The Article 6(2) of Korean Value-added Tax Act and the Article 8(6) of the Enforcement Decree of Value-added Tax Act define the ‘Permanent Establishment(PE)’ in Corporate Tax Act and ‘Fixed Establishment(FE)’ in Value-added Tax Act as identical concepts. Accordingly, Korean courts have applied the same standards in practice when it comes to judging those concepts in corporate tax and value-added tax.
In addition, the Korean Supreme Court recently ruled that in both corporate tax and value-added tax, the tax office must specify and prove the value of the "domestic supply" from the domestic/foreign-combined services provided by a foreign corporation.
As the above ruling was sentenced, uncertainty arose over whether or not a foreign corporation was obliged to pay VAT on services provided in Korea, and accordingly, it became an important issue to clearly secure Korean tax office's right to impose VAT on services provided by foreign corporations in Korea.
Therefore, this article presents the draft of legislation which is targeting to build the new concept of establishment in VAT Act through comparing that of value-added tax with corporate tax (income tax) and by analyzing legislation cases of foreign countries in regard to "Fixed Establishment(FE)". The contents of newly presenting legislation are as follows.
Firstly, the concept of 'Fixed Establishment(FE)' of non-residents and foreign corporations is newly enacted in the Value-added Tax Act. Unlike income tax, whose key problem is whether income could be attributed to ‘Permanent Establishment(PE)’ or not, Value-added Tax, whose key problem is judging ‘supplying place’ as Vaule-added Tax is imposed to transaction itself. Therefore, ‘Fixed Establishment(FE)’ should be individually enacted on Value-added Tax Act, not just adapting ‘Permanent Establishment(PE)’ concept from Corporate Tax Act.