By Kim Sang-jun
A sharing economy is an economy based on products and services being shared and used by several people. Specifically, it means that a person with sufficient goods, production facilities and services can rent them out to others, thus constituting shared consumption.
Some top successful U.S. companies in the sharing economy include Airbnb (home and room rental service for travelers), DogVacay (network of pet sitters at home), RelayRides and Getaround (car rental service), Lyft (ride-hailing service), Liquid (bike rental service), and Fon (global WiFi network).
In Korea, services for the sharing economy such as accommodation, ride-hailing and office sharing are being introduced, and many Koreans registered with Airbnb rent out their houses to others in return for payment.
In these circumstances, the following issues arise in connection with the sharing economy structure: i) if a person rents out his/her house on Airbnb and receives lodging charges in return, should he/she pay tax on that income?; and ii) if so, what kind of tax will be imposed?
The Value-Added Tax Act of Korea stipulates: an entrepreneur is defined as a person who supplies goods or services independently for business and shall be liable to pay value-added tax. As an act of allowing customers to use facilities is classified as the provision of services, value-added tax shall be imposed on such a service. An entrepreneur starting a new business shall file an application for business registration with the tax office within 20 days from the commencement of such activities.
On the other hand, according to the Income Tax Act of Korea, income generated from an accommodation business shall be classified as business income, which shall be taxable.
Given the above tax laws, if a person who rents out their house to others through the sharing economy structure earns income, they shall be deemed to be an entrepreneur supplying rental services independently and shall thus file an application for business registration with the relevant tax office within 20 days from the commencement of services.
In this case, the accommodation provider shall i) collect value-added tax from customers (10 percent of the accommodation charge) and report and pay it to the taxation authorities, and ii) aggregate income from the accommodation business with other forms of income to pay income tax and local income tax.
However, if the rental income earned in one year does not exceed KRW 24 million, the entrepreneur may be exempt from value-added tax, and if the house is in a designated farming or fishing village and the rental income is KRW 30 million or less per annum, such income shall be deemed as a farmhouse’s supplemental income, exempt from income tax.
What if a person running a lodging business with his/her own house has not filed an application for business registration, or has failed to report or pay value-added tax or income tax? The tax laws stipulate that an additional burden, such as penalty taxes, shall be imposed.
Official statistical data are yet to be established to show that people engaging in a house rental business on Airbnb are, or have been, paying taxes on their rental income in good faith. Only several news articles indicate complaints against some entrepreneurs who are running such businesses in the sharing economy for taking no measures required for business registration or tax returns. Every income entails taxes at all times. This is the truth that applies even to the sharing economy, with no exception.