Ardent’s FinTech Influencer Series highlights innovative voices in the world of Accounts Payable (“AP”) automation. This series is the go-to spot for progressive thoughts on how technology, transformational thinking, and revolutionary ideas are changing how AP work gets done. Continuing our FinTech Influencer Series, today we are speaking with Jae Jin Kim, Vice President of the Korean Institute of Public Finance (KIPF), South Korean
Ardent Partner: Welcome Jae-Jin and thank you for spending some time with me today. Let’s get started. Please tell me about your role and responsibilities as Vice President at the Korean Institute of Public Finance (KIPF), South Korea
Jae-Jin Kim: I have various responsibilities, among which are supporting the President of KIPF with the management of our institute internally and building international networks by attending a wide range of international seminars, events, etc. externally. Recently, KIPF has been taking on Official Development Assistant (ODA) projects, and I manage that team.
Ardent: When and why was eInvoicing introduced in South Korea?
JJK: e-Invoicing was introduced in 2010 in light of the excessive compliance costs of approximately KRW 6.7 trillion (approximately US $5.5 million) per annum to issue and submit paper VAT invoices, high burdens on issuers to keep paper VAT invoices on file for 5 years, inconvenience caused by preparing VAT returns, and difficulties in preventing tax evading activities. The demands for more transparent commercial transactions also triggered the adoption of e-Invoicing in Korea. Another reason behind our government implementing such a system was the mature South Korean IT environment with the highest internet penetration rate, average connection and download speeds in the world.
Ardent: How did South Korea go about developing eInvoicing standards and rolling them out?
JJK: In 2008, the Korean government formed the e-Invoicing task force team that included obtaining input from a taxpayers’ association, a tax agents’ association, establishing a basic plan, performing a technical review, revising the relevant tax laws as needed, and increasing the budget accordingly. In 2009, the government set up a website (www.esero.go.kr) to lay the foundation for e-Invoicing and established a system to issue e-tax invoices. Finally in 2010, e-Invoicing was launched in Korea.
The National Tax Service (NTS) did not require taxpayers to issue e-tax invoices initially. Rather, e-tax invoices were issued on a voluntary basis. In 2011, the NTS required all corporate taxpayers to issue e-tax invoices, and all individual taxpayers with the supply value of KRW 1 billion (approximately US $825,000) or more during a prior period had to issue e-tax invoices in the following year. The NTS continued to expand the scope of mandatory issuers and in July 2014, individual taxpayers with the supply value of KRW 300 million (approximately US $250,000) for a prior period were included in the scope.
The NTS also promoted e-Invoicing and improved taxpayer convenience in an effort to avoid possible difficulties that could be encountered by taxpayers when issuing e-tax invoices. For example, in November 2009, the NTS opened a call center to guide taxpayers around the process from the issuance of e-tax invoices to VAT filings on internet. Moreover, the NTS added another channel (Automatic Response System) to enable taxpayers to issue e-tax invoices over the phone, and taxpayers began to issue e-tax invoices on smartphones in January 2013. In addition to the issuance of e-tax invoices on the website, phones, and smartphones, the NTS allowed large corporate taxpayers to issue e-tax invoices using an Application Service Provider (ASP) or Enterprise Resource Planning (ERP) system.
Ardent: How has the eInvoicing initiative received by South Korean businesses?
JJK: e-Invoicing is a powerful tool that enhances transparency of business transactions but it also can create some burdens on taxpayers which can result in implicit resistance by taxpayers. To combat this, the NTS used both tax incentives and penalties to mitigate the resistance.
One of the incentives initially offered by the NTS was a tax credit of KRW 200 (approximately US $0.16) per issuance of an e-tax invoice up to KRW 1 million (approximately US $825) per year, although this tax credit no longer exists. On the penalty tax side, for non-issuance of e-tax invoices, a seller is obliged to pay 2% of the total amount of VAT, and a purchaser cannot claim an input deduction on the purchase. For late issuance, a VAT penalty of 1 percent of the amount due is imposed on a seller and 0.5 percent on a purchaser. Moreover, a seller pays 1 percent of the VAT amount if they issue a paper VAT invoice. Finally, for non-transmission and late transmission, a seller incurs an additional charge of 0.5 percent and 0.3 percent, respectively, in VAT.
For large corporate taxpayers, the NTS encouraged them to adopt e-Invoicing more easily by allowing the option to issue e-tax invoices over ASP or ERP.
Ardent: Is eInvoicing mandatory for all businesses?
JJK: The Korean government classifies businesses into two categories, the self-employed and corporate taxpayer. As I mentioned earlier, all corporate taxpayers were required to issue e-tax invoices beginning in 2011, and the NTS required all individual taxpayers with the supply value of KRW 1 billion (approximately US $825,000) or more during a prior period to issue e-tax invoices starting 2012. By July 2014, individual taxpayers with the supply value of KRW 300 million (approximately US $250,000) for a prior period were included in the scope of mandatory issuers.
Ardent: How has adoption been? What percentage of invoices are now sent electronically?
JJK: The adoption has been quite successful. As of July 2013, 99.9% of the tax invoices issued by mandatory issuers were sent electronically, and the supply value on e-tax invoices in 2014 reached 95.7% of the total supply value of both mandatory and voluntary issuers. Today, the portion of e-tax invoices sent electronically is even higher.
Ardent: What benefits and achievements have South Korea received from its eInvoicing initiative?
JJK: According to the survey conducted on 6,300 taxpayers at the initial stage, 74% of them answered that e-Invoicing was convenient, and 75% agreed to the full-implementation of e-Invoicing. I’m quite confident that more taxpayers are satisfied with e-Invoicing now because e-Invoicing has evolved continuously in a way to allow more convenience for taxpayers.
Furthermore, the KIPF estimated in July 2011 that the compliance costs in connection with e-Invoicing declined by KRW .97 trillion. Finally, real-time monitoring of e-tax invoices and analysis of VAT deductions input after filing of VAT returns has resulted in a decrease in fraudulent tax evasion activities. Overall, e-Invoicing not only improved taxpayers’ business processes and cut down compliance costs, but also helped the NTS reduce its administrative costs.
Ardent: What lessons have you learned along the way?
JJK: Tax incentives together with penalty taxes reduced taxpayer resistance, and gradual expansion of the scope of mandatory issuers also helped e-Invoicing take root in South Korea.
Ardent: What eInvoicing plans do you have for the future?
JJK: As you may already be aware, South Korea was one of the first and most successful countries to adopt e-Invoicing. As VAT is a very important source of tax revenue for most developing countries, we would like to be able to share our success story with them.
Ardent: What advice can you provide to other countries and regions looking to roll out eInvoicing and eInvoicing standards?
JJK: Tax authorities should expect resistance from taxpayers; E-Invoicing requires change and also discourages tax evasion. Providing tax incentives as well as penalties for non-compliance can be useful in the beginning as can using a progressive expansion of mandatory issuers. Most importantly, I encourage other governments getting started with e-Invoicing to enhance their tax infrastructures in advance.
Ardent: Thank you for your time and insight on the market and best of luck on your presentation at the Exchange Summit on December 7 – 9 in Miami.
