A VAT preliminary notice can sometimes be replaced by a preliminary return

This guide is for foreign founders, managers and finance staff of companies in Korea that receive a VAT preliminary notice (예정고지) from the tax office. Instead of filing a quarterly preliminary return, some businesses are billed 50% of the previous period's VAT. The rule: you do not always have to pay the notice as billed. If a reason set by law applies, you can file a preliminary return (예정신고) and pay the actual tax instead.

Who gets a notice instead of filing

Some companies get a notice in April and October, and others do not. Article 48(3) of the Value-Added Tax Act (부가가치세법) covers individual business owners (개인사업자) and corporate businesses (법인사업자) set by Presidential Decree. For them, instead of a preliminary return, the tax office determines and collects 50% of the tax payable for the previous taxable period (과세기간). Any amount under ₩1,000 is dropped.

Which corporate businesses fall under Article 48(3) is set in the Enforcement Decree of the Value-Added Tax Act (부가가치세법 시행령). This guide covers only what the Act says, so check the relevant article of the Enforcement Decree to confirm whether your company receives notices.

Receiving a notice does not mean you must pay it as billed. Article 48(4) opens a route to switch.

Preliminary periods and deadlines

For a person who starts or is about to start a new business, the first preliminary period runs from the business start date to the end of the preliminary period that contains that date. If you applied for business registration before the start date, it runs from the application date.

The notice uses the same date. Article 48(3) says the tax is collected by 25 days after the preliminary period ends.

When no notice is issued

The proviso to Article 48(3) excludes three cases:

• the amount to collect is under ₩500,000
• the business changed from a simplified taxpayer (간이과세자) to a general taxpayer (일반과세자) as of the start date of the taxable period
• the head of the district tax office (관할 세무서장) accepts that the business cannot pay, for one of the reasons in Article 13(1) of the National Tax Collection Act (국세징수법)

If the previous period's payable tax is under ₩1,000,000, 50% of it is below ₩500,000, so no notice is issued. No notice does not mean the filing duty is gone. That period's amount is added and calculated in the final return (확정신고), the return for the whole taxable period.

When switching to a preliminary return pays off

Under Article 48(4), a business with a reason set by Presidential Decree, such as worse results because of a temporary suspension (휴업) or a business slump, can file a preliminary return and pay the tax for that period. In that case, the decision under the main text of Article 48(3) is treated as never made. The notice is cancelled, and the tax is settled on actual results.

Switching usually helps in two situations:

• sales fell sharply compared with the previous period, so the actual tax payable is lower than the notice
• purchases of equipment, vehicles, software and the like were concentrated in the quarter, so it is in a refund position

The second matters most for cash flow. If you pay the notice and get the money back in the final return, the cash is tied up for about 3 months. If you switch to a preliminary return, it is settled in that quarter. However, a preliminary return that produces a refund is separate from the early refund (조기환급) conditions, so check the refund timing separately.

Worked examples

Take a company whose payable tax for the previous taxable period was ₩6,000,000. Under Article 48(3), the notice is 50% of that, ₩3,000,000.

Suppose this quarter's output VAT (매출세액, VAT on sales) is ₩4,000,000 and input VAT (매입세액, VAT on purchases) is ₩2,500,000, so the actual tax payable is ₩1,500,000. If you pay the notice, you pay ₩3,000,000 and settle ₩1,500,000 in the final return. If you switch to a preliminary return, you pay only ₩1,500,000. The difference is whether ₩1,500,000 is tied up for about 3 months.

In a quarter with capital spending, the gap is larger. With output VAT of ₩4,000,000 and input VAT of ₩12,000,000, the quarter is in a refund position of ₩8,000,000. If you pay the ₩3,000,000 notice, ₩11,000,000 is locked up in that quarter.

Now take a company whose previous period's payable tax was ₩800,000. Half of that is ₩400,000, which is under the ₩500,000 limit in item 1 of the proviso to Article 48(3), so no notice is issued at all. If you do nothing, that period's amount is calculated together in the final return. No notice does not mean no duty to pay.

For which input VAT you can deduct, see non-deductible input VAT.

Checklist

• Check the payable tax for the previous taxable period.
• Calculate whether 50% of it is ₩500,000 or more.
• If there is reduced, credited or occasionally assessed (수시부과) tax, subtract it before you calculate (the parenthesis in Article 48(3)).
• If there was a determination, correction, amended return or claim for correction, use the amount after it is reflected.
• Count the period's sales and purchases whether or not a notice has arrived.
• Compare the actual tax payable with the notice amount.
• Check whether input VAT exceeds output VAT, which means a refund position.
• Decide whether a reason in Article 48(4), such as suspension or business slump, applies.
• If you decide to switch, file the preliminary return within the 25-day deadline.
• After switching, the Article 48(3) decision is treated as never made, so do not pay the notice amount separately.
• Check whether this is your first taxable period after changing from a simplified to a general taxpayer.
• If you are a new business, settle whether your first preliminary period starts from the registration application date or the business start date.
• Preliminary return amounts are added again in the final return, so do not count them twice.
• In the final return, deduct the notified tax as tax already paid (기납부세액).
• Fix your review dates at early April and early October so you can repeat the same check each quarter.