Author JMJ

Zero-rated VAT in Korea

1. Introduction

The zero-rated VAT system applies a zero percent VAT rate to exported goods and allows a refund of input VAT incurred during the production process, thereby alleviating the tax burden on businesses while preventing international double taxation and enhancing export competitiveness. This zero-rated VAT system is of particular importance to foreign-invested companies conducting business in Korea. In the following sections, we will review the key aspects of the zero-rated VAT system.

2. Major contents

(1) The objective of the zero-rated VAT system

The zero-rated VAT system in Korea allows the supplies of goods and/or services to apply the “zero-rated” VAT, arriving at the total VAT amount of 0. Under the normal taxable transactions where 10% VAT rate is applied, the final consumer of the goods and/or services would bear the VAT amounting to 10% of the supply value; however, a supply of goods and/or services that applies a zero-rate VAT allows the final consumer to be fully exempted from VAT.

Within the context of VAT law in Korea, the supplier who applies the zero-rated VAT is not different from a normal VAT taxpayer, except that the former imposes zero-rated VAT in its supply of goods and/or services. As such, aside from certain benefits such as the exemption from issuance of tax invoices for certain transactions, the same rights and obligations under the Korean VAT law would apply to the zero-rated supplier.

(2) The implications of the zero-rated system

No VAT burden arises under the zero-rated supply. That is, in comparison to the VAT exemption regime where VAT is only exempted for supplies that create value, allowing for a partial exemption of the VAT, the zero-rated VAT system on the other hand provides for a full exemption from the VAT.

(3) Zero-rated transactions

Main examples of the zero-rated supply transactions are as follows:

(A) Export of goods

(B) Services rendered outside Korea

(C) Supply of international transportation services by ships and aircraft

(D) Supply of goods and services which earns foreign currency

(4) Tax invoices

Given that the zero-rated supplier is nevertheless a taxpayer as defined within the Korean VAT law, a tax invoice applying a zero-rate VAT must be issued. However, an exemption from issuance of the tax invoice is granted upon such supply transactions as the direct exportation of goods, services rendered to non-residents or foreign companies, etc.

(5) Supporting documentation to zero-rated supplies

Upon filing its preliminary or final VAT return, the zero-rated supplier must supplement the VAT returns with supporting documentation in accordance with the VAT law. The supporting documentation includes the Schedule of Exportation, Proof of Foreign Currency Remittance, Supply Agreement for services rendered overseas, etc.

(6) Principle of Reciprocity in application of zero-rated VAT

A zero-rated supply to a non-resident or a foreign company would apply only if the jurisdiction in which such non-resident or the foreign company is located provides the identical tax exemption to a resident or a Korean company, in accordance with the Principle of Reciprocity for VAT exemption.

3. Concluding remarks

As discussed above, the zero-rated VAT system would apply for certain transactions, such as the exportation of goods, etc., enabling the application of the zero-rated VAT and deduction of input VAT, and in some cases, an exemption from the issuance of tax invoices. Therefore, it would be beneficial for foreign-invested companies in Korea entering into frequent overseas intercompany transactions to make themselves familiar with the zero-rated VAT system in Korea. For appropriate tax treatments on the major transactions and new transactions of the foreign-invested companies in accordance with the Korean VAT law, a tax expert’s advice is encouraged.