South Korea targets foreign App’s with VAT to reduce tax avoidance
In the 2014 Korean Tax Revision Bill there are a range of changes to the Korean VAT regime, including VAT on foreign Apps sold to consumers. Bringing foreign App developers into the VAT net will help mitigate the tax avoidance they achieve by being based offshore.
VAT on digital services and Apps
The country is introducing Value Added Tax for the first time on the sale of software Applications (App’s) sold to its consumers from outside of the country. The measure is designed to provide some equality to local App developers, who must charge the standard 10% Korean VAT rate, and extend the tax base. The imposition of VAT is also the only affective route for Korea to tax the income on foreign digital service providers since they have no establishment in Korea and are therefore avoid local corporate income tax.
Currently, the Korean VAT regime treats such digital services sold from outside of the country (based on the location of the servers) as outside of the scope of the Korean consumption tax. This includes Apple’s ‘App Store’ and Google’s ‘Play Store’ for Android phones and tablets.
The challenge will be to ensure compliance since it is the foreign developers who responsible for calculating and collecting the VAT – not the store owners.
The new measure will come into force on 1 July 2015.
Other Korean VAT changes
In addition to the VAT charge on B2C App’s, there are a number of other measures to compensate for a lack of a reduced VAT rate in Korea, including:
- An extension of the VAT exemption for real estate upkeep on larger dwellings for a further three years
- Basic public transport will continue to be VAT exempt till 2018
- The supply of digital newspapers and journals will be exempted from VAT
- There are changes to the agricultural, used car and art market VAT rules