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Value-Added Tax (VAT) is a tax levied at each stage of a transaction and borne by the final consumer. However, the Value-Added Tax Act provides for a "representative payment system," which allows the counterparty to collect and remit VAT on behalf of the supplier in certain transactions. This column examines the specific requirements for the obligation to represent VAT in transactions with foreign businesses, the application process for representation payment, and exceptions.
1. Four requirements for payment on behalf of overseas business operators
The most common case where a taxpayer is required to pay VAT on behalf of a foreign entity under Article 52 of the Value-Added Tax Act is when services or rights (hereinafter referred to as "services, etc.") are supplied from a foreign entity without a domestic business establishment. This occurs when all four key requirements are met. These requirements facilitate the smooth collection of VAT on overseas transactions where tax source identification is limited, ultimately ensuring taxation in Korea, the country where the services are consumed.
1) Recipient requirements: To be used for purposes other than taxable business, such as tax-exempt business
The proxy payment system applies when a recipient of services, etc. uses the services, etc., not for a business subject to value-added tax (taxable business), but for a tax-exempt or non-profit business. This requirement is directly related to the purpose of the system. If a taxable business receives services, etc. from a foreign business and uses proxy payment, the tax paid can be deducted as input tax, resulting in a net tax revenue reduction of zero, effectively eliminating the system's practical benefits.
Therefore, this system was designed to impose value-added tax, which is a consumption tax, on tax-exempt businesses or non-profit organizations that cannot deduct input tax when they receive services, etc. from foreign businesses and consume them domestically.
However, it should be noted that even if a taxable business operator receives services for which the purchase tax amount is not deductible pursuant to Article 32 of the Value Added Tax Act, an obligation to make proxy payment arises as an exception.
2) Supplier requirements: Must be a foreign business entity without a domestic business location.
In principle, entities supplying services must be non-residents or foreign corporations without a domestic business establishment. This is in accordance with the basic principle of the system, which targets foreign businesses that lack a domestic business establishment, making it difficult to identify tax sources and collect taxes. However, even if a business establishment exists in Korea, if the supply of services is unrelated to the domestic business establishment, a taxpayer may be liable for tax payment on behalf of the business.
It's important to note that if a domestic branch with an overseas headquarters receives services from the head office, it is not subject to tax payment on behalf of the head office. In this case, transactions between the head office and the branch are considered separate taxation regulations.
3) Transaction target requirements: Taxable services or rights
The obligation to pay on behalf of others arises only when the services supplied are subject to taxation under the Value Added Tax Act. If the service is exempt under Article 26 of the Value Added Tax Act, such as medical care, education, or housing rental, the obligation to pay on behalf of others does not arise.
Therefore, it is very important in practice to first accurately determine whether a transaction is subject to taxation.
4) Supply location requirements: Use or consumption within the country
The obligation to pay on behalf of others arises when services are provided "domestically." "Domestically supplied" here refers not only to the physical location where the services are performed, but also to the location where the resulting services are used or consumed domestically.
For example, if a foreign law firm provides legal consulting services overseas and sends the results via email to a domestic business for use by the business, there are many cases where it is deemed that the utility of the services occurred domestically and thus an obligation to pay on behalf of the business is established (Seoul Administrative Court 2021 Guhap 87446, 2022.07.12, Josim 2021 Seo 3243, 2021.09.15, etc.).
2. Procedure for applying for proxy payment
The person obligated to pay on behalf of a taxpayer must report and pay the amount of tax to be paid on behalf of the taxpayer to the competent tax office along with the value-added tax payment on behalf of the taxpayer within the reporting deadline for the expected reporting period or final reporting period to which the “date of payment” belongs.
The following information must be accurately stated in the proxy payment report:
– Reporter information: business name, business registration number, name, business location, etc.
– Supplier information: Name (corporate name) and address of the supplier of services, etc.
– Transaction information: payment date, service supply price (converted to Korean Won), value-added tax to be paid on behalf of the customer, surcharge, etc.
Particularly when paying in foreign currency, attention must be paid to the exchange rate. Specifically, when paying in Korean Won for foreign currency, the customer's foreign exchange selling rate as of the payment date must be applied. When paying in foreign currency held in your possession, the base exchange rate or arbitrage rate as of the payment date must be applied.
Furthermore, if the services supplied are used for both taxable and tax-exempt businesses, the obligation to pay taxes on behalf of the taxpayer arises only for the portion used for the tax-exempt business, thus requiring an apportionment calculation. If actual attribution cannot be determined, the service fee subject to tax on behalf of the taxpayer is calculated by multiplying the "total supply price of the relevant services" by the "tax-exempt supply price ratio for the relevant taxable period (tax-exempt supply price to total supply price)."
3. Special provisions for business registration and payment for foreign businesses providing electronic services
With the introduction of the simplified electronic service business registration system in July 2015, when a foreign business operator supplies electronic services (apps, software downloads, cloud computing, etc.) to domestic consumers who are not business operators, the supplier
Foreign businesses are now required to register as simplified businesses directly with the Korean National Tax Service and report and pay value-added tax.
This is a device designed to ensure tax fairness and improve tax payment convenience for consumers in response to the surge in global digital transactions.
However, it is important to note that in the case of tax-exempt businesses receiving electronic services from foreign businesses, they are not subject to the special provisions for the supply of electronic services and therefore have an obligation to make payment on behalf of others.
4. Conclusion
The obligation to pay VAT on behalf of a taxpayer arises when taxable services or rights are supplied domestically from a foreign business entity without a domestic business establishment, but are not used in a taxable business. The taxpayer must submit a tax return and pay the tax within the reporting deadline for the tax period in which the payment was made. Whether or not this obligation to pay on behalf of a taxpayer applies may vary depending on the specific facts of the transaction, and the practical procedures require thorough knowledge. Therefore, it is advisable to consult a tax professional in advance to assess the risks involved.
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