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South Korea's VAT for electronically supplied services

The South Korean economy has grown substantially in the past few decades, although that growth has diminished of late. The country relies heavily on exports, but decreasing foreign demand for these exports, low domestic consumption and political uncertainty are among the challenges the country is facing.

The content provided has been reviewed and updated as of Jan. 15, 2018.

Legislative effective date

Although the digital service legislation was not introduced into the Value Added Tax Act of Korea (VAT Act) until Dec. 15, 2015, it was given a retroactive effective date of July 1, 2015.

Name of tax

Value added tax

Statute of limitation

Five years

Standard rate of VAT

10 percent

Electronic supplies

South Korea’s legislation defines digital services as:

“…any game, audio or video file, software, or other services prescribed by presidential decree (hereinafter referred to as ’digital services‘), which are capable of being executed in a mobile communication terminal device, computer and similar, to consumers in the Republic of South Korea.”

The following provides a general overview of various digital services that are subject to VAT in South Korea:

  • Software-as-a-service (SaaS)
  • Cloud/data hosting
  • Canned (i.e. standard) software delivered electronically
  • Customized software delivered electronically
  • Digital updates of previously sold hard copy software
  • Online marketplaces
  • Electronic books/music/video
  • Online gaming
  • Subscriptions to access online content (e.g., databases and libraries)
  • Mobile phone applications

Exclusions from this definition include:

  • Live broadcasts of webcasts
  • Access to recorded webcasts
  • Email services
  • Discussion forums

Registration

South Korea does not have a threshold limitation on registration requirements; rather, the determination is whether or not a foreign supplier supplies any digital services to South Korean customers.

There is a simplified online registration process for nonresident suppliers and should be completed within 20 days from the date the registration requirement arose.

If a foreign supplier is already registered due to other transactions, there is no need for the foreign supplier to register again under the simplified method.

Upon registration, a foreign supplier is required to file quarterly VAT returns.

If the foreign supplier does not register, charge, collect and remit VAT until a later date, the National Tax Service (NTS) has the authority to retroactively recover 10 percent of the consideration charged by the supplier to the end user. However, as this legislation was only effective as of July 1, 2015, the NTS only has the authority to retroactively charge VAT to that point.

It is recommended that VAT registered persons keep copies of all supplies of digital services to consumers in South Korea, including substantiation for the VAT charge.

Customer identification

The legislation does not specifically define what is meant by business to business (B2B) and business to customer (B2C) consumers. However, it can be inferred from the wording that consumer is meant to include only those end users who are not engaged in commercial undertakings (i.e., the general public). Similarly, B2B transactions are likely meant to be services provided to VAT registered businesses.

Only services supplied to consumers are subject to VAT, and any services supplied to businesses are treated as exempt. There is no reverse charge requirement.

Currently, there are no exemptions from charging VAT if the consumer in a B2C transaction is a certain type of organization, for example, nonprofit entities, charitable organizations, health education or government bodies. Additionally, there is no specific legislation in South Korea with respect to foreign consumers accessing digital services on transportation equipment (e.g., ships and aircraft).

Customer location

South Korea has not set out how a supplier should verify the location of a consumer. Therefore, the adopted method is similar to that applied in Japan. Using this approach, the service provider considers the residence address provided by the customer via the internet in addition to the country of issuance information stored in the credit card. A similar analysis can be applied for tourists in South Korea, which would generally result in a VAT charge not being required.

Supplier identification

For the purposes of South Korean VAT, a foreign supplier is any person who makes taxable supplies of digital services in any amount.

There is no threshold limitation triggering a VAT registration requirement. Similarly, there are no exemptions for certain types of organizations (nonprofit, educational institutions, etc.). The legislation is such that if you are supplying a service which is transmitted via an information and communications network which is capable of being stored and executed, or being operated in real time without being stored, in a mobile communication terminal device, computer, etc., you are required to register and to charge VAT.

The term foreign supplier, while not specifically defined, should be considered to be any person operating a commercial enterprise that is not a resident in, or operating through a permanent establishment in South Korea. While not required, a foreign supplier can choose to utilize a fiscal representative in South Korea, who will facilitate the VAT requirements on the company’s behalf.

South Korean legislation has defined rules in respect of intermediaries and agents. Specifically, where a supplier supplies a service through any of the following “third persons,” the third person shall be deemed to supply the digital service in South Korea, and thus bear the registration, charge, collection and remittance obligations in respect of VAT on the services:

  1. A person who operates an open market or other equivalent to provide services to enable digital services transactions through an information and communications network, etc.
  2. A person who acts as an intermediary, etc. in digital services transactions in a manner that collects the price from the purchaser and pays it to the seller
  3. A person prescribed by presidential decree, who participates in digital services transactions in a manner similar to paragraphs 1 or 2

Procedural matters

With respect to invoicing, as B2B digital service suppliers are exempt from VAT, there is no situation where a tax invoice is required as there is no opportunity for a refund of VAT paid on digital services. As such, invoicing will not be necessary when dealing with South Korean customers.

A late payment penalty of 10.96 percent per year will be applied in relation to failure to remit VAT. Additionally, a 10 percent penalty is applied in respect of failure to file VAT returns on a timely basis.

 

 

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table of contents

Introduction to the digital services VAT guide

A detailed guide to compliance with countries seeking to tax digital services supplied by nonresident suppliers.

Applying VAT to electronically supplied services

Key points to consider when determining how electronically supplied services should be accounted for with regard to VAT rules globally.

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