Time to Reform Tax Exemptions for Small Direct Purchases with Major Benefits from AliExpress and Temu [Tax System, Let's Change This]

Certification and Tax Burdens Only for Domestic Products: "Reverse Discrimination"
Need to Reexamine Tax Exemption Benefits
United States and Europe Also Accelerate Abolition of Exemptions

There is renewed debate over the need to reexamine the tax exemption benefits for ultra-low-priced overseas direct purchase products, represented by platforms such as AliExpress and Temu. As major countries including the United States and those in Europe are also shifting toward imposing taxes on low-value direct purchase goods, calls to improve tax exemption regulations for overseas direct purchases are growing domestically as well.

According to relevant ministries on July 18, the Ministry of Economy and Finance has not been able to review the abolition of the current tax exemption system for low-value imported goods, which exempts customs duties and value-added tax for amounts up to $150 (or $200 for goods from the United States). The government appears to believe that reforming the exemption system remains at a disadvantage in terms of public opinion, especially since last year's regulatory measures on overseas direct purchases faced strong backlash.

The main measure was to ban direct purchases of products that had not received KC (safety certification), but it faced opposition for restricting consumer choice. At that time, the Ministry of Economy and Finance's plan to reform the tax exemption system was also scrapped. An official from the ministry stated, "Currently, we are only monitoring overseas trends," and added, "Because this is closely related to taxation on ordinary citizens, it is difficult to push forward easily." The official also said, "Since reforming the exemption system only requires changing the enforcement regulations, if we proceed, it will likely be necessary to delay the timing rather than revising the tax law itself."

According to current customs law, the tax exemption limit for overseas direct purchases per person is $150 (208,560 won). For goods purchased from the United States, the Korea-US Free Trade Agreement (FTA) allows tax exemption up to $200 (approximately 278,080 won). Arithmetically, if a person purchases $150 worth of goods every day for 365 days, they could buy up to $54,750 (about 7.61 million won) without paying taxes.

The government has been considering reform because the issue of tax fairness between domestic products and direct purchase products continues to persist. Low-value overseas direct purchase products are brought into the country without special import declarations and are exempt from customs duties and value-added tax. In contrast, domestic businesses must undergo procedures such as KC certification and pay value-added tax, raising concerns about diminished competitiveness. According to a survey conducted in March last year by the Korea Federation of SMEs targeting 320 small and medium-sized enterprises (manufacturing and wholesale/retail), 53.1% of affected SMEs cited "loss of price competitiveness due to excessive tax exemption benefits" as the main type of damage.

For this reason, there have been consistent calls both inside and outside the government to reform the exemption system. The exemption limit was raised from $120 to $150 in August 2015 and has been maintained for about a decade, during which time consumer demand for direct purchases has surged. With the influx of ultra-low-priced Chinese products, there are now concerns about the competitiveness of domestic manufacturing.

More Than Half of SMEs Hit by Loss of Competitiveness... Focus on Imposing VAT

Within the government, there is a prevailing view that, along with adjusting the exemption limit, the focus should be on imposing value-added tax even on ultra-low-priced goods. While customs duties involve different rates for each product and are somewhat complicated administratively, value-added tax can be applied uniformly at a rate of 10% regardless of product type, offering administrative convenience.

The trend of abolishing exemption systems for low-value direct purchase products is spreading among major countries. In most countries, customs duties are not imposed, but value-added tax is applied.

The European Union has been imposing value-added tax on all e-commerce imports since July 2021. The previous exemption for goods under 22 euros (about 35,500 won) was abolished. This year, the EU also plans to completely abolish the customs duty exemption for low-value parcels under 150 euros (about 242,385 won). Additionally, the EU is considering imposing two fixed fees per parcel on e-commerce platforms. The United Kingdom abolished tax exemption for low-value direct purchase goods under 135 pounds (about 252,078 won) in 2021.

In April of this year, President Donald Trump signed an executive order abolishing the "low-value tax exemption standard" that excluded Chinese imports under $800 (about 1.17 million won) from customs duties. China has also been collecting value-added tax on low-value direct purchase goods since 2016. Since 2018, Australia has required overseas platforms with annual sales exceeding 70 million won to register as businesses and pay value-added tax quarterly.