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  • Service: Tax, Global Indirect Tax
  • Type: Regulatory update
  • Date: 11/1/2012

South Korea: VAT essentials 

Essential information regarding VAT as it applies in South Korea.


Scope and Rates

What supplies are liable to VAT?


Except where a specific exemption is provided by the VAT law, VAT is levied on the supply of all goods and services and the importation of all goods into Korea.


Goods include all tangible and intangible properties that have values. Tangible properties include commodities, products, raw materials, machinery, buildings and other properties having a tangible form. Intangible properties include power, heat, and other properties (including "rights") that do not have a tangible form.


For VAT purposes, the term "supply of services" refers to the provision of services for consideration pursuant to law or contract, except for services provided by an employee to his employer.


The importation of goods from outside Korea or from a bonded area is taxable under the Korean Value Added Tax Law (VATL).


What is the standard rate of VAT?


The standard VAT rate is 10 percent.


Are there any reduced rates, zero rates, or exemptions?


Although there is no applicable provision of reduced rates under the Korean tax law, the treatment of zero-rate VAT and exemptions are available as described below.


Zero Rate VAT


The following categories of transactions are zero rated:


  • the export of goods
  • the supply of services outside Korea
  • the supply of international transportation services by vessel or aircraft and
  • the supply of certain goods or services the compensation for which is received in foreign exchange.

Tax exemption


The Korean tax law prescribes VAT-exempt goods and services; the examples of such goods and services are as follows:


  • unprocessed basic foodstuffs
  • tap water
  • briquettes and anthracite coal
  • medical and health services (including the services of veterinarians, nurses, midwives, and pharmacists) and the supply of human blood
  • educational services
  • passenger transportation services excluding transportation by aircraft, express bus, chartered bus, taxi, and certain other types of transportation
  • books, newspapers, magazines, official gazettes, and broadcasting, excluding advertising, but including electronic publications
  • postage stamps (excluding postage stamps for collections), revenue stamps, certificate stamps, notary certificates, and the use of public telephones
  • goods subject to the control of the Office of Monopoly (particularly tobacco, processed tobacco of less than 200 won, and ginseng)
  • banking and insurance services, such as the services rendered by commercial banks, securities companies, trust companies, securities investment trust companies, pawn shops, leasing companies, insurance companies, and other money lending businesses
  • leases of residential housing and land associated with such housing, not exceeding 10 times the area of the land upon which the housing is situated
  • land
  • the personal services of writers, composers and other persons specified by Presidential Decree. The Presidential Decree specifies dancers, actors, professional sportspersons and entertainers:
    • ­ artistic works, artistic events, cultural events and nonprofessional sports events
    • admission to libraries, science exhibitions, museums, art galleries, zoos and botanical gardens ­
    • goods and services supplied by religious, charitable, scientific or other organizations that are devoted to the public interest.

What are the other local indirect taxes beside VAT?


Other indirect taxes include:


  • stamp tax
  • customs duty
  • liquor tax
  • securities transaction tax
  • individual consumption tax.

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Registration

Who is required to register for Korean VAT?


Every business person engaged in the business of supplying goods or services, whether or not for profit (a "business person"), is required to register for VAT purposes by applying for a business registration certificate. Business persons include individuals, corporations, the national and local governments and unincorporated organizations and associations.


Are there penalties for not registering or late registration?


Additional tax, in the nature of penalty, is imposed for failure to register or late registration: 1 percent of the total value of goods and services supplied from the date of business commencement until the date of compliance/registration. In addition, a deduction of input VAT incurred during the unregistered period will not be permitted.


Is voluntary VAT registration possible for an overseas company?


Yes. A foreign corporation without a domestic PE is not required to register in Korea for VAT purposes.


Are there any simplifications that could avoid the need for an overseas company to register for VAT?


N/A


Does an overseas company need to appoint a fiscal representative?


No.

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VAT grouping

Is VAT grouping possible?


In general, a business person is required to register for VAT for each place of business he or she operates in Korea. However, a business person may also choose to register for VAT as a single business unit.


Can an overseas company be included in a VAT group?


No. A foreign corporation without a domestic PE is not liable for Korean VAT. In addition, there are no tax law provisions that allow the tax grouping of multiple entities (i.e. more than two) for the purpose of filing a VAT return under the Korean tax law.

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Returns

How frequently are VAT returns submitted?


Every business person engaged in the supply of VATable goods or services is required to file VAT returns on a quarterly basis.


Are there any other returns that need to be submitted?


No.


If a business receives a purchase invoice in foreign currency, which exchange rate should be used for VAT reporting purposes? (e.g. central bank’s exchange rate applicable on the date of the invoice)


A central bank’s exchange rate on the date of the invoice is applied.

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VAT recovery

Can a business recover VAT if it is not registered?


No.


Does your country apply reciprocity rules for reclaims submitted by non-established businesses?


No.


Are there any items that businesses cannot recover VAT on?


In general, input VAT incurred in relation to the tax-exempt business will not be allowed a tax deduction. Additionally, the following are specific examples of items where input VAT cannot be recovered pursuant to the Korean tax law:


  • when there are no tax invoices or there are missing, omitted, or distorted information on tax invoices
  • expenditures that bear no direct relationship to the taxpayers’ businesses
  • purchase, rental and/or maintenance of small passenger vehicles
  • expenditures that have similar nature to entertainment expenses or equivalents
  • VAT-exempt goods or services (including input VAT incurred in relation to investment)
  • purchase of land related to capital expenditures for items such as land development, etc. and
  • input VAT incurred more than 20 days prior to the date at which an application for VAT registration is filed.

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International Supplies of Goods and Services

How are exports of goods and services treated?


In general, exports of goods and services are subject to zero-rate VAT. The following categories of goods and services that are typically subject to the zero-rate VAT:


  • goods for exportation
  • services rendered outside Korea
  • international transportation service by ships and aircraft
  • other goods or services supplied for foreign exchange earnings.

How are goods dealt with on importation?


Except where a specific exemption is provided by the VAT law, VAT is levied on the importation into Korea of all goods like domestic supply of goods. Related to the importation of goods, head of customs issues a tax invoice and levies taxes, which will be paid by an importer. However, when an importer uses the imported goods for VAT-exempt businesses, the importer will be able to file a refund claim for input VAT.


How are services which are brought in from abroad treated for VAT purposes?


When a domestic corporation makes a fee payment for service brought in from abroad, the domestic corporation will be liable for proxy VAT if the service recipient (i.e., the domestic corporation) is engaged in VAT-exempt businesses.

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Invoices

Is a business required to issue tax invoices?


Yes.


What do businesses have to show on a tax invoice?


All valid tax invoices must contain the following information:


  • the supplier's name and registration number
  • the registration number of the buyer
  • the tax base
  • the VAT amount
  • the date of preparation or issuance

Can businesses issue invoices electronically?


Effective from 1 January 2001, a supplier should issue an electronic VAT receipt. From 2011, an electronic VAT receipt has become mandatory for corporations.


Is it possible to operate self-billing?


When a taxpayer receives the supply of goods or services and is not able to take a receipt of tax invoices from supplier, he may request the head of district tax office an approval of self-billing within three months from the transaction date when invoice is supposed to be issued. The consideration of relevant transactions is to be more than equal to KRW 100,000.


Can a business issue VAT invoices denominated in a foreign currency?


No. It should be denominated in Korean Won for Korean tax purposes.

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Transfers of Business

Is there a relief from VAT for the sale of a business as a going concern?


Yes. A comprehensive business transfer in which, all rights and obligations related to a particular business are transferred will be exempted from VAT obligations.

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Options to Tax

Are there any options to tax transactions?


No.

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Head Office and Branch transactions

How are transactions between head office and branch treated?


In principle, inter-office transactions within a single entity (i.e., domestic transactions) are taxable for VAT purposes. However, if the entity has opted for the taxation method of business unit rather the place of business, such transactions will not be liable for VAT.

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Bad Debt

Are businesses able to claim relief for bad debts?


Yes. Provided that certain conditions stipulated by the applicable legal provisions are met, a business person may claim relief for bad debts within 5 years from the date of the supply in general.

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Anti-Avoidance

Is there a general anti-avoidance provision under VAT law?


Yes. There are specific anti-avoidance provisions that apply to related parties not dealing at arm's length and cases of self-supply. These include:


  • a provision to reassess the consideration of a supply between the related parties by applying the fair market value if it is considered to be unreasonably insufficient or if it is absent and
  • a provision to apply the fair market value in the case of ordinary self-supply.

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Penalty Regime

What is the penalty and interest regime like?


Each business person fixes his own VAT liability by filing a VAT return. However, the government may reassess the tax base and the net VAT payable or refundable and impose penalty tax if the business person fails to file a return, if the return contains errors or omissions, or if the business person is found to be evading taxes.

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Tax Authorities

Tax audits


How often do tax audits take place?


Most tax audits are conducted on a regular basis (i.e., every 4-5 years). VAT audits are not conducted on a stand-alone basis but are conducted along with corporate income tax and withholding tax audits.


If a taxpayer is not in compliance with VAT filing/payment obligations, the tax authority suspect tax evasion, or the government decides to conduct tax audits on companies within a specific industry, the tax authority may conduct a tax audit on an ad hoc basis.


Are there audits done electronically in your country (e-audit)? If so, what system is in use?


The tax auditors may conduct a tax audit electronically in part. For instance, the auditors may use the National Tax Service’s internal system to run basic checks on a taxpayer’s VAT filing/payment status. Also, the auditors may perform an audit electronically by accessing the taxpayer’s database or IT system to review certain information.


Advance rulings and decisions from the tax authority


Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?


Yes


Are rulings and decisions issued by the tax authorities publicly available in your country?


Yes: http://taxinfo.nts.go.kr/index.jsp (available only in Korean).

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Miscellaneous

In your country, are there unique specific indirect tax rules (regimes) that differ from standard indirect tax rules in other jurisdictions?


No


Are there indirect tax incentives available in your country (e.g. reduced rates, tax holidays)?


No

 

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