<Abstract>
Domestic tax-exempt recipients receiving services from overseas suppliers must collect value-added tax (“VAT”) from the overseas suppliers when paying consideration and pay the VAT to the tax authorities with filing VAT returns. Article 52 of the Value-Added Tax Act of Korea (“VAT Act”) refers to this mechanism as the reverse charge. According to a series of letter rulings issued by the tax authorities, the tax liability under the reverse charge system are automatically confirmed when paying consideration like withholding for income taxation. Also, the position of these letter rulings is that the refund process for the recipients under the reverse charge is the refund application procedure prescribed by Article 51 (1) of the Framework Act on National Taxes (“FANT”), not the refund claim procedure prescribed by Article 45-2 of the FANT.
However, such letter rulings are not compatible with the current interpretation of the FANT and the VAT Act. In addition, the refund application procedure is not appropriate in dealing with various issues regarding the reverse charge. Therefore, the tax authorities’ position is not righteous. Furthermore, the Seoul High Court Decision 2020Nu59293, 59309 (December 12, 2024) allowed the recipient to file a refund claim for VAT paid through the reverse charge. However, there is no decision rendered by the Supreme Court of Korea.
The policy proposals for solving these issues are as follows. Most of all, several articles of the FANT shall be amended in order to make it clear that the reverse charge filing has a confirmation effect. Next, it is necessary to revise the VAT Act so that reverse charge filing shall fall under tax base and amount filing for the tax refund procedure. In addition, it is appropriate to revise the penalty tax system regarding the reverse charge. Finally, the tax authorities should repeal or revise their former inconsistent or contradictory letter rulings.
<keywords>
value added tax, reverse charge, tax return, confirmation of tax liability, tax refund claim
<Abstract>
Domestic tax-exempt recipients receiving services from overseas suppliers must collect value-added tax (“VAT”) from the overseas suppliers when paying consideration and pay the VAT to the tax authorities with filing VAT returns. Article 52 of the Value-Added Tax Act of Korea (“VAT Act”) refers to this mechanism as the reverse charge. According to a series of letter rulings issued by the tax authorities, the tax liability under the reverse charge system are automatically confirmed when paying consideration like withholding for income taxation. Also, the position of these letter rulings is that the refund process for the recipients under the reverse charge is the refund application procedure prescribed by Article 51 (1) of the Framework Act on National Taxes (“FANT”), not the refund claim procedure prescribed by Article 45-2 of the FANT.
However, such letter rulings are not compatible with the current interpretation of the FANT and the VAT Act. In addition, the refund application procedure is not appropriate in dealing with various issues regarding the reverse charge. Therefore, the tax authorities’ position is not righteous. Furthermore, the Seoul High Court Decision 2020Nu59293, 59309 (December 12, 2024) allowed the recipient to file a refund claim for VAT paid through the reverse charge. However, there is no decision rendered by the Supreme Court of Korea.
The policy proposals for solving these issues are as follows. Most of all, several articles of the FANT shall be amended in order to make it clear that the reverse charge filing has a confirmation effect. Next, it is necessary to revise the VAT Act so that reverse charge filing shall fall under tax base and amount filing for the tax refund procedure. In addition, it is appropriate to revise the penalty tax system regarding the reverse charge. Finally, the tax authorities should repeal or revise their former inconsistent or contradictory letter rulings.
<keywords>
value added tax, reverse charge, tax return, confirmation of tax liability, tax refund claim