VAT Treatment: Domestic Sale vs Export

Many importers assume that once they have paid the supplier and completed customs clearance, all major costs are settled. However, this is not entirely accurate. In most cases, an additional 10% Value-Added Tax (VAT) is imposed at the time of import, which can come as an unexpected expense.

In practice, VAT is typically paid through your customs broker, who settles it with customs on your behalf and includes it in their invoice together with customs duties and clearance fees.

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Is Import VAT a Lost Cost?

No. Import VAT is generally not treated as a cost for businesses that are able to recover input VAT through the VAT system.

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Example: Domestic Sale

• Import value: KRW 20,000,000
• Import VAT (10%): KRW 2,000,000 → input VAT

Now, you sell the goods locally:

• Selling price: KRW 30,000,000
• Output VAT (10%): KRW 3,000,000 → output VAT

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VAT Calculation

VAT payable = Output VAT – Input VAT

• Output VAT = KRW 3,000,000
• Input VAT = KRW 2,000,000

VAT payable = KRW 1,000,000

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Domestic Sale

In this case, you do not receive a refund. Instead, you remit the difference to the tax authority.

• You paid KRW 2,000,000 at import
• You collected KRW 3,000,000 from your customer
• You remit KRW 1,000,000 to the government

!! For domestic transactions, VAT is charged on the full selling price, and the amount payable is calculated as output VAT minus input VAT.
While this mechanism often results in taxation on the value added, VAT is not directly calculated on profit or margin.

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Example: Export Case

The situation changes if the imported goods are exported instead of being sold domestically.

• Import value: KRW 20,000,000
• Import VAT (10%): KRW 2,000,000 → input VAT

Now, suppose the goods are exported:

• Export value: KRW 30,000,000
• Export VAT: KRW 0 (zero-rated) → output VAT = 0

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VAT Calculation

VAT payable = Output VAT – Input VAT

• Output VAT = 0
• Input VAT = KRW 2,000,000

VAT payable = –KRW 2,000,000

!! A negative amount indicates a VAT refund position.

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Export

It becomes recoverable through the VAT refund mechanism, provided proper export documentation is in place. This is because exports are subject to a zero VAT rate:

• No VAT is charged on the sale
• Input VAT remains claimable (refundable)

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Summary

This means no output VAT is charged on the sale, while input VAT incurred on related purchases or imports may be refundable.
However, VAT refunds are not automatic and require proper filing and supporting documentation proving that the transaction qualifies as an export under the VAT law.

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Important Note

VAT is not a tax on profit, but a consumption tax.

• Domestic consumption → VAT applies
• Foreign consumption (exports) → VAT is applied at a 0% rate (zero-rated)

!! However, the profit (KRW 10,000,000) is still subject to corporate tax or income tax, separately from VAT obligations.