South Korea – VAT on electronic services provided by foreign entities – changes as of 1 July 2015

Korea joins the group of countries which require non-established companies to register and account for on their B2C sales of electronic service into South Korea.

The VAT law has recently been amended to apply VAT to the supplies of electronic services (e.g. applications, games, music, films, electronic documents, software, etc.) purchased from non-resident service providers (i.e. offshore app developers or through offshore open markets app stores).

If a non-resident or foreign corporation that has no business place in Korea provides local recipients electronic services, as defined in the presidential enforcement decree, which are activated through mobile device, computer, etc., then the relevant electronic services shall be considered as being provided in Korea. Accordingly, the foreign provider is subject to the simplified VAT registration process and VAT return filing through the website of National Tax Service (“NTS”) as well as for VAT payment on these services.

If a non-resident or foreign corporation provides Korean customers with electronic services through a third party (i.e. open market, intermediary for the electronic services, etc.) that is a non-resident or foreign corporation having no business place in the country, the third party is deemed to provide such electronic service in Korea and obliged to the above mentioned VAT requirements.

The timing of supply of electronic service is the earlier of i) the time that a purchaser receives the electronic service from the supplier; and ii) the time that a purchaser completes the payment for the purchase. Some good news that the service providers concerned, will not be required to issue VAT invoices.

Please note that the law would be applied to both business-to-business and business-to-customer transactions. This requirement may not be entirely clear from the legislation, however PwC Korea had further conversations with the Ministry of Strategy and Finance (“MOSF”) and was advised informally that the new rules would cover both B2B and B2C electronic services, provided that they meet the criteria stated in the presidential enforcement decree.

What does it mean for you?

You need to have an action plan to be compliant with the new Korean requirements and get registered by 1 July 2015. The currently applicable VAT rate is 10% in Korea, so you may also want to check if your pricing is right and enable your system to deal with additional reporting requirements.

For further information please contact Changho Jo of PwC Korea or me.