Park Yun-jun serves as assistant commissioner for the National Tax Service.

By Park Yun-jun

Last year, Korea marked its highest level in foreign direct investments in a decade, close to $12.8 billion, despite North Korean attacks against the South Korean frigate Cheonan and the recent shelling of Yeonpyeong Island.

Breaking the $10 billion-level of the last half decade, 2010 was a watershed year for Korea where foreign direct investment began to expand in earnest, even amid a global trend of a decline in foreign direct investments.

In addition, Korea’s hosting the fifth G20 summit in 2010 was certainly an opportunity to show solid fundamentals of its economy which overcame the global tides of economic crisis twice.

Korean corporations in the global market have also played a remarkable part. Time (November 15, 2010) recognized Korea as “an innovator, an economy that doesn’t just make stuff, but designs and develops products, infuses them with the latest technology, and then brands and markets them worldwide with style and smarts.”

Based on Korean prestige in the global market and trust of foreign investors, an upward trend is expected for incoming foreign capital to Korea.

Then what should be considered to attract foreign investors?

For potential investors seeking to enter Asian markets, Asia’s abundant offering of advanced technology, relatively cheap labor and high economic growth rates are appealing.

However, before making an investment decision, investors would be prudent to include in their due diligence, a country’s tax environment applied to foreign investment.

Nevertheless, viewpoints on taxation as an incentive for foreign investments have changed considerably.

Whereas tax incentives in the past were about alleviation of tax burden, such as the reduction of the corporate tax rate or deduction of the corporate tax of foreign invested corporations, tax authorities are placing less emphasis on tax incentives as they realize that giving tax incentives to foreign investors does not necessarily result in tangible investment effects but revenue loss to investment-inviting countries.

It is often the case that an inviting country’s tax cut effect offsets the course of setting taxes in their home country.

What is more important now with regard to tax matters when deciding on foreign investment is not how much benefit investors gain, but predictability in taxation. Investors need to check not only tax rates and tax incentives that inviting countries of their choice offer but also how transparently taxation is administered.

The National Tax Service of Korea (NTS) provides the “Advance Ruling” service. Advance rulings are basically a tax office’s answer carrying legally binding force to a business’ question on a specific transaction, provided that the business presents an accurate sets of facts and circumstances, with which investors can expect to remove uncertainty in their tax positions.

Since its introduction in 2008 until 2010, the NTS issued 384 rulings, with a taxpayer’s satisfaction rate of 91 percent.

Whereas advance rulings are services where taxpayers can receive binding answers on a specific issue, investors also need to make sure the tax authorities make themselves available to indicate their position on comprehensive tax matters.

Korea’s Horizontal Compliance Program would be a good example. The NTS has signed Compliance Horizontal Compliance Agreements with 70 companies and ten of them are foreign corporations.

Under the program, participants have meetings, regularly and on-request, with a dedicated tax unit of the competent regional tax office to discuss business transactions where they can receive an expedited interpretation of the tax law.

From a business side, the program is like having the most reliable tax consultants. A company compliant with the agreement can also expect exemption from periodic tax audits. Thus, the program is an effective means for investors to remove uncertainty over tax.

It is often that a company investing in an unfamiliar territory inevitably meets unforeseen losses if thorough preparations are not made before investment decisions.

The NTS is doing its best to assure its taxpayers greater certainty in tax treatment. Investors would be surprised to find out how many of the unpleasant surprises they might have encountered are minimalized in Korea.

Park Yun-jun serves as assistant commissioner for the National Tax Service.