Reporter's Notebook Should Korea be hostile to foreign businesses?

EU's listing of Korea as tax haven comes as big surprise

By Park Jae-hyuk

The European Union’s latest publication of the list of 17 non-cooperative tax jurisdictions must come as a surprise to foreign enterprises that have complained about difficulties doing business in Korea.

According to the Ministry of Strategy and Finance, Wednesday, the EU regarded Korea’s tax benefits to foreign businesses investing in free economic zones and foreign investment zones as a kind of preferential tax regime, which means it is wrong to offer more benefits to foreign companies than Korean ones.

The EU’s claim is utterly opposed to what foreign businesspeople have long complained of ― the Korean government implementing discriminatory policies that give preferential treatment to domestic businesses.

The European Chamber of Commerce in Korea’s (ECCK) White Paper released last month also includes such complaints. The ECCK demanded the Korean government remove discriminatory policies in favor of homegrown businesses and amend laws not meeting business standards of foreign companies.

For example, its logistics and transport committee requested the government to allow goods carried into the free trade zones to be re-imported to the country without value-added tax. Also, its taxation working group wants small foreign-invested companies to be exempt from the requirement of submitting a country-by-country report.

At a meeting in October between the American Chamber of Commerce in Korea (AMCHAM) and Lee Yong-sup, the vice chairman of the Presidential Committee on Job Creation, chief executives of foreign-invested companies recommended Korea learn from Singapore, which attracts foreign companies with lower corporate income tax rates and various tax benefits.

Against this backdrop, Trade Minister Paik Un-gyu recently promised to provide foreign enterprises with three incentives: tax reductions, financial support and land. He may struggle to keep his promise, following the EU’s recent decision.

Although the Korean government expressed deep regret over the EU’s decision and Finance Minister Kim Dong-yeon belittled it, the country is expected to be pressed to reduce benefits to foreign companies, so it can be delisted from the 17 nations. The global market has already reacted to the decision, depreciating the Korean won against the U.S. dollar.

As the government said, it seems the EU’s recent announcement violates Korea’s sovereignty over taxation, going against OECD standards and international consensus. It has been usual for many countries to offer tax benefits as incentives to attract foreign investors.

However, it is also true that foreign companies have been treated preferentially in Korea.

Global tech giants, such as Google, Apple and Cisco, have been accused of attempting to avoid taxes here, although they deny such claims. Chanel, Louis Vuitton and other international luxury brands have faced similar criticisms, given that they have kept their business performances in Korea a secret. Plus, domestic breweries have argued they suffer discrimination in favor of imported beer brands in terms of tax rates.

Industry officials advised the government to focus on eliminating its unique regulations out of step with global standards and guaranteeing labor market flexibility, instead of offering tax benefits. They say foreign entrepreneurs cite high wages and an inflexible employment system as the biggest reasons for avoiding investing in Korea.

Considering these, Korea does not have to be unfriendly toward foreign companies to get off the tax haven list. The nation just needs to offer fair opportunities and benefits to both Korean and foreign businesses.