Tax and Business Law Fundamentals: VAT, Corporate Tax, and the Commercial Act
This domain tests VAT, corporate income tax, and the Commercial Act rules governing bookkeeping and financial reporting for Korean companies. Questions are computational and rule-based.
Core rules
- VAT: the standard rate is 10%; output VAT less input VAT equals the amount payable. Exports are zero-rated, with input VAT refundable; exempt supplies such as unprocessed food and medical services carry no output VAT and no input VAT credit.
- VAT returns for general taxpayers: 1 January to 30 June, filed by 25 July; 1 July to 31 December, filed by 25 January.
- Corporate tax is progressive, with brackets commonly at 9%, 19%, 21%, 24%, and 26%, plus a local income tax surcharge of 10% of the tax.
- The Commercial Act requires companies to keep proper books, prepare financial statements, and retain accounting records for 10 years.
Worked example
Output VAT is ₩22,000,000 and input VAT ₩15,000,000, so VAT payable is ₩7,000,000. For taxable income of ₩500,000,000: 9% × 200,000,000 = ₩18,000,000; 19% × 300,000,000 = ₩57,000,000; corporate tax = ₩75,000,000; local surtax at 10% = ₩7,500,000; total burden = ₩82,500,000. Each bracket applies only to the income within it, so the top rate is not applied to the whole base.
Traps
- Claiming input VAT on expenses used for exempt supplies.
- Treating zero-rated and exempt supplies as identical.
- Applying the top marginal corporate tax rate to all income instead of by bracket.
- Assuming entertainment expenses and fines are fully deductible; they are restricted or non-deductible.