VAT on global IT services to start from July 1

International IT companies selling services in Korea will be charging the value-added tax (VAT) from next month.

The 10 percent levy will be assessed on cloud-related and other digital products, but it will first be directed only at transactions with consumers. Google recently sent an email regarding this to individual users of paid services.

“According to Korean law, accounts that did not submit a business registration number will be charged a 10 percent VAT from July 1,” the email read.

The charging of the tax follows reforms passed by the National Assembly in December. Among companies affected are Google, Facebook, Airbnb, Instagram and YouTube.

Currently, the purchase of mobile games and apps via the Android store are the only paid services at Google in which the VAT is included.

The new law will extend the scope of VAT-imposed services to cloud computing and advertising offered to individual users. Users submitting a business registration number will be exempt from the obligation, as there is no legal basis yet for charging global IT companies on business-to-business services.

YouTube, Facebook and Instagram will impose the VAT on its business-to-consumer services, too, next month. Before the reform, local IT companies complained for years that they were doing business on an “uneven” playing field against global firms. Local companies were required to pay the VAT on a wider range of services, making it difficult to compete on price.

Another reform pending for approval at the National Assembly is a plan to impose the VAT on business-to-business services, which generate relatively more sales.

Apart from benefiting local companies, the VAT on global IT firms will also help the government estimate their total domestic revenue. That information has been hard to source.

BY SONG KYOUNG-SON [song.kyoungson@joongang.co.kr]