VAT Administration in Korea

March 2005

National Tax Service

Value Added Tax Law

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

Revenue

Types

Revenue

Value Added Tax

32.5

Customs Tax

6.6

Individual 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 Transaction
Collected

Refunded

30.5

16.2

Actual

(1)

14.3

VAT on
Imported (2)

Total
(1+2)

18.2

32.5

Infrastructure for Fair Taxation

Tax
TaxInvoice
Invoice

CreditCard
Card
Credit

Taxation
Infra
(NTS)

Datafrom
from
Data
PublicAgencies
Agencies
Public

Cash
CashReceipt
Receipt

Self
SelfAssessment
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

(Billion dollar)

1997

1998

1999

2000

2001

2002

2003

37

30

41

77

131

168

165

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.
cash and cards

Consumers

cash receipt

document for
income deduction

National
Tax Service

Restaurants
details

details

approval

Franchised
agencies

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 taxinvoice sellers and built an electronic system that shows the
suspects conforming to the characteristics
Penalties : Maximum 3 years 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 years 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.