Korea Amends Cross-Border Supply of Electronic Services VAT Scheme

Robert Gallagher
February 9, 2016

On December 15, 2015, the Korea National Assembly enacted legislation that amends the application of Korean Value Added Tax (VAT) on foreign suppliers of electronic services in Korea. With retroactive effect from July 1, 2015, only supplies of electronic services by a foreign business to a non-VAT registrant in the Republic of Korea (Business-to-Consumer transactions) are subject to Korean VAT.

Revisiting Trends in the Digital Economy: The Republic of Korea and the Cross-Border Supply of Electronic Services

On July 1, 2015, the Republic of Korea became one of the early adopters of the “Destination Principle” in relation to the cross-border supply of electronic services. Under the “Destination Principle”, supplies of electronic commerce are subject to the applicable tax (VAT, Goods/Services Tax, or Consumption Tax) in the country in which the recipient of the supplies is located. Beginning on July 1, 2015, a foreign business supplying electronic services to Korea must register to collect and remit Korean VAT.

Under Korean law, electronic service refers to “a service that is operated by being stored in a mobile communication terminal device or a computer, or a service that can be used in real time without being stored in any device.” This definition includes the sale of digital applications, games, music, software, and films. If the electronic services are supplied to Korea utilizing information and communication networks, they are deemed to be supplied within Korea, and the foreign provider must collect and remit Korean VAT.

B2B vs. B2C Taxation Schemes

Under the original legislation, the taxation scheme for the cross border supply of electronic services did not distinguish between business–to-consumer (“B2C”) transactions and business-to-business (“B2B”) transactions, leaving the scheme somewhat ambiguous. As a result, all foreign providers of electronic services into Korea were required to register.

On December 15, 2015, the Korea National Assembly amended Article 53(2) of the Korea VAT Act. The amended Article 53(2) excludes from the application of Korean VAT a supply of electronic service by a foreign business to a VAT registrant in the Republic of Korea (B2B transactions). Therefore, only supplies of electronic services by a foreign business to a Korean customer (B2C transactions) are subject to Korean VAT. The Korea National Assembly amended the Korea VAT Act with retroactive effect from July 1, 2015.

Sovos Compliance will continue to closely monitor and analyze this rapidly evolving area of indirect taxation! Stay tuned and subscribe to the Sovos blog for more!

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Robert Gallagher

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