By Cho Jin-seo
Staff Reporter
The government plans to extend corporate tax exemptions for foreign-invested companies in six Free Economic Zones (FEZs) to five years from the current three years, from as early as next year.
The plan was proposed by the Ministry of Knowledge Economy to President Lee Myung-bak on Friday to encourage foreign direct investment (FDI) in the special industrial and trade zones. The zones were launched in 2004 but their development has been falling behind initial expectation, officials said.
The ministry is to submit the revised bill to the regular session of the National Assembly this September. It hopes the proposed law will come into effect from next year, Kim Bong-jun of the Free Economic Zone Planning Office told The Korea Times.
``Many citizens feel that the FEZ project is getting protracted five years after its launching. We hope this incentive plan will boost the project's development,'' he said.
In general, firms operating in South Korea are subject to pay 25 percent of their annual income as corporate tax. Foreign firms in the FEZs have been offered three-year exemptions and two years at 50-percent of the normal rate. According to the revised plan, the exemption period will extend to five years with two years of partial taxes to follow.
To qualify for the tax exemption, a business should have more than 10 percent of its capital come from a single foreign investor ― a clause that effectively blocks Korean conglomerates from the benefit, Kim said.
The government designated three FEZs in 2004 and another three this April, hoping they would make South Korea a manufacturing and trade hub for the Northeast Asia region, covering China, Japan, Taiwan and Hong Kong. But their development has been less than satisfying. According to government statistics, these areas saw some $1.2 billion of foreign investment until September 2007, about 2.5 percent of the FDI South Korea drew during the period.
The nature of the project has drawn other criticisms from in and out of Korea. Local businesses and media have complained that the policy discriminates against Korean businesses.
At the same time, many foreign investors and consultants have suggested that it would be better for Korea to lower regulations and raise the living standards for foreign nationals in South Korea as a whole, not only in a few special zones away from Seoul.
Nonetheless, the government is determined to facilitate the FEZ project. Friday's incentive package included other benefits, such as deregulation on international schools and research institutions.
According to the proposal, international schools will be allowed to accept Korean students who have lived for more than five years overseas. Currently, the law prohibits the portion of Korean students in foreign schools to under 2 percent.
The FEZ office also said it will try to shorten the registration process of foreign businesses from the current 12 months on average to between three and five months.
``The FEZs are in the developmental stage, and we need to speed this up and shorten the registration process to encourage foreign investment,'' said Yang Byung-nae, manager of presidential council on national competitiveness, a presidential advisory group.
Among the six zones, those in the prospering port towns of Busan, Incheon and Gwangyang are quite popular among investors, while smaller ports such as Pyeongtaek, Gunsan and the inland town of Daegu have received less attention, Kim said.
indizio@koreatimes.co.kr