VAT returns in South Korea are an essential consideration in the overall tax obligations of any business operating there. As a value-added tax (VAT) registered vendor, your business is required to charge VAT on the sale of goods and services as well as VAT on purchases incurred. The difference between this input tax and output tax defines your VAT obligation which is to be paid to the tax authorities, in this case, the National Tax Service or NTS.

From a small enterprise to an international conglomerate, knowing how to accurately and timely file VAT returns in South Korea is important to ensure there is no disruption to business operations as well as to safeguard against penalties. In this detailed article, we examine the specifics of VAT returns in South Korea, which include current VAT rates, registration requirements, filing intervals, deadlines, invoicing rules, deductible expenses, VAT reclaim policies, and compliance risk. 

What is a VAT Return in South Korea?  

A VAT return refers to a document submitted by VAT registered taxpayers in South Korea to the National Tax Service (NTS) regularly. It outlines the VAT liability or refund situation of the business, detailing output tax as VAT charged on sales and input tax as VAT paid on purchases. 

Purpose and Importance  

Legal Compliance:  

Filing VAT returns is essential for your business, considering the requirements of South Korean law.  

Transparency in Financial Reporting:  

A clear record of transactions is one of the most critical pieces of trust builders with regulators, investors, and financial institutions, which is achieved through VAT returns.  

Cash Flow Management:  

Through proper and accurate calculations of net VAT payable or refundable, overpayment and underpayment are reduced which allows businesses to better manage their cash flows.  

Facilitating Business Expansion:  

For some business mergers, loans, and even entering new markets, an adequately maintained VAT return record is necessary.  

Your company’s good standing is at risk with potential penalties when not understanding and filing VAT returns is incorrectly omitted.

Current VAT Rates in South Korea

It is relatively simple in South Korea. Almost all goods and services are taxed at a single standard rate. However, some items may qualify for reduced or zero-rated VAT.  

Standard and Reduced Rates

  • Standard VAT Rate: 

South Korea has a 10% standard VAT rate, which is levied on all commercial transactions, including wholesale and retail sales, professional services, and manufacturing outputs.  

  • Reduced Rate Supplies:  

Certain goods, such as exports, qualify for zero-rated VAT. This means no VAT is charged on these supplies, but businesses can reclaim VAT on other expenses incurred in supplying these goods.  

  • Exempt Items:  

Certain specific goods and services, such as financial services, educational services, and some cultural activities, may be free from VAT. Always check with your local NTS office regarding the latest guidelines.  

As stated previously, balancing these figures appropriately ensures efficient exercises with VAT paying in South Korea. Misclassification will exhaust further aggravating penalties with every STC filed in South Korea that is incorrectly declared.

Who Needs to Register for VAT in South Korea?

Most businesses in South Korea need to register for VAT if their taxable turnover exceeds a certain threshold. While this is the case for larger businesses, many smaller ones choose to register voluntarily to reap the benefits provided by the tax system.

Registration Requirements

  • Mandatory Registration:

Businesses over the specified turnover threshold (which is reviewed periodically by the NTS) are required to register for VAT. This includes virtually all businesses within South Korea that are engaged in the supply of goods and services. 

  • Voluntary Registration:

Even if your turnover is below the mandatory threshold, registration is beneficial since you can claim input tax credits and enhance your business credibility. 

  • Foreign Businesses:

Also, non-resident companies supplying taxable goods or services in South Korea are required to register for VAT, provided their turnover exceeds the specified threshold. This is especially critical for e-commerce and service businesses that operate across borders. 

Not meeting these criteria can result in failure to have your business recognized as a VAT vendor and therefore not being able to charge, collect, and remit VAT.

How Often Must VAT Returns Be Filed in South Korea?

In South Korea, the frequency of VAT return filing is dependent upon the total VAT liability that was incurred in the preceding period. The timelines for filing are designed in a way that ensures that the tax authorities are kept up to date based on the activities of businesses within a reasonable time.

Filing Frequencies

  • Monthly Filing

Businesses with significantly higher VAT liabilities might be required to file their returns monthly. This is, as a rule, what happens when the VAT payable in the previous period exceeds a particular amount.

  • Quarterly Filing

Most SMEs (small to medium enterprises) will have VAT return filings done every quarter. This enables businesses to reduce the amount of time spent on compliance while still being able to meet legal regulations.

  • Annual Filing

A business may be allowed to submit an annual VAT return if its VAT liability is extremely low. This, however, is quite rare and will generally apply to businesses that do not deal with a sizable number of taxable transactions.

Understanding your frequency of filing helps in planning your VAT compliance calendar and ensures that returns are filed on time.

VAT Return Deadlines in South Korea

Compliance deadlines regarding the submission of VAT returns in South Korea are especially critical because of the associated penalties and interest that may arise. The NTS is adamant about compliance deadlines.

Key Dates/Deadlines: 

Periodic Returns:

VAT due is generally on the 10th of the month after the reporting period ends. For example, if you file quarterly VAT returns, the deadline is the 10th of the month immediately after the quarter ends.

Extended Deadlines:

Taxes may be extended for some time by the office, however, this is usually communicated far in advance. Always consult with your tax advisor or service provider about changes in deadlines due to extensions.

Annual Summary Return:

Companies that claim an annual VAT return should ensure that all the data from the periodic returns is consolidated and submitted before the date defined by NTS, which is usually a couple of months after the closing of the financial year.

Meeting these deadlines is essential for keeping compliance with VAT regulations in South Korea and avoiding expensive fines.

How to File VAT Returns in South Korea: Step-by-Step Guide

The complete process of returning South Korea VAT involves various meticulous steps to ensure that each transaction is taken care of.  

Step 1: Gathering Required Financial Documents  

  • Sales Invoices:  

Retrieve all sales invoices for items sold and VAT amounts charged for the economy.

  • Purchase invoices:  

Gather invoices for purchases already paid for and that will be claimed as input tax.  

  • Credit and/or debit notes:  

Adjustments concerning the VAT calculations will be incorporated for the purpose.  

Step 2: Determining VAT Owing  

  • Determine Output Tax:  

Determine the total VAT for taxable sales.  

  • Calculate Input Tax:  

Determine the total VAT for business expenses.  

  • Net VAT Calculation:  

In case of excess input tax after offsetting output and input VAT, which is a payable or reclaimable VAT situation.  

Step 3: Complete the VAT Return Form  

Gathered documentation for all sales will be attached for all the invoices and credit and/or debit notes, and applying the incorporation VAT.  

  • Online Portal:  

File through the NTS portal for smoother VAT returns filing.  

  • Input Data:  

Business Name and VAT registration number, turnover and taxes paid, etc, as taxpayer particulars alongside providing the documents.  

  • Attach Supporting Documents:  

Provide scanned copies of all invoices and credit/debit notes derived from the purchases.

Step 4: Returning the Submission and Making Payments

  • Review:

Go through all the inputs to ensure they are entered correctly before submitting.

  • Submit Via Portal:

Cloud VAT allows you to submit your VAT return over the Internet.

  • Payment Method:

Make payments using the bank details provided if your VAT liability is positive. Also, make sure to put your VAT registration number and reporting period in the payment reference.

Step 5: Storage and Maintenance of Documents:

  • Documentation:

Make sure to keep all submitted VAT returns, payments, and supporting documents for at least 5 years. These documents are crucial if there are any disputes or audits.

For South Korea, having this systematic approach to local regulations will ensure compliance and accuracy in VAT tax filing.

VAT Invoicing Requirements in South Korea

In South Korea invoicing is very important vis-a-vis VAT compliance. Each VAT invoice issued in South Korea must meet strict requirements set forth by the tax authorities.

Key Elements of the Invoice:

Business Details:

Capture the company name, VAT, and business address.

Invoice Number and Date:

All issued invoices should also have sequence numbers and the date of issue.

Customer Name and Address:

Indicate the name and address of the customer.

Goods/Services Description

Add pertinent details about the description of goods and services provided.

VAT Rate and Amount

Specify the VAT rate applicable (standard rate of 10% or zero-rated) and the VAT amount charged.

Total Invoice Value

Mention explicitly the total amount due inclusive of VAT.

Compliance with these invoicing criteria will ensure that all proper VAT record maintenance, claiming of input tax relief, and tax return document submission requirements are fulfilled.

What VAT Can Businesses Deduct in South Korea?

A relief of one of the burdens imposed by a VAT is that it can be deducted from the value-added tax (VAT) that a business incurs on operating expenses when compared against the VAT collected on sales. This operation relieves the government from the hassle of having to deal with so many restrictions a VAT payment creates.

Deductible Input Tax

Business Expenses

The value-added tax (VAT) on goods and services rendered to a business, such as raw materials, office supplies, or professional services, is claimable.

Documentation

Claimable invoices for taxes are put forward with reasonable and proper business expenditure and expense invoices.

Restrictions

Unclaimed business expenses fall under reimbursable expenses. 

By organizing reasonable documentation of your expenditures, you’re ensuring the solutions you provide for your VAT calculations are logical and thus minimizing your tax liabilities.

How to Recover VAT Credits and Refunds in South Korea

If your business’s input VAT exceeds the output VAT, you may be eligible for a VAT refund. Korean businesses can claim VAT refunds through the nation’s VAT refund system.  

Step-by-Step Guide to VAT Refund:  

Calculate Refund Amount:  

Find the input VAT that exceeds the output VAT.  

Collect Documents:  

Retrieve all invoices and receipts relevant to the claim that show supporting documentation.  

File for Refund Claim:  

Submit the refund claim online via the provided portal or through a tax consultant.  

Claim Review:  

After the initial assessment, approved claims are deposited into the registered client’s bank account.  

It’s vital to meet deadlines when attempting to reclaim VAT, as not doing so will increase legal costs.  

VAT on Imports and Exports in South Korea  

Some of the VAT rules about international business activities within Korea are essential to understand for businesses involved in imports and exports.  

Imports:  

Import VAT:  

A standard 10% VAT applies to the customs value of all imported goods.

Reclaiming VAT:  

Recoverable input tax is associated with the value-added tax (VAT) charged on goods brought into the country when those goods are used for taxable supplies.  

Exports:   

Documentation:

All documentation relating to the claim for zero-rating, including shipping documents and export declaration, must be kept.  

Proper understanding leads to better control of finances and ensures adherence to international regulations governing business activities.  

Reverse Charge Mechanism for VAT in South Korea  

The reverse charge rule applies in South Korea under certain circumstances, which is when the supplier invoices for the goods and/or services, but the VAT obligation shifts entirely to the recipient of the supplied goods or services.  

How It Works:  

Applicability:

In most cases, it relates to a situation where a non-resident supplier renders a service to a South Korean business entity or any other type of cross-border transaction.

Duties of the Recipient:

A recipient of the service has assumed the responsibility under the self-assessment mechanism is reverse the charge and claim the VAT himself, include it in a declaration as an annex of a return, and if they meet set criteria, have it redeemed. 

Minimum Documentation Requirements:

All relevant aspects must be incorporated and addressed on the invoice, this does not document supporting justification for the removal of the charge, and gathering all other relevant materials required to justify the removal of the charge must be put together. 

In order to avoid breaching any legal boundaries concerning taxation, the reverse charge method must be applied accurately for the VAT system to function effectively. 

VAT Obligations for Digital Services in South Korea

Certain types of digital services, such as online advertising as well as software subscriptions, and even video and audio streaming services, have specific VAT obligations in South Korea. Moreover, if a non-resident provider of digital services lacks a VAT registration, they are required to register if their taxable supplies exceed a certain threshold within a year.

Essential Considerations:

Mandatory Registration:

Upon meeting the above-mentioned threshold, non-resident providers of digital services are made subject to mandatory VAT registration in South Korea.

Section Relating to Invoices:  

Digital services should be accompanied by an invoice confirming the charge, the VAT (Value Added Tax) is 10%, and what is billed as total.

Compliance:  

It is one thing to have local laws and another to report and remit tax collected timely. Service providers who operate within these jurisdictions are said to comply with the local laws regarding VAT.  

Not fulfilling these obligations imposed on digitally operating cross-border businesses puts them at risk of incurring penalties. Such measures may aim to facilitate the smooth conduct of cross-border digital business operations.

Common VAT Compliance Mistakes in South Korea

Such errors can trigger penalties, interest, and in some situations, audits. The list of these issues that should be steered clear of is as follows:

The Omission of Invoice Completion:

Access to input tax deductions may be denied if a business does not include important identifiers such as VAT rates, business registration details, invoice numbers, and other crucial invoice parts.

Late Filing:

Missing the deadline for filing VAT returns can lead to staggering penalties. As with many other countries in the world, South Korea is very strict about return deadlines. The deadline must be met at all costs.

Calculation Errors:

While assuming output tax, input tax, or net VAT due, one or multiple of these components will create overpayment or underpayment of taxes.

Poor Record-Keeping:

A lack of records can prohibit you from claiming VAT refunds and from facing audits.

Misapplication of VAT Rates: 

Tax slabs of goods and services are sometimes identified incorrectly. These lead to serious problems with compliance and the tax office.

As with most things in life, prevention is easier than dealing with the consequences. It is better to have proper documentation and perform regular reviews to ease the burden of complying with VAT regulations.

VAT Penalties and Compliance Risks in South Korea

Every South Korean business has to register for a VAT number and file VAT returns with revenue authorities based on its income level and business type. South Korea has specific guidelines on managing VAT, and if these are neglected, it can become a liability quickly. Here is how your business can avoid or minimize known compliance risks:

Late Filing Penalties:

Tax return deadlines, like any other deadline, should always be kept. If you miss the deadline, within South Korea, you will incur a fine that will be a certain percentage of your VAT and will only go higher with every passing second.

Late payment penalties:

Overdue VAT will incur an additional charge, thereby increasing the overall tax amount owed.

Audits and scrutiny:

Continuous failure to comply with the set deadlines and not meeting compliance guidelines will result in considerable scrutiny from the relevant governing bodies.

Operational Disruptions:  

Non-compliance may impact your VAT refund eligibility and disrupt your business processes.  

With the implementation of internal controls and automated compliance systems, these risks can be reduced, thus protecting the standing of your business.

Simplify Your VAT Registration and Filing in South Korea with Commenda

Meeting South Korean compliance requirements along with managing VAT returns comes with a set of intricacies. It is usually a labor-intensive work that often needs additional resources from the service provider. However, it is useful to consider specialized services.

Why Choose Commenda?

Professional Help

Our tax advisors understand the layers involved with South Korean VAT and tax. From Commenda’s end, we support you with registration, filing, and documentation of the returns.

The Use of Advanced Systems

We utilize proprietary technology with automation that goes beyond the collection of raw data. It includes computation and even reporting. This allows for the timely submission of your VAT returns.

Simple Procedures

Commenda allows you to do away with the annoying complications of VAT tax filing. We fill out the forms and submit them electronically alongside completing all other activities necessary, leaving you with more time to focus on the core activities of your business.

Effective Cost Solutions:  

Service packages can be tailored to fit businesses of any size, which helps minimize mistakes and penalties while maintaining an affordable price.  

Support for Ongoing Compliance:  

You will receive oversight services that detail capture for you so you are always up to date on deadlines.  

To help with tailored VAT compliance solutions in South Korea, schedule a demo with Commenda.  

Conclusion  

As a business in South Korea, your company’s VAT returns are mandatory as part of its financial compliance. VAT captured on sales and VAT on purchases needs to be tracked. Accountability is very critical for a business as it protects the business from severe penalties and regulatory scrutiny. Following certain guidelines like invoicing, submitting within deadlines, and providing sufficient documentation will streamline your VAT processes and improve overall business performance.

With Commenda, all returns submitted will be VAT compliant under the mandates of the South Korean tax system and this ascertains financial success and stability. In addition, there is complete trust that Commenda ensures precision, punctuality, and compliance with South Korean tax laws.

Make Your Move Today! Commenda’s expert services assist businesses by optimally aligning the VAT compliance necessities for doing business in South Korea.