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Today, unlike in the past, retail has various distribution channels, from offline channels such as department stores and large marts to online platforms such as Coupang and Naver Smart Store, and SNS. Such diversified sales methods provide more opportunities for business owners, but at the same time, they cause complex accounting and tax issues that vary depending on the type of sales.
From now on, we will look at accounting treatment for each major retail sales type, and things to keep in mind when reporting corporate tax and value-added tax.
- Offline sales: Special purchase/sales purchase
Although there are various channels through which products and goods are distributed, the types of contracts can be broadly divided into four categories.
- Direct Purchase: A contract in which a distributor purchases a company's inventory and assumes the risk of the inventory. The distributor adds a margin to the purchase price and sells it to the consumer, making a profit.
- Special Purchase (Special Purchase): This is a contract where a distributor purchases inventory from a company in the form of credit purchase, and then settles the transaction by deducting the agreed commission rate from the actual sales price. This mostly occurs in transactions with department stores, and products that are not sold at department stores can be returned.
- Sales Purchase: This is a transaction type contract in which a distributor purchases goods from a company when the goods or products are sold to consumers. It is different from a special purchase in that no separate purchase occurs before the goods or products are sold to the final consumer.
- Lease: This is a contract type that occurs frequently in transactions with department stores and shopping malls, and is a contract in which a low fixed rent is paid along with a certain percentage of sales as a commission.
In the case of direct purchase, when the company delivers the product or goods to the distributor, and in the case of lease, when the goods are sold to the consumer at the store, the risks and rewards of ownership of the goods are usually transferred to the buyer. This point in time is the point in time when sales are recognized under accounting standards, the point in time when profits and losses are attributed under the Corporate Tax Act, and the point in time when supplies are supplied under the Value Added Tax Act, so there are no special issues.
Meanwhile, in the case of special purchase (specific purchase) and sales purchase, since the accounting and tax perspectives are different in terms of sales and sales recognition timing, let's take a closer look at the accounting treatment, value-added tax, and corporate tax law treatment. In the current market, the terms special purchase, specific purchase, and sales purchase are used interchangeably, and most sales purchase contracts have been converted to the form of special purchase. Since there is no practical benefit in distinguishing between them in accounting treatment and corporate tax law, we will not distinguish them separately, but will only look at them in the value-added tax law, which clearly distinguishes between each form.
(1) Accounting treatment
1) Sales
The company recognizes sales based on the total amount sold to consumers , not the net amount received from department stores, and the sales commission paid to department stores is not deducted from sales but is recorded as a separate sales management expense.
2) Sales recognition point
The point in time when the goods are moved from the company's warehouse to the department store's warehouse is simply a movement of inventory, and the risks and rewards of ownership of the goods are not transferred, so sales should be recognized at the point in time when the goods are actually sold to the consumer from the department store.
(2) Value added tax
1) Sales
According to Article 75 of the Enforcement Decree of the Value Added Tax Act, if a transaction party issues a tax invoice in net form in accordance with the contract and properly reports and pays the value added tax, the formal choice of the party is recognized as is. In other words, if a tax invoice is issued in net form, the value added tax should be reported accordingly.
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2) Sales recognition point
In the case of special purchases, the act of credit purchase occurs when the company delivers the goods to the distributor, so unlike accounting treatment, this period is the time of issuance of the tax invoice and the time of supply under the Value Added Tax Act. In the case of sales purchases, no separate purchase occurs before the goods are sold to the final consumer, so the time of sale to the final consumer is the time of supply under the Value Added Tax Act.
However, in practice, there are cases where tax invoices are not issued at the time of moving goods to department stores, etc., but rather, tax invoices for sales and purchases are received and issued at the same time when the department store sells to customers. In this case, although the contract is in the form of a special purchase, it is considered a sales purchase in reality, and there are cases where the time of sale to the consumer is judged as the time of supply of the goods (Caution-2020-Seo-1582).
(3) Corporate tax
Since the corporate tax law is important for the tax base, it does not matter whether the sales are gross or net. In addition, in terms of the timing of sales recognition, the corporate tax law determines that the timing of profit and loss is the timing when the company sells the product to the final consumer, even in the case of special purchases where the distributor's credit purchase occurs, so the accounting treatment and perspective are the same (Ministry of Strategy and Finance, Corporate Tax Division-384, Caution-2021-전-6986).
- Online consignment sales
(1) Accounting treatment
1) Sales
We recognize revenue based on the amount paid by the consumer before deducting online platform fees, and we also recognize revenue for shipping costs borne by the seller.
2) Sales recognition point
In general, in the case of online sales, since consumers can freely return items until the purchase confirmation date, sales should be recognized as the risk and reward being transferred on the purchase confirmation date. However, if the return can be reasonably estimated, sales can be recognized based on the shipping date, and the expected return amount can be estimated, deducted from sales, and recognized as a liability.
(2) Value added tax
Article 28, Paragraph 2 of the Enforcement Decree of the Value Added Tax Act stipulates that in the case of a sale subject to a return condition, a sale subject to consent, other conditional sales, or a sale subject to a time limit, the time when the condition is fulfilled or the time limit passes and the sale is confirmed is considered the time of supply.
According to the Electronic Commerce Act, a consumer who has entered into a contract with a mail-order seller for the purchase of goods, etc. may withdraw the contract within 7 days from the date of receipt of the written contract contents. However, the important thing is the individual terms and conditions within the online platform. If the consumer can express his/her intention to confirm the purchase, exchange, or return within a certain period of time according to the platform terms and conditions, and if the purchase is automatically confirmed after a certain period of time if no intention is expressed, the time of purchase confirmation becomes the time of supply. However, if there are no separate terms and conditions, the time of delivery of the goods becomes the time of supply (Written-2019-Law Interpretation Department-1949 [Law Interpretation Department-2611]).
(3) Corporate Tax Act
Even in cases where consumers can return or exchange products within the purchase decision period in accordance with the Electronic Commerce Act and the individual terms and conditions of online platforms, the Corporate Tax Act determines that the time of profit and loss is the date of delivery of the product in accordance with Article 40 of the Corporate Tax Act and Article 68, Paragraph 1, Subparagraph 1 of the Enforcement Decree of the same Act.
So far, we have looked at accounting and tax issues related to retail sales of products and goods. Retail sales require a variety of complex judgments depending on the characteristics of the distribution channel and the type of contract, and as the size of the business grows and the channels diversify, it becomes more difficult to manage this complexity on your own.
Therefore, it is necessary to utilize comprehensive advice from accounting and tax experts with in-depth understanding of the relevant industry to accurately understand the company's financial performance and effectively manage unnecessary surtax and tax risks.
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