The National Tax Service of South Korea provides valuable information through their official blog on how taxpayers can strategically save on their Value-Added Tax (VAT). This guide, part one of a series, focuses on points related to sales.
Understanding VAT and the Consequences of Non-Compliance
Value-Added Tax (VAT) is levied on the added value of goods or services in each production and distribution stage. It plays a significant role in revenue collection and compliance is strictly monitored. However, some business operators may intentionally under-report their sales revenue, thinking that it will not be detected by the tax office. This non-compliance can result in heavy tax penalties as evidenced by the case of a restaurant owner who built his wealth through understating half of his sales revenue and facing a significant punitive fine when audited by the tax office.
To encourage compliance, the National Tax Service’s monitoring and auditing activities continue to become more sophisticated. The rise of digitisation provides ample data for thorough analysis of each taxpayer’s reporting trends, comparison with industry peers, checking for consistency in reported data, etc. Also, numerous tax evasion reports and credit card-related tip-offs are being processed regularly. This cumulative information enables effective management and analysis of taxpayers’ compliance.
Those found under-reporting sale samount face the following consequences:
- Tax Audit: Taxpayers suspected of non-compliance will be subject to a tax audit.
- Penalties and Fines for Evaded Taxes: If under-reported cash sales are detected during the audit, the underpaid VAT, corporate tax, and income tax are applied with additional penalties for underreporting, delay in payment, and noncompliance with taxes invoice and cash receipt issuance.
- Criminal Charges: If tax evasion is established, the offender is subject to a punishment under the Criminal Tax Act, which could mean imprisonment or a fine equivalent to twice the evaded amount.
Therefore, the importance of accurate and faithful reporting cannot be overemphasized, and taxpayers should avoid shortcuts which may lead to severe penalties in the future.
Maximizing VAT Returns: Zero VAT Rate for Exports
The Value-Added Tax system implements a zero-rate (0%) for exported goods and services. This is designed to encourage exports by making the sales VAT amount ‘0’, thus allowing the full amount of purchase tax to be refunded.
However, to comply with this rule, business operators must submit the necessary documents to prove the eligibility for the zero-rate. The types of documents required vary per case, so it is recommended to identify exactly what they are and prepare them in advance.
Noncompliance with this provision with a lack of proper documentation will not only result in no refund on the purchase tax, but also in a penalty for failing to apply the zero-rate.
This article has presented some key points on Value-Added Tax related to sales. Compliance and thorough understanding of the regulations will not only save you from potential legal problems but also allow your business to benefit from Korea’s tax system.
Disclaimer : This content is a translation of material originally published in Korean by the National Tax Service of the Republic of Korea. While efforts have been made to ensure accuracy, this translation is provided for informational purposes only and does not carry legal weight. In the event of any discrepancy, the original Korean version shall prevail. Users should consult the official Korean documents for precise interpretation. This translation does not constitute legal advice. The translators and publishers shall not be held liable for any loss arising from reliance on this translation.