What exactly are the supplies of goods subject to VAT?

John Parker, a successful entrepreneur based in Los Angeles, sat in the sleek office of a Korean tax advisor in downtown Seoul. It was his first venture into the Korean market, having established a subsidiary of his U.S.-based e-commerce company. Despite his years of experience managing businesses, John quickly realized that understanding Korean tax law was like navigating a dense, foreign forest.

“I’ve been hearing a lot about this VAT,” John said, leaning forward. “I think it’s called value-added tax? But honestly, I have no clue how it works. In the U.S., I’m used to sales tax—it’s straightforward. But VAT? It sounds complicated.”

The tax advisor, Mr. Oh, smiled knowingly. He had encountered many foreign business owners baffled by Korea's tax system. “VAT is quite different from sales tax,” he began. “Let me explain it in simple terms, using your business as an example.”

John squinted at the explanation. “Supply of goods… What exactly does that mean?”

“The supply of goods refers to any act of transferring goods to another person,” Mr. Oh replied. “This includes selling, gifting, or even transferring ownership as part of an investment, such as in-kind contributions. The key is that the goods are delivered or ownership is transferred.”

“Wait,” John interrupted, “so if I give products as samples to potential clients here, is that considered a supply of goods?”

Mr. Oh nodded. “Yes, it can be. Even giving out free samples might qualify, depending on the circumstances. The idea is that the goods leave your control and go to someone else.”

“What’s the difference between delivering goods and transferring goods?” John asked, trying to absorb the details.

“Delivery is about physically handing over the goods or granting control to someone else. Transfer, on the other hand, refers to the legal transfer of ownership rights. For example, if you sell a product, both delivery and transfer occur. But if you loan equipment or store it temporarily for someone, it doesn’t count as a transfer of ownership.”

John jotted notes furiously. “Okay, got it. What if the goods get damaged or lost in transit?”

“That’s not considered a supply of goods,” Mr. Oh clarified. “For VAT purposes, the goods must be intentionally delivered or transferred to another party.”

“I export a lot of products to the U.S. from here,” John said. “What happens with VAT on those?”

“That’s a great advantage of operating in Korea,” Mr. Oh said. “When you export goods, they’re subject to a zero-rate VAT. This means you don’t charge VAT on those goods, but you can still claim a refund for the VAT you paid on related expenses.”

John’s eyes lit up. “So, exporting is tax-efficient?”

“Exactly,” Mr. Oh confirmed. “But be careful with bonded areas. If your goods are stored or transferred within bonded zones—like free trade zones—they’re still considered a supply of goods under Korean VAT law.”

After an hour of conversation, John leaned back, his notebook filled with Mr. Oh’s explanations. “So, VAT isn’t just about sales. It’s about every step of the process, from delivery to ownership transfer, and it applies even to things like free samples or exports.”

“That’s right,” Mr. Oh said, smiling. “And as your tax advisor, my job is to make sure you’re compliant while maximizing your tax benefits.”

John stood, shaking his hand firmly. “Thank you, Mr. Oh. This has been eye-opening. I came here feeling lost, but now I see how crucial VAT is for my business in Korea.”

As he left the office, John felt a newfound confidence. With Mr. Oh’s guidance, he was ready to navigate the intricacies of Korean tax law and ensure his business thrived in this new market.