Origins and Korea's adoption
French finance official Maurice Lauré designed the modern VAT in 1954. Turnover taxes compounded at every stage of production, and his design fixed that by taxing only the value added at each step. The European Community made VAT its common system in 1967, and it spread worldwide. In July 1977 South Korea replaced eight indirect taxes with a single 10% VAT, which also made it easier to refund taxes to exporters. Anger over the resulting price rises is often cited as one factor behind the 1979 Bu-Ma protests. Today some 170 countries levy a VAT or similar consumption tax. The US has no federal VAT and relies on state sales taxes instead.
How it's calculated
Businesses collect output tax on their sales and deduct the input tax they paid on business purchases, remitting only the difference. Input credits require valid tax invoices or card receipts. Because the tax passes down the chain to consumers, it's criticized as regressive: lower earners pay more relative to income. To soften that, Korea exempts unprocessed food, healthcare, education, and public transit, and applies a 0% rate to exports. Unlike a Pigouvian tax, which aims to discourage behavior, VAT is designed to raise revenue steadily from a broad base.
General vs. simplified taxpayers
Sole proprietors with annual sales under ₩104 million can register as simplified taxpayers. They pay a lower, industry-based tax once a year in January and owe nothing if sales are under ₩48 million. General taxpayers file in January (for July–December) and July (for January–June), and corporations also file preliminary returns in April and October. Income tax on a sole proprietor's profits is filed separately in May as comprehensive income tax.
FAQ
- Is simplified taxpayer status always better?
- It means lower tax, but no input-tax refunds—so heavy startup investment may favor general status.
- Do freelancers pay VAT in Korea?
- Most individual service freelancers are VAT-exempt and file only income tax.
Sources reviewed: 2026-10-26
References
- 부가가치세법(1976년 제정, 1977년 7월 1일 시행).
- 국세청. (2025). 「부가가치세 신고 안내」.
- Ebrill, L., Keen, M., Bodin, J.-P., & Summers, V. (2001). The Modern VAT. International Monetary Fund.