INTRODUCTION TO THE E-TAX INVOICE SYSTEM

South Korea has long been recognized as a global leader in digital infrastructure and innovation. In the sphere of taxation and compliance, it has taken significant strides toward digital transformation, particularly through the implementation of a comprehensive e-invoicing system. The e-Tax invoice system has been instrumental in improving transparency, reducing tax evasion, and streamlining business processes.

This article explores the legal underpinnings, implementation timeline, technical requirements, benefits, and future outlook of e-invoicing in South Korea.

LEGAL FRAMEWORK AND REGULATORY FOUNDATIONS

The core legal basis for e-invoicing in South Korea lies in the Value-Added Tax Act (VAT Act) and the resultant Enforcement Decree, both of which are administered by the National Tax Service (NTS) and the South Korean tax office.

1. Value-Added Tax Act (VAT Act) regarding e-invoicing in South Korea

The VAT Act, most recently revised to accommodate evolving digital requirements, mandates the issuance and submission of electronic VAT invoices for all VAT-registered businesses exceeding certain revenue thresholds.

Key extracts include article 32(2) of the VAT Act, which requires VAT-registered suppliers to issue electronic tax invoices through the NTS portal or authorized service providers. The VAT Act also outlines that businesses must issue e-invoices within a specified timeframe (typically by the 10th day of the following month at the latest), although real-time issuances is encouraged.

2. Enforcement Decree of the VAT Act, enforcing compliance for the e-Tax invoice

The Enforcement Decree further details the requirements for data formatting, issuance deadlines, submission procedures, and penalties for non-compliance.

For instance, Article 68 mandates the use of digital signatures to ensure invoice authenticity, and Article 71 outlines penalties for late issuance or misreporting. These penalties are typically calculated as a percentage of the supply price, as follows:

• 2% for unissued tax invoices.
• 1% for non-transmission or delayed transmission.
• 0.5% for late transmission beyond the VAT period deadlines

TIMELINE OF IMPLEMENTATION OF THE SOUTH KOREAN E-INVOICE

South Korea was one of the earliest adopters of mandatory e-invoicing among OECD countries. South Korea introduced mandatory electronic tax invoicing for all corporate taxpayers in 2011. The thresholds for individual businesses have been adjusted over time, as follows:

• 2012: Mandatory for individual businesses with annual sales over KRW 1 billion.
• 2014: Threshold lowered to KRW 300 million.
• July 2022: Further reduced to KRW 200 million.
• July 2023: Lowered to KRW 100 million.
• July 2024: Reduction to KRW 80 million.

This progressive rollout is helping businesses gradually transition while allowing the government to fine-tune the system over time.

HOW THE SOUTH KOREAN E-INVOICING SYSTEM WORKS

South Korea's e-invoicing model is a clearance, centralised-exchange model. This means that all invoices must be submitted to the National Tax Service either directly or through certified intermediaries before or immediately after issuance, with some exceptions based on VAT regulations. Here's how it works:

1. Invoice Generation
   Businesses generate invoices using their Enterprise Resource Planning (ERP) systems or through one of the approved software providers.
2. Digital Signature
   Every e-invoice must include a digital signature issued by a government-authorized body. This ensures legal validity and prevents tampering. Businesses can obtain digital certificates from authorized certification authorities, including the Korea Information Certificate Authority (KICA) or the NTS.
3. Transmission to the NTS
   The e-invoice is sent to the National Tax Service either directly via the NTS e-Tax system, or through an authorized Electronic Tax Invoice Service Provider (ETISP).
4. Delivery to Buyer
   The buyer receives the validated e-invoice, typically via their own ERP or accounting system, synced with the NTS or with an approve software provider.
5. Storage and Audit Trail
   Both parties are required to store the invoice digitally for at least five years. The NTS also keeps records for audits and data analysis.

TECHNICAL AND COMPLIANCE REQUIREMENTS

South Korean businesses must ensure the following for compliance:

• They must hold a digital certificate/signature issued by an authorized certification authority, which will be used to sign each electronic invoice.
• Invoices must be in XML format and adhere to the correct XML schema specified by the NTS. Approved software providers must be able to generate invoices in this format.
• Invoices must be time-stamped to validate issuance dates, and for audit trail and archiving purposes.
• A unique approval number from the NTS must be included. This is obtained during the clearance process of the invoice, before it is made available for the recipient.
• Businesses must maintain digital audit logs of issued and received invoices, as well as archive the invoices in a compliant manner.

To ensure compliance with the above, service providers must pass stringent technical and cybersecurity checks before receiving accreditation. These are not required for direct users but they will remain liable to ensure compliance with all of these requirements.

WHO MUST COMPLY WITH ISSUANCE OF THE SOUTH KOREA E-TAX INVOICE?

The requirement to issue e-invoices applies to all domestic transactions for corporate taxpayers, regardless of size. Sole proprietors/entrepreneurs with annual revenue exceeding KRW 80 million (around EUR 50,000). Finally, Foreign entities with VAT registrations in South Korea and operating through a fixed place of business in Korea must also comply.

Failure to comply may result in fines of up to KRW 10 million per instance, disallowance of input VAT deductions, and the increased likelihood of tax audits.

BENEFITS OF THE SOUTH KOREAN E-TAX SYSTEM

The country's electronic tax invoice system and digital tax infrastructure has delivered several tangible benefits for the country and its economy:

1. Increased Tax Compliance

Automated, real-time reporting to the NTS significantly reduces under-reporting and fraud. The tax gap between expected and collected VAT has narrowed substantially.

2. Efficiency Gains 

Businesses report reduced invoice processing times by up to 70%, improved reconciliation, and faster payments and refunds.

3. Transparency and Auditability

All transactions are digitally traceable, with minimal room for manipulation. This improves investor and partner confidence, as well as access to reliable data.

4. Environmental Sustainability

Digital invoicing has reduced paper consumption by millions of pages per year, aligning with South Korea’s green policy goals.

CHALLENGES AND CRITICISMS OF E-INVOICING IN SOUTH KOREA

Despite its success, the system has not been without criticisms. The initial cost of compliance has been high, especially for small businesses and sole proprietors who have faced challenges in adapting due to the cost of new systems and digital certificates. And, while rarer now, system downtime has been experienced, which can significantly disrupt business processes. However, the use of an experienced and cost-effective approved software provider can significantly reduce the challenges experienced, and ensure compliance and business continuity without hassle.

COMPARISONS WITH GLOBAL SYSTEMS

South Korea’s e-invoicing model bears similarities to those of Italy and Romania, among other centralised clearance models. However, the Korean e-Tax system stands out for its long-standing maturity, high compliance rate, and deeply integrated digital ecosystem.

REGULATORY UPDATES AND THE ROAD AHEAD

The Korean government continues to evolve the system, with recent initiatives including integration with e-Accounting requirements and linking e-invoices to full financial reporting. Discussions are also ongoing with countries like Vietnam and Indonesia to mutually recognise each other’s frameworks and allow for the possibility of regulated cross-border e-invoicing. Finally, although not directly raised yet, the possibility of AI-based fraud detection and the use of blockchain technology to secure invoice data is always on the horizon once e-invoicing systems have been introduced. Finally, the Ministry of Economy and Finance is exploring how data analytics from e-invoices can shape and drive macroeconomic policy and tax reform.

PRACTICAL ADVICE FOR BUSINESSES FOR E-INVOICING COMPLIANCE

To ensure compliance and maximize benefits, businesses should:

1. Select a robust and experienced Certified Provider to ensure seamless integration with the NTS with minimal disruption to business processes.
2. Educate Internal Teams, especially finance, tax and IT personnel, on technical and regulatory requirements, deadlines, and security.
3. Automate Where Possible, use integrated ERP tools to reduce manual errors and achieve true real-time e-invoicing to ensure compliance.
4. Stay Updated with regulatory and technical specifications, which may change annually.

Selecting the right partner with the necessary accreditation, experience and knowledge will vastly improve the likelihood of achieving these goals and maximising compliance.

CONCLUSION

South Korea’s e-invoicing system is a hallmark of digital governance. By mandating real-time invoice clearance through a centralized tax authority, the country has created a robust, efficient, and transparent fiscal ecosystem. While challenges remain, particularly for SMEs, the overall benefits for businesses as well as the country, are undeniable.

Finance professionals and tax technologists can look to South Korea as a model of mature implementation. With global momentum behind e-invoicing, understanding the Korean system provides critical insight into future trends in international tax digitization. At eezi, Powered by VATIT, we have the experience and know-how to guide you down the road to compliance. Contact us to learn more!