Korea VAT Filing: Case Review for VAT Refund Rejected

July is the month for the first round of Value Added Tax (VAT) reporting in 2024. If you’re one of the 6.71 million people who need to file, mark your calendar for Thursday, July 25th. That’s your deadline to report and pay your VAT in Korea.

Korea VAT filing due by July 25

We’ve got about 260,000 more people filing this time compared to the same period last year. That includes 5.43 million individual taxpayers (up by 210,000) and 1.28 million business entities (up by 50,000).

Following VAT filing cases are announced by National Tax Service in Korea as examples of incorrect tax reporting related to Value Added Tax (VAT).

CASE 1) Clothing retailer claiming VAT deduction for non-business luxury villa purchase amount

VAT refund rejected due to a claim for non-business related expense

Circumstances:

• A clothing wholesaler and retailer (B) requested a VAT refund of several hundred million won, claiming it was for business premises expansion costs.
• The tax authority investigated the construction site and found it was actually a luxury villa in a scenic location.
• The villa was determined to be for the business owner’s personal use and unrelated to the clothing business.
• The tax authority disallowed the input tax deduction for these non-business-related construction costs.
• As a result, additional VAT of several hundred million won was imposed on the retailer.

In the case of expenses unrelated to business, they fall under the category of non-deductible input tax as specified in Article 39 of the Value-Added Tax Act.

• Examples of business unrelated expense include acquisition and management costs for non-business real estate, art paintings, antiques, as well as residential household-related expenses (such as groceries).

CASE 2) : Tax-exempt business company incorrectly claiming VAT deductions for service fees paid to a third party

VAT refund rejected due to VAT exempted business

Circumstances:

• The corporation (A) primarily engaged in stock investments as a tax-exempt business.
• They reported 0 won in taxable sales for VAT purposes.
• However, they received tax invoices for investment consulting services related to stock investments.
• They incorrectly claimed a VAT refund of several million won based on these invoices.
• The tax authority selected this case for audit due to suspicions of improperly claiming VAT refunds related to tax-exempt activities.
• As a result, the tax authority imposed additional VAT of several million won.

Input VAT related to tax-exempt businesses should not be deducted and should be reported as non-deductible input tax.

If you would like to ask more questions on VAT filings, feel free to reach myself at www.aratax.net

Written by Ara Jung (CTA)

All information provided is of limited scope and not exhaustive or comprehensive of any subject. It is not intended to be a legal advice, and should not be used in place of consultation.