Ji-Hyun Yoon, A Study on the VAT Taxation System for Domestic Service Supply by Non-Residents – Focusing on B2B Transactions, Journal of IFA, Korea, Vol. 34, No. 3 (2018), pp. 87-145.
<Abstract>
This article discusses when and how Korea levies value added tax (“VAT”) on services supplied to resident businesses by non-resident suppliers. Adhering to the so-called “destination principle”, Korean VAT law provides that services should be physically provided within Korea to be subject to VAT in Korea. However, as services are increasingly provided remotely through electronic means, the focus on the place of physical performance or delivery of service now seems outdated. This article argues that the introduction of a new law, whether via a court precedent or legislative action, is urgently needed in this regard. When it is determined that a particular service has been supplied within Korea, the tax authorities collect VAT through either a fixed establishment (“FE”) or the reverse-charge mechanism. The former applies when a non-resident supplier has a FE in Korea, and that FE is “related” to the relevant supply of service. However, Korean VAT law defines neither of these terms, and this article attempts to present some guidance to reduce the administrative or compliance costs. First, the term “FE” in relation to the VAT law should not be fully equated with the term “permanent establishment” (“PE”) in the context of an income tax treaty because their roles and functions are markedly different. Secondly, this article acknowledges that no single interpretation can exclusively be a correct interpretation of these concepts. Rather, this article seeks the interpretation that may reduce the administrative and compliance burdens to the greatest extent possible. Based on this methodological premise, this article suggests that the term “FE” should be understood as a type of ordinary business establishment under the VAT law, and the term “relation” should be eqivalent to “supply.” Following the review of the provisions of the Korean VAT law and various materials (both Korean and foreign) including court decisions, administrative rulings and practices, and views of commentators, it is submitted that there is a strong support for the foregoing cost-reducing interpretations, which are also in line with standard international VAT practices. Thirdly, the requirement of “relation” (or “supply”) is met when employees, materials and technical resources of a FE are mobilized in the provision of services to an extent greater than those of any other business establishment that belongs to the same taxpayer. This is in a sense not that different from the general definition of “supply of service.”
<Keywords>
Place of Supply, Supply of Service, Unity of Supply, Destination Principle, Fixed Establishment, Permanent Establishment, Reverse-Charge Mechanism
Ji-Hyun Yoon, A Study on the VAT Taxation System for Domestic Service Supply by Non-Residents – Focusing on B2B Transactions, Journal of IFA, Korea, Vol. 34, No. 3 (2018), pp. 87-145.
<Abstract>
This article discusses when and how Korea levies value added tax (“VAT”) on services supplied to resident businesses by non-resident suppliers. Adhering to the so-called “destination principle”, Korean VAT law provides that services should be physically provided within Korea to be subject to VAT in Korea. However, as services are increasingly provided remotely through electronic means, the focus on the place of physical performance or delivery of service now seems outdated. This article argues that the introduction of a new law, whether via a court precedent or legislative action, is urgently needed in this regard. When it is determined that a particular service has been supplied within Korea, the tax authorities collect VAT through either a fixed establishment (“FE”) or the reverse-charge mechanism. The former applies when a non-resident supplier has a FE in Korea, and that FE is “related” to the relevant supply of service. However, Korean VAT law defines neither of these terms, and this article attempts to present some guidance to reduce the administrative or compliance costs. First, the term “FE” in relation to the VAT law should not be fully equated with the term “permanent establishment” (“PE”) in the context of an income tax treaty because their roles and functions are markedly different. Secondly, this article acknowledges that no single interpretation can exclusively be a correct interpretation of these concepts. Rather, this article seeks the interpretation that may reduce the administrative and compliance burdens to the greatest extent possible. Based on this methodological premise, this article suggests that the term “FE” should be understood as a type of ordinary business establishment under the VAT law, and the term “relation” should be eqivalent to “supply.” Following the review of the provisions of the Korean VAT law and various materials (both Korean and foreign) including court decisions, administrative rulings and practices, and views of commentators, it is submitted that there is a strong support for the foregoing cost-reducing interpretations, which are also in line with standard international VAT practices. Thirdly, the requirement of “relation” (or “supply”) is met when employees, materials and technical resources of a FE are mobilized in the provision of services to an extent greater than those of any other business establishment that belongs to the same taxpayer. This is in a sense not that different from the general definition of “supply of service.”
<Keywords>
Place of Supply, Supply of Service, Unity of Supply, Destination Principle, Fixed Establishment, Permanent Establishment, Reverse-Charge Mechanism