The tax authorities have interpreted that free option products provided by construction companies or unions to members during redevelopment or reconstruction projects are subject to a 10% value-added tax. These items were not taxed until now, but when inquiries arose from the industry, they stated, "Taxes must be paid." Because value-added taxes are levied on the transaction amounts, if an item is not exempt, it must be paid at each stage when a transaction occurs. This means that if a construction company purchases items from manufacturers of home appliances and supplies them again, it must pay the value-added tax again.
In the industry, it is common for the construction company in charge to provide home appliances such as TVs, built-in refrigerators, bidets, and system air conditioners in the apartments where members reside. Additionally, the finishes in the apartment building where members live may also be upgraded, such as using premium materials like solid wood flooring. These are offered as paid options to general buyers, costing up to about 20 million won per unit. Considering the 10% value-added tax rate, when constructing a large complex with more than 1,000 members, the tax alone could amount to several billion won.
According to the National Tax Service on the 27th, the value-added tax division of the National Tax Service sent a response noting that bidets, LED TVs, built-in refrigerators, and other items provided free of charge only to members in a housing unit for sale under a reconstruction maintenance project agreement signed with the construction company earlier this month are subject to value-added tax. This response interpreted Article 9 of the Value-Added Tax Act, which defines "supply of goods," and Article 14 of the same law, which defines "supply of ancillary goods and services."
In the response, the National Tax Service stated, "The bidets, LED TVs, built-in refrigerators, dishwashers, cooktops (gas and electric ranges), and other items provided free of charge by the construction company and union to members cannot be considered goods or services typically associated with the construction services of the national housing being built under the project," adding, "They are subject to value-added tax, and whether other non-listed items are normally related to the construction services of national housing exempt from tax should be assessed based on the actual circumstances."
A representative from the National Tax Service remarked, "We sent out a response stating that these are tax subjects in response to relevant inquiries earlier this month" and added, "It is difficult to find similar interpretation cases in the past. This will serve as a reference for future tax determinations."
The National Tax Service's interpretation this time is significant in clearly identifying the items that are exempt under the value-added tax law. Under current tax law, when supplying (selling) national housing units of 85㎡ or less per household, the supplier's value-added tax is exempt. Until now, the industry had arbitrarily judged that the exemptions provided for this scope of national housing included home appliances or premium finishing materials that were provided free of charge at the time of sale, resulting in no value-added tax being paid.
Lee Geon-du, head of tax accounting at Duram, explained, "This interpretation clarifies that ancillary options are not included in the exemptions for national housing under the value-added tax law."
The case interpreted by the National Tax Service this time is expected to have a significant impact on the construction industry. This is because various home appliances and premium finishing materials that had been offered free of charge to members have been sold as paid options to general buyers, with no taxes paid at all. The free options provided to members have been reflected in the construction costs.
An industry source noted, "They provided not only TVs and refrigerators but also premium finishes like solid wood flooring and window frames to members," adding, "These options can be worth hundreds of thousands to as much as 20 million won." Another source stated, "It is quite common to provide such options free of charge to members," noting that the types of options are usually determined during the negotiation process between the union and the construction company.
If additional value-added taxes must be borne, the construction costs could rise further. This is because large redevelopment and reconstruction projects with more than 1,000 members would see a tax increase of several billion won. In the case of District 4 in Hannam, where Samsung C&T was selected as the construction company, there are 1,153 members. If we assume that each member is assigned one unit and options worth 20 million won are provided, the value-added tax that should be reflected in the costs would be around 2.3 billion won.
One tax accountant stated, "Once the National Tax Service's interpretation has been officially sent out in written form, it cannot be reversed and serves as a kind of benchmark," adding, "This means that items provided free of charge to members that previously had no taxes will undoubtedly now be subject to taxation."