New Tax Regulations for Digital Services in Korea and Japan – Are you ready?

With more and more countries assessing the option to apply taxes on the sale of digital services from non-resident companies into their territory, South Korea and Japan have taken steps towards restoring equality between local and foreign sellers – and collecting taxes on sales that so far may have escaped their reach.

As of July 1, 2015, non-resident sellers providing electronic services into Korea are obliged to register and account for their B2C and B2B sales. The applicable VAT rate is 10%. Japan is currently expected to follow with a similar regulation for October 1 for all non-resident sellers providing electronic services B2C above an annual threshold of JPY 10 million. The applicable rate would be 8%.

As always in these cases it is important for e-commerce merchants to look at the small print. Not all definitions of what constitutes an electronic service are alike. While in some countries the focus resides on music, games, apps and video content, other countries such as Korea include desktop software downloadable via the internet and cloud services in their definition. Talking to your tax advisor if you are providing electronic services abroad is recommendable.

With regards to equality of local and foreign sellers, Korea seems to have exempted foreign sellers from the obligation of issuing VAT invoices. While this, if confirmed, at a first glance may facilitate business under the new regulations, there could also be potential disadvantages where B2B is concerned as customers may not be in a position to reclaim their VAT. Hopefully further revision of this point following go live of the new taxes will lead to corresponding adjustments.