2010. 10. 21
Agenda. Assessment of Korea s VAT regime. Success factors. Korea s policy direction of VAT regime
. Assessment of Korea s VAT regime An overview of Korea s VAT The purpose of introducing VAT Assessment of Korea s VAT regime
1. An overview of Korea s VAT Taxable Transactions - The supply of goods and services - The importation of goods Tax Rate : 10% Calculation : invoice method - Amount payable = output tax - input tax = Sale x 10% - Purchase x 10%
1. An overview of Korea s VAT Zero-rating : input tax is refundable - goods for exportation, services rendered outside Korea, Exemptions : input tax is not refundable - Basic life necessities such as agricultural products, Medica l services, Education, Books, newspapers, Artistic works, e tc Taxable Period - First period: Jan. 1 ~ Jun. 30 - Second period: Jul. 1 ~ Dec. 31
1. The purpose of introducing VAT To simplify indirect taxation & tax administration More than 10 tax items existed before 1977 (e.g. Business tax, entertainment tax, commodity tax etc.) Integrated into two tax items (i.e. VAT, Special Consumption tax) To facilitate exports & the capital increase Apply zero tax rate to exporting goods Tax credits for facilities investments
2. Assessment of Korea s VAT regime Assessment in Korea Secure the stable tax revenues at early stage of economic development - In 1977 when VAT was first adopted, the fourth 5 year-economic development plan started (billion dollar) 1978 Total tax revenue (A ) 6.9 VAT Revenue (B) 1.7 B/A 24.6% 2009 128 36 28.5% Help boost the export industry
2. Assessment of Korea s VAT regime Assessment abroad OECD (2008, OECD Economic Surveys-Korea) - Compared to OECD average (18%), lower rate but broader tax base - Ranked 5th in VRR (VAT Revenue Ratio) index
Success factors 1. Design 2. Infrastructural aspects 3. Administrative Aspects
1. Design 1. Tax rate: 10% of flat rate For simple & efficient tax administration Easy to calculate, easy to prevent tax avoidance Multiple tax rate could cause the excessive costs For maintaining the neutrality of economic activity As for general consumption tax, securing the economic neutrality is essential. Multiple tax rate could distort economic behaviors
1. Design 2. Exemption for Daily Necessities & Welfare Services To address the regression of consumption tax To minimize the resistance of introduction 3. Preferential tax treatments (Simplified Taxation) Provided to small traders since 1977 Convenient tax payment & reduce administrative costs Current simplified taxpayer : less than $ 48,000 annual turnover
1. Design What are the preferential treatments? - Simplified taxpayers are eligible for special tax treatment in issuance of tax invoice, tax amount calculation, tax return frequency and etc. Issuance of tax in voice Calculation of ta x amount due Tax filing General taxpayer obliged Compute the input & o utput tax amount due 4 times a year Simplified taxpayer Non-obliged (issuance of receipt) Compute the output tax amount due only 2 times a year
2. Infrastructural aspects 1. Cross-checking system through tax invoice (B2B) Added-values arise in stages of delivering a product from manufacturing to retailing - Traders have the status as buyer and seller at the same time at each stages Traders are required to issue tax invoices upon buying & selling in every transaction - The issuance of all tax invoices can make a cross-check of all traders regarding each buying & selling
2. Infrastructural aspects 2. Use credit card cash receipts (B2C) Difficulties in retail, restaurant, accommodation businesses Credit card use encouraged in early 1990s Cash receipt system introduced in 2005 71% of private consumption could be verified in 2009
2. Infrastructural aspects What re the incentives for credit card cash receipt uses? Income deduction for credit card use Over certain amounts of credit card use deductible - Credit card cash receipt : 20%, - Ceiling : $ 3,000 / year Tax credits of credit card issuance Over certain amount of credit card sales creditable - General taxpayers : 1.3% - Simplified taxpayers in restaurant lodging business: 2.6% - Ceiling : $ 7,000 / year
3. Administrative Aspects 1. Excellent administrative bodies & education system Recruited excellent workforces & set up the relevant systems Periodic & frequent training 2. IT-based Home Tax Service Makes taxpayers do tax-related works over the Internet at home & office Does not require tax authorities to input every filing documents
. Korea s policy direction of VAT regime
1. Broaden the tax base to offset the low tax rate Raising VAT rate for tax revenues could harm consumption & investment, and cause inflation Certain tax-exempted items should be newly subject to tax - Cosmetic surgery, veterinary practices etc. Increase transparency of transaction with the enforcement against tax avoidance & evasion
VAT rate in OECD countries (Based on standard tax rate as of 10.1.1.) Nation VAT rate (%) Nation VAT rate (%) Japan 5.0 United Kingdom 17.5 Canada 5.0 France 19.6 Switzerland 7.6 Italy 20.0 Australia 10.0 Island 21.0 New Zealand 12.5 Denmark 25.0 Spain 16.0 Sweden 25.0
2. Introduction of IT-based tax system (E-tax invoice) Taxpayers Have no obligation to submit the sum table of tax invoices & keep tax invoices Can monitor & manage the entire processes Tax authorities Can monitor the real-time transaction Can enhance transparency of tax revenue management Can reduce administrative costs