Deferment of import VAT payment for export SME

Under the current Value Added Tax Law (“VATL”), a taxpayer is required to pay import VAT to the customs office upon declaration for import of goods. Under the proposed revision, export SME satisfying certain conditions (to be regulated in the Presidential Decree of VATL) will be entitled to the deferment of the import VAT payment upon the import declaration and can settle the payment by offsetting import VAT against input VAT credit when filing the VAT returns.

This proposed revision will be applied to goods imported on or after July 1, 2016.

Zero-rate VAT on supply of goods or service for earning of foreign currency

Under the current VATL, a taxpayer can apply zero-rate VAT on supply of certain goods or services to a non-resident or foreign company for earning of foreign currency. With the proposed revision, zero rate VAT on professional services (e.g., legal, accounting and tax services, advertising, market research, management consulting services, etc.) or business supporting services (e.g., employment agency, administrative support services, etc.) provided to the non-resident or foreign company, which may be viewed to be used/ consumed in Korea, will be applicable only if similar favorable tax treatments are granted to domestic residents in the country of the non-resident or foreign company, based on the reciprocity principle.

This proposed amendment will be applied to transactions made on or after July 1, 2016.

VAT on supply of cross-border electronic services

From July 1, 2015, supply of electronic services (such as games, audio or video files, electronic documents, software, etc. activated through mobile communication devices or computers) in Korea by foreign suppliers, overseas open market operators, etc. (the “foreign digital suppliers”) using information communication network would be subject to 10% VAT in Korea. The current VATL does not specify that the above provision is not applicable to B to B transactions; thereby domestic business operators receiving electronic services, subject to Korean VAT under the current VATL, from the foreign digital suppliers cannot claim input VAT credit on the electronic services, since the foreign digital suppliers are not required to issue VAT invoices.

Hence, the proposed revision to the VATL clearly states that supply of electronic services by the foreign digital suppliers will not be subject to VAT in Korea if the services are provided in relation to a business of the domestic business operators. The proposed revision will be applied from a taxation period to which the promulgation date of VATL belongs.