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Value-Added Tax (VAT)

A consumption tax applied to goods and services, with a standard rate of 10%, applicable nationwide.

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Comprehensive Guide to Value-Added Tax (VAT) in South Korea

Value-Added Tax (VAT) in South Korea is a consumption tax levied on the value added to goods and services at each stage of production and distribution. It is governed by the Value-Added Tax Act (๋ถ€๊ฐ€๊ฐ€์น˜์„ธ๋ฒ•), which outlines the rules and procedures for VAT registration, filing, and payment. Below is a detailed guide to understanding VAT in South Korea.

1. Overview of VAT in South Korea

  • Governing Authority: The National Tax Service (NTS) of South Korea administers VAT.
  • Taxable Transactions: VAT is applied to the supply of goods and services, as well as the importation of goods into South Korea.
  • Taxpayer: Businesses and individuals engaged in taxable activities are required to register for VAT and comply with filing and payment obligations.

2. Standard VAT Rate

  • The standard VAT rate in South Korea is 10%.
  • This rate applies to most goods and services supplied domestically and to imports.

3. Exemptions and Reduced Rates

South Korea provides certain exemptions and reduced VAT rates to support specific industries, promote social welfare, and encourage economic growth.

Exemptions

The following goods and services are exempt from VAT:

  • Basic necessities: Unprocessed agricultural, livestock, and fishery products.
  • Healthcare services: Medical and dental services, as well as prescription drugs.
  • Education services: Tuition fees for schools and universities.
  • Financial and insurance services: Banking, insurance, and other financial transactions.
  • Cultural services: Admission to cultural events such as museums, libraries, and art galleries.
  • Real estate: Sale and lease of residential properties.

Zero-Rated VAT

Certain goods and services are subject to a 0% VAT rate, meaning no VAT is charged, but input VAT can still be claimed as a refund. These include:

  • Exports: Goods and services exported outside South Korea.
  • International transportation: Services related to international shipping and air travel.

Reduced Rates

South Korea does not have a reduced VAT rate (e.g., 5%) like some other countries. Instead, exemptions and zero-rated VAT are used to provide relief.

4. How VAT is Applied

VAT is applied at each stage of the supply chain, from production to final sale. Businesses charge VAT on their sales (output VAT) and can deduct VAT paid on their purchases (input VAT). The difference between output VAT and input VAT is the amount payable to the tax authorities.

Example:

  1. A manufacturer sells a product to a retailer for KRW 1,000,000 + 10% VAT (KRW 100,000).
  2. The retailer sells the product to a consumer for KRW 1,500,000 + 10% VAT (KRW 150,000).
  3. The retailer pays the government KRW 50,000 (KRW 150,000 output VAT - KRW 100,000 input VAT).

5. VAT Registration

Who Needs to Register?

  • Any individual or business engaged in the supply of taxable goods or services must register for VAT.
  • Foreign businesses providing digital services to South Korean consumers (e.g., e-books, software, streaming services) are also required to register for VAT.

Registration Process

  1. Domestic Businesses:
    • Register with the National Tax Service (NTS) before commencing taxable activities.
    • Submit the required documents, including a business registration certificate.
  2. Foreign Businesses:
    • Appoint a local tax agent in South Korea.
    • Register for VAT through the NTS or an online portal.

Special Cases:

  • Small businesses with annual revenue below KRW 48 million may qualify for simplified taxation, which reduces VAT compliance burdens.

6. VAT Filing and Payment

Filing Periods

  • VAT returns are filed biannually:
    • First period: January 1 to June 30 (filed by July 25).
    • Second period: July 1 to December 31 (filed by January 25 of the following year).
  • Businesses with higher revenue may be required to file quarterly.

Filing Process

  1. Prepare VAT invoices and receipts for all taxable transactions.
  2. Calculate output VAT (VAT collected on sales) and input VAT (VAT paid on purchases).
  3. Submit the VAT return online via the NTS e-filing system or through a tax agent.
  4. Pay any VAT due by the filing deadline.

Penalties for Late Filing or Payment

  • Late filing or payment of VAT may result in penalties, including:
    • A surcharge of up to 20% of the unpaid VAT.
    • Interest on overdue payments.

7. VAT Refunds

Businesses can claim a refund for input VAT paid on purchases if:

  • The input VAT exceeds the output VAT for the filing period.
  • The business engages in zero-rated activities (e.g., exports).

Refund Process

  1. Submit a VAT refund application along with supporting documents (e.g., invoices, receipts).
  2. The NTS reviews the application and processes the refund, typically within 30 days.

8. Specific Considerations for Businesses and Individuals

For Domestic Businesses:

  • Maintain accurate records of all transactions, including VAT invoices and receipts.
  • Use the NTS electronic invoicing system to issue and store VAT invoices.

For Foreign Businesses:

  • Appoint a local tax agent to handle VAT compliance.
  • Be aware of the VAT obligations for digital services provided to South Korean consumers.

For Tourists:

  • Tourists can claim a VAT refund on eligible purchases made in South Korea. To qualify:
    • The purchase must be made at a store displaying a "Tax-Free" sign.
    • The total purchase amount must exceed KRW 30,000.
    • Refunds can be claimed at designated counters in airports or seaports upon departure.

9. Recent Updates and Trends

  • Digital Services: Since July 1, 2015, foreign businesses providing digital services to South Korean consumers are required to register for VAT and charge 10% VAT on their services.
  • Electronic Invoicing: The NTS mandates the use of electronic tax invoices for businesses with annual revenue exceeding KRW 300 million.

10. Resources and Support

  • National Tax Service (NTS): www.nts.go.kr
  • Taxpayer Helpline: Call 126 (available in English and other languages).
  • Online Filing Portal: Hometax (www.hometax.go.kr)

Conclusion

Understanding and complying with VAT regulations in South Korea is essential for businesses and individuals engaged in taxable activities. By following the guidelines outlined above, you can ensure proper VAT registration, filing, and payment, while taking advantage of exemptions and refunds where applicable. For complex cases, consulting a tax professional or the NTS is highly recommended.