total turnover.
A non-established business (i.e., a nonresident or foreign corporation) for VAT purposes is one of the following:
• A non-established business that does not have a place of business in Korea
• A non-established business with a domestic place of business, provided that the supply of services is not rendered through the domestic place of business
Domestic reverse charge. Where the following companies supply taxable goods or services and receive payments through credit cards, the credit card company will be subject to domestic reverse-charge obligations:
• General entertainment and drinking establishments
• Dancing and drinking halls
Digital economy. Korea applies VAT on electronic services purchased by Korean customers from abroad. Nonresident providers of electronic services must register with the Korean tax authorities through the simplified business registration system.
Electronic services include those services related to gaming, audio or video files, electronic documents, software, or other works, which are manufactured or processed in the form of coding, letters, voices, sounds, images, etc., after optical or electronic processing, services offering an online advertising place, cloud computing services, brokerage services of renting or consuming goods or places in Korea, and of selling or buying goods or services in Korea.
The VAT on electronic services will not apply if the electronic services are rendered to a domestic entity that is registered for VAT purposes in Korea (i.e., in business-to-business (B2B) transactions).
There are no other specific e-commerce rules for imported goods in Korea.
Online marketplaces and platforms. Where a nonresident provider of electronic services uses an online marketplace or platform, that marketplace or platform company is considered to provide the electronic services in Korea, i.e., not the nonresident provider. The platform/marketplace is therefore responsible to account for the VAT on the supplies made.
The nonresident provider of electronic services via the online marketplace or platform in Korea doesn’t need to register or account for VAT. However, it would largely depend on the facts of the case and should be examined on case-by-case basis.
However, if the online marketplaces and platforms are nonresident providers, they would need to register for VAT (as outlined under the Digital economy subsection above) and account for VAT locally. Nonresident providers who register a simplified business must keep transaction details for the supply of electronic services for five years from the final report due date of the tax period that the transaction belongs to and submit the transaction details within 60 days upon request from the tax authorities.
Registration procedures. Any person that begins a business must register the place of business with the district tax office within 20 days after the date of business commencement. A person can apply for registration via the HomeTax website (https://www.hometax.go.kr) or by visiting the tax office. Documents that must be submitted when applying for VAT registration in Korea include:
• Business registration application form
• Copy of business license (if government approval is required for the business)
• Copy of lease contract
• List of shareholders
• Alien registration certificate or a copy of a passport (when the representative of the company is not a resident)
• Certificate stating the completion of foreign investment notification
• Copy of foreign currency purchase certificate
• Notice of designation of a tax administrator (if there is no employee that handles tax matters in Korea)
The business may be registered before the date of business commencement. The tax office that has jurisdiction over the business location issues a business registration certificate. Where a taxable person operates more than one business place, the taxable person is allowed to register two or more business places as a single business unit for VAT purposes.
Deregistration. A registered business that ceases to operate is required to deregister by returning its business registration certificate to the tax office.
Changes to VAT registration details. When there is a change in VAT registration details, such as in the name of the company, representative, type of business, address of the place of business or status of a sub-business place when the taxable person has registered two or more business places as a single business, the taxable person should submit the application form for revision of business registration details via HomeTax (https://www.hometax.go.kr) or by visiting the tax office. Certain changes, such as changes in co-representatives or status of a sub-business place, are only allowed to be submitted by visiting the tax office.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero-rate.
The VAT rates are:
• Standard rate: 10%
• Zero-rate: 0%
The standard rate of VAT applies to all supplies of goods or services unless a specific measure provides for the zero rate or an exemption.
Examples of goods and services taxable at 0%
• Exported goods
• Services rendered outside Korea
• International transportation services by ships and aircraft
• Other goods or services supplied for foreign currency
The term “exempt supplies” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.
Examples of exempt supplies of goods and services
• Social welfare services (e.g., medical and health services and education services)
supported by a valid VAT tax invoice, customs document or similar documents, such as contracts, remittance certificates, etc.
The time limit for a taxable person to reclaim input tax in Korea is five years. Input tax may be recovered during the corresponding taxable period. If the tax invoice was received and the input tax was not claimed, a taxable person may correct the errors in the return within five years from the due date of the VAT return period.
Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used for business purposes. Input tax incurred on expenses directly related to the business is generally recoverable.
Examples of items for which input tax is nondeductible
• Input tax on expenses not directly related to the business
• Input tax on the purchase and maintenance of small automobiles used for nonprofit purposes
• Input tax on the purchase of goods or services that are used in VAT-exempt business
• Input tax on entertainment expenses or similar expenses outlined in the Presidential Decree governing VAT recovery
• Input tax amount incurred before the date of registration
Examples of items for which input tax is deductible (if related to a taxable business use)
• The VAT amount on goods or services that are used by taxable persons for their own business
• The VAT amount on the importation of goods that are used by taxable persons for their own business or imported by them for such use
Partial exemption. If goods or services purchased by a taxable person are used both for taxable and exempt business, the creditable input tax is calculated based on the ratio of sales (the sale of taxable business supplies, divided by total sales) multiplied by the input tax incurred that relates to both taxable and exempt supplies. In this case, the input tax is partially recovered. In general, the input tax multiplied by the above ratio is recovered.
Approval from the tax authorities is not required to use the partial exemption standard method in Korea. Special methods are not allowed in Korea. Taxable persons must submit a statement of nondeductible input tax to the tax authorities. Taxable persons must submit a statement of nondeductible input tax when they file preliminary (if necessary) and final VAT returns. The input tax amount, the total sales amount and the sales amount of nontaxable business supplies are required to be filed. This is a part of a statement of nondeductible input tax that also includes information on other nondeductible input tax (such as input taxes incurred from entertainment expenses).
Capital goods. Capital goods are items of capital expenditure that are depreciated and used in a business over several years. Input tax is deducted in the VAT-taxable period in which the goods are acquired. The amount of input tax recovered depends on the taxable person’s partial exemption recovery position in the VAT-taxable period of acquisition. However, the amount of input tax recovered for capital goods must be adjusted over time if the taxable person’s partial exemption recovery percentage changes to a certain extent during the adjustment period.
Refunds. When a taxable person files its VAT return and the input tax exceeds the output tax, the taxable person will receive a VAT refund within 30 days from the final filing due date. The final filing due date is 25 days from each period end. This is generally done automatically through the submission of the periodic VAT return.
The taxable person can apply for an early refund if the company meets any of the following three conditions:
• The taxable person makes zero-rated supplies
instead of a VAT invoice or exempting an obligation of a VAT invoice if it is considered too difficult to issue a VAT invoice or if it is deemed unnecessary. If a taxable person conforming to one of the following positions outlined below supplies goods or services (except for VAT exempted supplies) at the time of supply, the taxable person must issue a receipt to the customer instead of issuing a tax invoice:
• Simplified taxable person
• A taxable person supplying goods or services to nonbusiness entity
Records. In Korea, a taxable person must keep the books in which transactions are recorded. In Korea, examples of what records must be held for VAT purposes include details of tax invoices or receipts issued or received, name of supplier or recipient, supplied items or receipt items, supply value or supply value receipt, output tax and input tax, supply date or receipt date, etc. Records may be kept in hard copy or in electronic format.
In Korea, VAT books and records must be held within the country. Specifically, this means the business site in Korea. While Korean tax law does not explicitly state the position on whether records can be held overseas, tax authorities interpret it to imply records should be held at a business site in Korea, on the basis that backup files of electronic files must be kept in Korea. However, this regulation and interpretation was created several years ago. In practice, the location of the data at the place of business (Korea) is not verified. However, the taxable person should be prepared for submission upon the request of the authorities.
Record retention period. A taxable person must keep the books in which the transactions are recorded for a period of five years after the date of the final return for the tax period in which the transactions occurred.
Taxable persons must record all details of transactions related to their amount of tax payable or amount of tax refundable in their account books and maintain them at their own places of business for five years from the deadline for filing a final return for the taxable period of the relevant transactions. However, businesses that issue tax invoices using the ETI system are not required to maintain relevant records.
Electronic archiving. Electronic archiving is allowed in Korea. The VAT law states that account books, tax invoices and receipts can be stored electronically, but there is no mention of other documents.
I. Returns and payment
Periodic returns. The VAT period is six months on a calendar-year basis (first VAT period: January through June; second VAT period: July through December). VAT returns must be filed on a quarterly basis, including preliminary returns.
A taxable person is required to file preliminary returns for the first and third quarters of the year, which end in March and September, respectively. These preliminary returns must indicate the tax base and the tax amount payable or refundable. The preliminary return must be filed within 25 days following the last day of each preliminary return period.
Taxable persons must file a final return for the quarters ended June and December for the second and fourth quarters of the year. The final return must be filed within 25 days following the end of the tax period.
Periodic payments. A taxable person must pay the tax amount payable for the preliminary return period when the return is filed. A taxable person must also pay the tax amount payable for the final return period at the time of filing the return. Both payments are due within 25 days following the last day of each preliminary and final return period.
The term “international transactions” refers to a) transactions, in which one party is a foreign company (i.e., a non-established business) or b) foreign assets or services provided abroad, even if both parties are residents.