The surge in direct overseas purchases through Chinese e-commerce companies such as AliExpress, Temu and Shein has prompted discussions about alternatives to reduce side effects. However, the proposed tax on small imported goods is closely related to the Korea-US Free Trade Agreement (FTA), and it has been confirmed that it is virtually impossible to implement it in the short term.
According to officials from related ministries and agencies on the 25th, the Ministry of Economy and Finance, together with the Customs Service and the National Tax Agency, is scrutinizing the overall tax exemption system, especially for direct purchases from overseas. A surge in e-commerce purchases in China, known as the “Artesh” phenomenon. MOEF is considering the option of exempting value-added tax and customs duties for small-value imports of less than $150 per transaction.
However, there are negative views within and outside the government regarding the possibility of exempting small imported goods from value added tax (VAT). The reason for this is the FTA between South Korea and the United States. Under the FTA, the government has set separate standards for small imports, which apply only to transactions with the United States and have a value of $200 or less.
The exemption from value added tax for small imported goods has been maintained since the enactment of the Value Added Tax Law in 1977. If value-added tax is imposed on small imported products, overseas sellers will need to cooperate with tax collection, making administrative procedures complicated. This may increase taxation costs.
Current issues revolve around equity. Regardless of whether the product is imported from abroad or produced domestically, it is considered appropriate to impose value added tax on it as long as it is consumed domestically. Import volumes also increased significantly. Last year, the total value of goods imported via e-commerce reached approximately US$5.28 billion, an increase of 11.7% year-on-year and 67.9% increase compared to 2019. According to a report released by the Korea Public Research Institute, if value-added tax had been applied to small-scale imports in principle in the 2020 fiscal year, the tax revenue that could have been collected would have exceeded 200 billion won.
There is a growing movement in many countries to abolish value-added tax exemptions for small imported goods. The European Union (EU) has abolished the VAT exemption for imported goods valued at less than 22 euros from 2021. Australia has been imposing VAT on small imports since July 2018, and New Zealand has implemented this policy since December 2019.
In response to these market changes, the Korea Fair Trade Commission (KFTC) will begin an investigation into e-commerce from March 26th. The JFTC plans to collect opinions from industry stakeholders and set investigation targets by the end of next month. We have also created an internal team specifically for this purpose. The results of the investigation are expected to be revealed through the FTC policy report by the end of this year.
