VAT Administration in Korea

National Tax Service

March 2005

Value Added Tax Law

1. Background In 1977, 8 indirect taxes were integrated into VAT in order to stre

amline Korean tax system.

2. Tax Rate of VAT

Basic rate : 10% of added value

Zero-rating : Transactions relating to the exported goods and the services provided in foreign countries.

Exemption : Transactions relating to non-processed foods, medical service, educational service, financial and insurance services, and so on.

Value Added Tax Law

3. Suppliers collect VAT

Suppliers(Sellers) add 10% to the price on each transaction and pay the 10% to tax offices every 3 months.

4. Deduction of VAT collected

Suppliers deduct the amount of VAT that is collected by another supplier when they purchase goods and services.

It is not applicable to the suppliers who provide the goods and services under VAT exemption.

Value Added Tax Law

5. Exception : Simplified Taxation

Background : VAT was introduced in order to simplify the tax reporting procedure of small companies and thus enhance the level of tax compliance.

Target : self-employeds under 48 mil won ($ 46,600) on annual sales basis

Taxable Period : every 6 months

Calculation of Tax : Sales during taxable period × Average rate of added value to the sales in the same business type × 10% (VAT rate)

VAT Revenue (2003)

1. VAT among other taxes (Billion dollar)

TypesRevenu

eTypes

Revenue

Value Added Tax 32.5 Customs Tax 6.6Individual Income

Tax 20.1 13 other Taxes 17.8

Corporate Income Tax 24.9 Total 101.9

2. Breakdown of VAT revenue (Billion dollar)

VAT on Domestic TransactionVAT on

Imported (2)

Total(1+2)Collected

Refunded

Actual (1)

30.5 16.2 14.3 18.2 32.5

Infrastructure for Fair Taxation

TaxationInfra(NTS)

Tax InvoiceTax Invoice Credit CardCredit Card

Data fromPublic Agencies

Data fromPublic Agencies Cash ReceiptCash Receipt

Self AssessmentSelf Assessment

Encouraging Taxpayer Compliance

1. Tax Invoice

1st step : Suppliers are obliged to issue tax invoices to purchasers when they provide goods and services. If not, 1% of non-issued sales shall be imposed as a penalty.

2nd step : Suppliers and purchasers must submit a format containing details of tax invoices to tax offices.

3rd step : Tax offices type details of tax invoices into the NTS main computer.

4th step : Computer detects taxpayers who failed to report or report under their actual sales.

Encouraging Taxpayer Compliance

2. Credit Card Policy

Background : Cash remains no trail and many tax-evaders would not report their cash sales. So the Korean government decided to encourage people to use credit cards from 1999.

Incentives : 20% of credit card expenditure can be deducted from credit card users’ taxable income and $ 17 million was granted to credit card users by a lottery system in 2000.

Result : credit card expenditure increased sharply

1997 1998 1999 2000 2001 2002 200337 30 41 77 131 168 165

(Billion dollar)

Encouraging Taxpayer Compliance

3. Data from Public Agencies

In 1999, National Assembly passed a special law that orders public agencies to provide 103 tax-related documents periodically to the National Tax Service(NTS).

Examples of Tax-Related Documents - details of law suit from the Supreme court - details of expenditures from insurance companies - details of business licenses from local government

NTS developed an electronic system analyzing taxpayers by matching the document with their reported sales.

Encouraging Taxpayer Compliance

4. Cash Receipt System

It is a system recording cash transactions in the same way as the current credit card system.

Franchisedagencies

Restaurants

NationalTax Service

Consumers

① cash and cards

② details

④ cash receipt

③ approval ⑥ document forincome deduction

⑤ details

Tax Frauds And Regulations

1. Tax-invoice Sellers

Cause : As Korea becomes transparent through the previous measures, many taxpayers try to reduce tax burden by increasing fake purchase with fake invoices.

Example : Tax-invoice sellers purchase a corporation and issue fake tax invoices to the demanders.

Detection method : NTS analyzes the characteristics of tax-invoice sellers and built an electronic system that shows the suspects conforming to the characteristics

Penalties : Maximum 3 year’s imprisonment Seize without prior warrant (From 2005)

Tax Frauds And Regulations

2. Credit-card-striper Lenders

Cause : Credit card policy raised tax burden of the businesses especially dealing with individual consumers

Example : A person opens a store with only VAT(10%) obligation, lends his/her card striper to another store with the obligation of both VAT(10%) and Special Consumption Tax(10%) and receives commission from the borrower

Detection method : NTS analyzes the characteristics of the lenders and built an electronic system that shows the suspects conforming to the characteristics

Penalties : Maximum 1 year’s imprisonment

Tax Frauds And Regulations

3. Illegal-tax-refund Applicants

Example : A corporation imported huge amount of gold bars, exported it a month later and applied for VAT refund. It was found later that the corporation put the other cheap objects in exporting containers and the imported gold bars to domestic merchants through black market.

Detection method : NTS analyzes the characteristics of the illegal-tax-refund applicants and built an electronic system that shows the suspects conforming to the characteristics. And NTS is strengthening the cooperation with the Korea Customs Service.

Observation

1. The scale of tax frauds is getting bigger

Most of all, illegal tax refund is complicated and getting bigger in Korea. The NTS is now preparing a significant measure.

2. The limit in regulating tax frauds efficiently

Korea is making great efforts to prevent illegal tax refund but is aware that conducting it alone is not efficient because illegal tax refunds are diverse, intelligent and globalized.

3. International cooperation is necessary

Korea does feel it very important to exchange tax-related information with foreign countries.