Setting up a small business in Korea isn't hard, but understanding the bookkeeping and tax requirements can be tricky, especially as there isn't a lot of Korean accounting information available in English. Sure, various web site resources cover the basics, but I've encountered plenty of situations where I still needed to get expert advice. And sometimes, even when I thought I understood what to do, I've found out later that my information was incomplete.
I am not an accountant, much less a Korean accountant, so please DO NOT consider the following information authoritative; I'm bound to not have everything right here. If you know something I got wrong or have more information to share, please don't hesitate to post a comment on this discussion to help clear up or expand on the matter.
1. What do accounting services cost in Korea and what does a small business get from using a professional provider?
I initially looked into tax advice from an accounting service in Seoul which catered to expats. But the rates they quoted just about made my eyes pop out. So instead of that, I got a referral from a professor at Hanyang University where I've been studying and decided to handle my taxes through a local accounting office (세무사 사무소) which he recommended. For W120,000/month + 10% value-added tax, I would take my monthly receipts and bank statement down to their office each month and they would calculate and file my tax forms, such as for VAT (부가가치세) and withholdings to contractors (원천징수). With the filing of income taxes in May, I would also get a bill for several hundred thousand won more to cover the extra effort on that.
Service rates are apparently based on sales volume and since most of my sales are overseas and thus didn't require their attention, I had hoped for a break, but alas, it wasn't to be... I got the impression that there is a minimum that's been agreed (i.e. colluded to) between accounting providers in the area.
For this price, I would get periodic coffee and chats with the accountant who owned the firm, but my work was handled almost exclusively by one of the bookkeepers in the office. This became an issue for income taxes and other matters related to my being a foreigner and to the fact that my customer base and various assets are located overseas, since nobody in the office had worked with another foreign-owned business before. It was also a big hassle for me that they didn't use email at all; everything I sent had to be faxed or hand-delivered, and I got the sense that my wish to use email made me a problem customer, something I could hardly believe would be the case in today's day and age, but I'm sure just reflects the realities of very small businesses in Korea.
I recently switched to a different (and much smaller) accounting office (again, on a recommendation) and I expected my rates to go down since I had, for some reason, thought I was overpaying before (an associate of mine in Seoul only pays W110,000/month). In fact, I'm now paying quite a bit more (around W200,000/month) but my work is being handled directly by the accountant herself, I don't feel like I'm imposing to ask questions, I get informed answers... and she uses email!
I sense that taxation in Korea is a somewhat local and even personal affair. That means that accountants may know the people at the local tax office who are enforcing the tax laws. In a culture and system where one's personal network means everything, it can't hurt to work with someone in a position to intercede with the authorities on tax matters that may arise. This, in addition to the tax reporting and advice I get from using an accountant, is a third benefit which helps to justify the expense.
One more thing... If you're going to start with a Korean accountant, do so from January. Your accountant will be responsible for all of your tax reporting for the year no matter when you start, and you'll likely see an initial bill retroactive to January of the year. This will be the case even if you used a different tax accountant during the first part of the year and switch mid-way, which means you'll end up paying double for the months from January until you start with the new accountant.
2. How are the Korean and American tax approaches different?
It's taken me a long time to come to terms with this, but a fundamental difference between the Korean and American tax systems is that in the US, the IRS expects and generally trusts taxpayers to pay their taxes properly. Of course, this is backed up by many means of verification which the IRS uses to flag, audit and (severely) punish those not in compliance, but this is also why just about any invoice will do when evidencing a business expense, and why little explanation is required for certain accounting decisions.
On the other hand, the Korean authorities assume that nobody'll pay their taxes honestly unless forced to do so. Thus, because non-compliance would be the norm otherwise, the rules require that everything a business wishes to take as an expense be documented in strict ways that can be a hassle (see below) but then applies a level of "flexibility" in certain ways that would be unheard of back home (such as a very-small-business form (간이 사업자) that demands almost no accountability at all from businessowners).
By the way, this difference of perspective explains to some degree why prominent and rich Koreans keep getting let off lightly for accounting and tax shenanigans. Since it's assumed that most everybody's not paying properly anyway, the government seems to content itself with steady improvements over time and punishments to large tax offenders appear to outsiders to be shockingly light (and often, shockingly tied up in political considerations).
3. How do I evidence business transactions in Korea?
There are only three types of official receipts which can be used to evidence business transactions: a cash receipt (현금 영수증) to which your business number (사업자 등록번호) has been entered, a tax invoice/receipt (세금계산서) to which your business number has been entered or a credit card receipt (purchased with a credit card registered under your business number). If it's not one of those, and your transaction is over W30,000, then the receipt may be useless (though, there are exceptions (see below) and this is where having accounting/bookkeeping support is helpful).
- Cash payment - Often, when paying cash, the clerk will ask if you need a cash receipt. This apparently can be handy for some classes of taxpayer on personal expenses too, but for a business, if you paid cash but you or the clerk didn't enter your business registration number into an electronic terminal at the point of sale, then the receipt you got is probably not a cash receipt and you didn't do it right.
- Cash invoice/receipt - These can be issued online at esero.go.kr and a few other sites. The process of signing up is painful though. Don't even try it if you don't have Korean-language help or skills and an abundance of patience. Fortunately, the tax forms can be downloaded online and printed/filled out manually. However, the manually prepared form then must be registered in the tax service's system and if the online option is too much trouble and you aren't using an accounting/bookkeeping service, then, if you've only got a few, you might just take the hand-written forms down to the local tax office (by the end of the month - this is important!) and get an officer there to do it. Also, if you're paying cash at a business that does not have a terminal for issuing cash receipts, then you could ask for a tax receipt/invoice instead, though this is a hassle and may not be possible to get either.
- Credit card receipt - Once you've registered your business, you can then get a credit card from your bank (presumably, the one where you've set up your business bank account registered in your business number) and once that card is linked to your business number, whatever you purchase with the card will be automatically registered as a business expense in the tax office's system. (Of course, it's important to only run business expenses through this card.)
Keep in mind that just wiring money from your business bank account to someone else's account is NOT adequate evidence of a business transaction; a tax invoice/receipt is also required. Also, charging an online purchase to a cell phone for which monthly bills are linked to your business number and thus handled with a virtual tax invoice/receipt is also NOT enough to call it a business expense. You must get a tax receipt/invoice using your business number for each of these expenses, too.
Also, note that issuing a receipt in one of the above forms means that the sale is logged in the national tax administration's system and the seller is now responsible for taxes on the income. By demanding a proper receipt, you may be asked for another 10% to cover the value-added tax (VAT) which the seller will now have to pay. It's your decision whether to agree or not (keeping in mind that you can't call it a business expense if you don't), but because the transaction now adds to the seller's official sales, he/she will also face additional income tax implications. What this means is that if you've negotiated a great deal on a purchase that the seller thought he/she wouldn't have to pay taxes on, you may find the deal gone if you demand proper documentation, and just offering to pay the 10% VAT may not be enough to get your negotiated price back.
4. What do I do if I can't get an officially recognized receipt?
This situation happens frequently and appears to represent a gap in the Korean tax system design, which seems to be a continuous project in development. I would assume these holes will be plugged eventually. In the meantime...
- Transactions with individuals and very small companies unable to issue an official receipt - There is a class of small business (간이 사업자) which is not able to issue tax receipts. For example, when paying the real estate commissions after purchasing my current office, the real estate agent was unable to issue a tax statement. I paid cash and they gave me a hand-written receipt. Later, my accountant told me that I should have at least wired the money (계좌이체) as evidence, rather than hand over a large amount of cash like that, since it would at least be better evidence than nothing. In this case, my accountant said she'd work it out for me.
- Purchases from vending machines - I'm not talking here about buying a coke from a vending machine. Rather, when I recharge my transportation card, there's no way to get a cash receipt for the purchase (and sometimes I can't even get a regular receipt if the machine's out of paper). I write these purchases down in my books but I make sure to spend no more than W30,000 at a pop and hopefully my accountant is working it out.
- Paying rent - I rented an officetel for several years and the owner had no intention of issuing me an official receipt. My accountant seems to have worked it out by getting a copy of my lease contract and then verifying the monthly payments. However, when the owner of the officetel changed in the middle and when I was asked to send payments to someone other than the owner (both frequent "happenings" in Korea), it did cause my accountant some grief.
- Payments to non-profit organizations - I haven't figured this one out exactly either, but apparently some businesses are set up with tax benefits that then mean they don't issue tax invoices/receipts. This happened with the management of the officetel of my former office and they were only able to issue a tax receipt on a portion of my monthly rent (for some reason that I didn't understand). My wife is also not able to get a tax receipt for management fees of her coffee shop. Due to her business form (간이 사업자) it doesn't affect her, but some other establishments in the building get hit with higher taxes because of this.
Keep in mind that if wiring money for services based on a tax invoice/receipt, the recipient account must match the recipient name shown on the tax receipt/invoice. Again, I learned about this after a mistake... After paying for the remodeling of my new office and getting a tax invoice/receipt from the contractor, he then told me he wanted to cancel the first document and issue a new one in the name of another company he owns. I'm sure it had to do with his taxes, but it means that the receipient of the payment no longer matched the name on the receipt. My long-suffering acountant said she'd take care of this too, but to not make this mistake again (especially as it was a large amount of money).
5. What if an invidual pays me for business services? What are my receipt options if I don't take credit cards or have a cash receipt machine?
To individuals, there is apparently an unwritten threshhold around the W100,000-200,000 level for wire transfers that can somehow be finagled without a tax invoice/receipt if such transfers don't happen too often. However, if receiving payment from an individual, a tax receipt should, in principle, be issued using the person's resident registration number.
6. Why's it called a tax invoice/receipt? Which is it? An invoice? Or a receipt?
In Korean, it's a 세금계산서, or literally, "tax calculation statement". But in English, I've seen it most suitably described as a tax invoice/receipt. If you issue a tax invoice/receipt, you can use it as both an invoice and a receipt. Koreans are very loose on the sequence in which payment is made and the tax invoice/receipt is issued, but in principle, the tax invoice/receipt should be issued first and the payment made second. The problem is that by issuing the tax invoice/receipt, the transaction is entered into the tax authority's electronic system. So, if the tax invoice/receipt is issued and then payment isn't made (or a request is made to send the payment to an account other than one owned by the recipient entered into the tax receipt), then the tax invoice/receipt should be cancelled as soon as possible (and/or reissued). Dealing with this lag between issuance of the tax invoice/receipt and receipt of payment can be a huge hassle.
7. How do you handle business reimbursements to an individual?
Because of the need to get official receipts for every business expense, reimbursements are problematic. For example, suppose I ask someone to purchase materials for an event or tell a contractor to attend some education that I agree to reimburse later. In this case, they have to get a cash receipt or tax invoice/receipt made out to my company, not to them personally. Otherwise, they would then have to issue yet more documentation when I reimburse, something that an individual may not be prepared to do. But if not, there is no way to count it as a business expense.
This seems to comes into play from time-to-time when doing work for large organizations. On more than one occasion, I've done work for a Korean company who then, after delivery, told me one of their vendors would be paying the bill and to go contact them to exchange details so I can get paid. I've found this extra work to be quite irritating.
8. I use Quicken or QuickBooks. Any chance of finding an accounting service provider who can work with those files?
No, not unless you go through a service that caters to expats. I just print out my accounting records and send to the accountant each month. I don't think my previous bookkeeping service referred to the monthly records at all and just recreated my books from the official receipts, but I'm hoping my current accountant is making more of an effort to get it all in there for me.