A Taxation Model: The Korean Value Added Tax on Electronic Commerce

By Choi, Yeong C. | Review of Business, Spring 2004 | Go to article overview

A Taxation Model: The Korean Value Added Tax on Electronic Commerce


Choi, Yeong C., Review of Business


Abstract

The unprecedented development of the Internet and growth of electronic commerce have added more interdependency in the global economy. At the same time, some international conflicts for taxation, especially for sales tax, are created. This paper analyzes the taxation system of the Republic of Korea whose economy depends heavily on developed countries. Also, it evaluates Korea's Value Added Tax, which is equivalent to the U.S. sales tax with a view towards coping with the global electronic commerce market.

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Introduction

The explosive growth of electronic commerce is expected to continue along with the development of the Internet. Traditionally, all commercial transactions have been carried out by means of physical exchange. However, information technology and the unprecedented development of the Internet have made traditional trade possible through electronic networks. So it is obvious to see electronic commerce through the Internet mainly driven by private sectors will be expanded without limit in cyberspace. However, in cyberspace the system of taxation, an exclusive authority vested in governments, may remain in a gray zone where the highest probability of tax evasion is most likely to occur.

The unprecedented development of the Internet and growth of electronic commerce have added more interdependency in the global economy. Concurrently, some international conflicts for taxation have been created. Much of the past research on the subject of electronic commerce has been superficial. When problems were found with electronic commerce taxation, some analyses have been presented, but no appropriate taxation model has been suggested and developed. The motivation of this study is to analyze the taxation system of the Republic of Korea whose economy depends heavily on developed countries, especially on the Unites States, and to evaluate Korea's taxation system with a view towards coping with the global electronic commerce market.

Electronic Commerce and Value Added Tax in Korea

As presented in Exhibit 1, the number of Internet users has been increasing rapidly in recent years. The International Internet Society estimates that the global number of users will increase to 709 million by the year 2004 (from a mere 120 million in 2000). In Korea there were approximately 731,000 Internet users in 1996, but the number has already reached more than 25 million by June 2002. Electronic commerce using the Internet will rapidly increase in scale and will occupy more than 30% of consumption expenditure in private sectors within the next 30 years.

Taxation Structure of the Value Added Tax

Exhibit 2 depicts the current Korean Value Added Tax (VAT) payment system by self-assessment. The periods that tax is imposed in a calendar year are divided into two segments, the first half (January 1st to June 30th) and the second half (July 1st to December 31st).

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The Korea Value Added Tax Law 18-1 requires one estimated tax return for the first three months (equivalent to the U.S. monthly remittance) of every six-month period and a self-assessment return (equivalent to the U.S. quarterly return) for the six-month period. A taxpayer must report the total amount of receipts and tax due or tax refund to the head of the regional tax office within 25 days after each three-month period and pay the amount due.

It might vary state to state, but in general in the U.S., the sales and use tax statutes require four quarterly and eight monthly filings. The monthly filings are for the first and second months of each calendar quarter (January, February, April, May, July, August, October, and November). A monthly remittance must be filed for each of these months in which the amount of tax due exceeds $500 (the state of New Jersey case). When the amount due for any of these months is $500 or less, payment for that month may be remitted with the next quarterly return. …

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