When South Korea implemented the value-added tax (VAT) in 1977, it consolidated eight previous indirect taxes into a single, simplified levy, streamlining the taxation system. This VAT, set at a standard rate of 10%, is universally applied to goods and services throughout the nation, except for those falling under zero-rating or exemption categories. Any business, regardless of its profit status, engaging in the provision of goods or services to South Korean entities or consumers is obliged to register for VAT. Moreover, physical presence in South Korea is a prerequisite for companies seeking VAT registration, except for digital service providers like application developers, who can operate remotely while still being required to register and remit VAT on sales to local end consumers. Facilitating this process further, South Korea's tax administration operates online, enabling remote management of accounts.
Within 20 days from commencing operations, foreign taxpayers are required to visit the NTS Hometax website and complete an application for business registration.
The prerequisites for business registration include –
- The business operator's or representative's name, contact number, physical address, email, and website details (in cases where a corporate entity operates under a different name, the trading name should be provided);
- Details regarding company registration, including the registered country, address, registration number, type of electronic service offered, and the date of first service provision in Korea;
- Information about the appointed tax agent, including their resident number or tax registration number, contact details, and email address (if applicable);
- When establishing an account with a bank or telecommunications company to qualify for a VAT refund, an account number is necessary.
Upon submission, a competent tax officer evaluates the applicant's information, checking for business authenticity and document completeness. If all requirements are met, the business registration number is issued within five working days, with notification sent to the taxpayer via email.
VAT payments are to be deposited into a foreign exchange bank account specified by the Commissioner of the Korea National Tax Service. Taxpayers, along with their tax advisors, will receive the VAT account number via email, as detailed in the "Basic Information of Simplified Business Operator" section. VAT payments must be made in Korean Won (KRW). However, taxpayers are allowed to settle their VAT obligations in US Dollars (USD) when receiving payments from overseas, utilizing the prevailing standard foreign exchange rate. It is mandatory for taxpayers to complete their VAT payments three days prior to the payment deadline, factoring in the necessary time for remittance delivery.
Failure to make payment by the stipulated deadline will result in the issuance of a tax payment notification. In the event of non-payment by the deadline, the taxpayer will incur a penalty tax equivalent to 3% of the outstanding tax amount. Should the payment remain outstanding, a monthly penalty tax of 1.2% will be applied thereafter.
Businesses holding a South Korean VAT registration are obligated to submit regular VAT returns, detailing all taxable inputs (expenses) and outputs (sales). South Korea follows a semiannual return schedule, covering periods from January 1 to June 30 and from July 1 to December 31. Additionally, interim returns are required after the first and third quarters of the calendar year. The filing deadline for these returns in South Korea is 25 days after the end of the respective period, with any associated VAT liabilities due by that date as well. For businesses that have paid more VAT than they have received in sales during the reporting period, tax credits will be reimbursed within 30 days of the return deadline.
Foreign businesses facing Korean VAT charges for domestic goods or services but not engaged in taxable transactions in Korea may, under certain circumstances, seek VAT reimbursement through a reclaim process. However, this law applies only when the refundable tax surpasses KRW 300,000 (approximately €200,000) and there exists no VAT or mutual agreement in place with the foreign taxpayer's country of domicile.
Understanding and navigating South Korea's Value Added Tax (VAT) system is crucial for businesses operating in the country. Since its implementation in 1977, the VAT has streamlined taxation by consolidating multiple indirect taxes into a single levy, set at a standard rate of 10%. Regardless of profitability, all businesses providing goods or services to South Korean entities or consumers must register for VAT, with certain exceptions for digital service providers. The registration process, facilitated online, mandates physical presence in South Korea for most companies. VAT payments must be made in Korean Won, with options for USD payments for overseas transactions. Failure to adhere to payment deadlines incurs penalties, emphasizing the importance of timely compliance. Regular VAT returns, filed semiannually with interim filings, are obligatory, ensuring transparency in tax reporting. Foreign businesses not engaged in taxable transactions in Korea may seek VAT reimbursement under specific conditions. For comprehensive assistance in navigating South Korea's VAT landscape, contact us at Pearson & Partners Korea.