This month saw Korea’s new VAT rules for electronic services take effect, bringing new and more complex tax requirements for foreign companies selling apps to Korean consumers.
Previously, the Korean VAT regime treated digital services sold from outside the country (based on the location of the servers) as outside the scope of the Korean consumption tax. This included Apple's App Store and Google's Play Store.
Now, the country has introduced VAT on the sale of software applications sold to its consumers from outside of the country in a measure is designed to provide some equality to local App developers, who must charge the standard 10% Korean VAT rate, and to extend the tax base.
With effect from 1 July, 2015, electronic services provided either directly by a foreign service provider or through an offshore open market app store, are subject to 10% Korean VAT. The new rules cover services provided across the internet or other electronic networks including apps, games, video, films, music, software, e-documents and so on.
Direct electronic services providers and third party intermediate suppliers will both have to pay tax. Direct providers will need to apply for business registration with the tax authorities to file and pay VAT. Third party operators like Google and Apple will also need to apply the registration and pay VAT on sales.
Foreign suppliers of electronic services (applications, MP3, music, films, etc.) can now complete a simplified VAT registration on the National Tax Service website. A simplified VAT registration should be made within 20 days from the date of commencement of providing electronic services, i.e. by 20 July 2015 for e-services that are provided as at 1 July 2015.
Presently, the foreign ICT giants are estimated to record more than one trillion won in annual sales in Korea. According to the Korea Mobile Internet Business Association, Google and Apple posted sales of 1.5930 trillion won (US$1.5bn) and 955.8 billion won (US$878.9m) in 2013, respectively. Still, they pay almost no tax in Korea and have registered themselves as limited liability companies, which mean they do not have to disclose their exact sales and profits.
In contrast, Korean Internet service providers like Naver and Daum Kakao have to disclose sales and pay taxes.
Experts have pointed out that reverse discrimination could hinder the growth of domestic ICT companies, with their foreign rivals continuing to increase their presence.
The outcome has been immediate rises in apps prices on the Google Play platform. Apple iTunes raised its prices on 8 July.
We observed similar changes in European Union earlier this year; the place of supply for electronic services rendered in the B2C model (business to consumer) has changed drastically since 1 January.
Similar to Korea, the EU decided that VAT will be payable in a country where the customer is located instead of the place where provider is registered. As a result, many operators had to register in countries where customers are located.
Although the EU provided some simplifications for business to mitigate any negative impact of this change, many entities from the IT industry were left unsatisfied.
Currently the EU is working on improving the system.
This change in Korean VAT law will not only increase costs for customers (as they will incur cost of VAT included in final price) but also decrease profits for developers as their operational costs (like compliance fees, administrative costs) in Korea will increase. It highlights the trend of governments trying to increase income, and VAT (or sales tax) can seem like the perfect tool to achieve that.
For more on how changes in VAT regulation can affect your business, contact our VAT team.
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