N. Korea’s ‘tax bomb’

Keeping Gaeseong complex benefits both

The joint industrial complex in the North Korean border city of Gaeseong is the only pipeline linking the two Koreas due to their strained relations, especially since President Lee Myung-bak took office in February 2008.

The possible tinderbox for renewed inter-Korean relations after the December presidential election is facing the threat of being put out because North Korea has unilaterally slapped heavy taxes on South Korean firms operating there.

A South Korean official was quoted as saying by Yonhap News, Thursday, “The North imposed corporate income and businesses taxes on some of our companies operating in the complex under new tax enforcement regulations enacted in August.’’

About 10-20 out of the total 124 South Korean companies there ― mostly small- and medium-sized ones ― were reportedly taxed heavily with a garment manufacturer hit with a $100,000 “tax bomb.’’

As part of its efforts to extract taxes, the Stalinist state is allegedly threatening to restrict the movement of goods and personnel in and out of the complex unless taxes are paid.

North Korean employees at the complex also ask South Korean firms to provide severance pay even if employees quit voluntarily. Under the current labor terms, South Korean firms are obliged to offer severance pay only when North Korean employees are forced to quit after serving at least one year.

North Korea’s taxation move toward the complex is a serious matter since the taxes were levied, based not on a voluntary declaration by companies but on the North’s unilateral estimation of business activities. From last year through this year, four South Korean companies in the complex reportedly paid about $160,000 in corporate income tax under relevant rules.

True, the North’s August tax package already drew strong protests from the South Korean companies because it envisioned slapping fines of up to 200 times the money involved on those caught for accounting fraud. The package also dropped a clause stipulating the prohibition of retroactive taxation and made it mandatory for the companies to submit documents that could contain trade secrets.

Pyongyang’s latest move was taken as a desperate attempt to secure hard currency under the new leader Kim Jong-un, who is said to be giving top priority to improving people’s living standards.

North Korea’s mistrust in accounting transparency on the part of the Southern companies in the complex could be another reason. More than $200 million has been paid to North Korean workers ― currently nearly 53,000 ― in the form of wages and social insurance costs since 2004.

Most problematic is that there is no quick fix at the moment because of the lowest-ever ebb in the inter-Korean relationship. As the tax problem lingers, companies there will feel it increasingly difficult to do business normally and the long-term prospect for the Gaeseong complex will be darker. This will signify losses for both sides.

We urge the Seoul government to make its utmost effort to persuade Pyongyang so that the last remaining inter-Korean project will be kept intact. <The Korea Times>