The rapid increase in direct overseas purchases through Chinese e-commerce companies such as AliExpress, Temu, and Shein has led to discussions about alternative measures to mitigate the side effects. However, it has been confirmed that the proposal to tax small imported goods is closely linked to the South Korea-U.S. Free Trade Agreement (FTA), making it practically impossible to implement in the short term.
According to sources from relevant ministries on March 25, the Ministry of Economy and Finance (MOEF), along with the Korea Customs Service and the National Tax Service, are closely examining the overall tax-free system for overseas direct purchases, particularly in response to the surge in Chinese e-commerce purchases, known as the “Altesh” phenomenon. The MOEF is considering options for exempting value-added taxes and tariffs for small imported goods amounting to less than US$150 per transaction.
However, both within and outside the government there is a negative view regarding the possibility of exempting value-added tax (VAT) for small imported goods. The reason lies in the FTA between South Korea and the United States. Under the FTA, the government has set a separate threshold for small imported goods, which is only applicable to transactions with the United States and amounts to US$200 or less.
The exemption of VAT for small imported goods has been maintained since the enactment of the Value-Added Tax Act in 1977. If VAT were imposed on small imported goods, it would require cooperation from overseas sellers for tax collection, leading to complicated administrative procedures. This could potentially increase the cost of taxation.
The issue at hand revolves around fairness. It is deemed appropriate to levy VAT regardless of whether goods are imported from overseas or produced domestically, as long as they are consumed domestically. The volume of imports has also surged significantly. Last year, the total value of goods imported via e-commerce amounted to approximately US$5.28 billion, marking an 11.7 percent increase compared to the previous year and a 67.9 percent increase compared to 2019. According to a report published by the Korea Institute of Public Finance in 2020, if VAT had been applied to small imported goods as a matter of principle, the tax revenue that could have been collected would have exceeded 200 billion won.
There is a growing trend of abolishing VAT exemptions for small imported goods in various countries. The European Union (EU) abolished the VAT exemption for imported goods under 22 euros starting in 2021. Australia has been levying VAT on small imported goods since July 2018, while New Zealand has been implementing this policy since December 2019.
The Korea Fair Trade Commission (KFTC) is embarking on an e-commerce investigation starting from March 26, driven by such market changes. The KFTC plans to gather opinions from industry insiders to set the targets for the investigation by the end of next month. It has also formed an internal team specifically for this purpose. The investigation findings will be revealed through the KFTC policy report by the end of this year.