Korea to impose VAT on range of inbound direct-to-consumer connected services

10% VAT extended to business-to-consumer (B2C) services including online ad posting, cloud computing, goods/services “intermediation”

Amendments to Value Added Tax Act will take effect from July 1, 2019

Changes will affect B2C services of multinational technology firms, but scale of impact is unclear

On December 8, 2019 the Korean National Assembly passed amendments to the Value Added Tax Act (VAT Act) that will expand the 10% VAT to offshore businesses that provide any of a broadened range of online services to local consumers. Under the new rules, which are set to take force July 1, 2019, the VAT will apply to revenues earned by offshore businesses in providing direct-to-consumer online ad services, cloud computing, and goods/services “intermediation”, as well as “similar services”. This will not apply to business-to-business (B2B) services: Offshore digital services provided to local businesses – customers with local business registrations – are specifically excluded from transactions subject to the VAT under the new rules.

The VAT requirement already, since January 2017, applied to offshore-sourced online supply of games, audio, video and other content and software to local consumers, such as Google’s and Apple’s app store sales to local users, and viewer-purchased content on YouTube. The law as now amended will extend the VAT-assessable scope of cross-border connected services to the additional types of services, but leaves in place the existing exclusion of B2B transactions. (The latter aspect has drawn political heat, and there is talk of a continued push to reach B2B down the road.)

There is a degree of uncertainty and perhaps confusion surrounding the nature of transactions that will be affected. The rules specifically include “online ad posting services”, and initial news reports mentioned, as an example, ad revenues of YouTube. But the VAT would not, evidently, apply to YouTube’s ad arrangements with businesses (registered as such). Likewise, cloud computing on B2C terms is a significant segment (including, for instance, monthly offshore cloud-based smartphone servicing), but small compared to B2B service.

Meanwhile, the scope of “intermediation” and “similar services” remains to be further specified by Presidential Enforcement Decree (or prime implementing regulation), which should follow in the first half of 2019. It is possible that “intermediation” may concern some types of digital platforms (insofar as transactions are on a B2C basis), but this is uncertain at present.

With the changes to take effect from July 2019, many offshore businesses will need to assess whether their services are affected. To the extent affected, businesses would need to take VAT registration steps. There is a simplified registration process, which can be completed online at the National Tax Service’s website www.nts.go.kr, within 20 days after launch of the relevant business (or 20 days after July 1, 2019 in respect of a pre-existing service).