Value Added Tax(“VAT”) in Korea

Value Added Tax (“VAT”) in Korea

1. Overview

Just as Corporate Income Tax and Personal Income Tax, VAT is another vital component with which foreign investors should be acquainted when doing business in Korea. In this newsletter, we briefly outline the key aspects of VAT in Korea such as the taxpayers, taxable objects, VAT exemption, zero-rated VAT, tax rates, VAT returns and payment.

2. Main contents

An individual or corporation that engages in the supply of goods or services independently in the course of business or who imports goods (collectively referred to as “taxpayers”) is liable to pay VAT. Taxpayers subject to VAT include individuals, corporations, national and local governments, associations of local authorities, and unincorporated foundations or organizations, including a foreign corporation’s branch and permanent establishment.

VAT is levied at a rate of 10 percent on the supply of goods and services and the importation of goods. Some goods and services attract a zero rating (e.g. goods for exports, certain services rendered to non-residents) while some goods and services are exempt (e.g. basic life necessities and services such as unprocessed foodstuffs and agricultural products; medical and health services; finance and insurance services).

Under the VAT law of Korea, a taxpayer is required to collect VAT (10% of the price of goods sold or services rendered, except for specified exempt goods and services) when goods or services are supplied. A taxpayer is required to issue a VAT invoice (tax invoice) to the customer when it sells goods or renders services. Conversely, when a taxpayer buys goods or receives services, such taxpayer is required to pay VAT (10% of the price of goods or services rendered, except for specified exempt goods and services) and receive a VAT invoice (tax invoice) from the provider of such goods and services.

The amount of VAT payable or refundable is calculated by deducting the input VAT paid from the output VAT received. A taxpayer is required to file a VAT return and pay net VAT (i.e., output VAT minus input VAT) to the competent tax office within 25 days from the end of each quarter. If input VAT is greater than output VAT, VAT refunds are processed within 30 days following the statutory filing deadline; however, the actual refund timeline may differ depending on the type of refund. If a tax payer fails to file a VAT return within the prescribed due date, or fails to issue or receive tax invoices in a timely manner, additional tax penalties may be imposed. 

3. Conclusion

As seen above, there are various issues to consider in terms of VAT when carrying out a business in Korea. Especially if there are multiple cross-border transactions, it is important to assess whether such transactions fall under zero-rated VAT or VAT exemption, and whether tax invoices are required to be issued for such transactions. Thus, it is recommended to consult with tax professionals in cases where uncertainties arise regarding VAT in Korea, in order to avoid any unwarranted tax risks.