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Don’t kill the goose

Publication Date : 22-10-2012

 

North Korea has started to drop tax bombs on South Korean companies operating in the Gaeseong industrial complex in the North.

According to reports, Pyongyang has recently imposed corporate income and business taxes totalling US$160,000 on eight of the 123 South Korean companies in the complex.

Of the eight firms, one was slapped with $87,000 while another was levied $30,000. One company has already paid about $20,000 in taxes to the North.

Pyongyang has also told 21 companies to submit various documents including accounting books, a move seen as preparation for taxation.

The North imposed hefty taxes on the South Korean companies pursuant to a revised tax rule. Pyongyang amended the rule unilaterally in July, ignoring its own law governing the operation of the industrial complex. The law stipulates that the two sides consult with each other on matters related to its management.

The amended tax regulation allows the North to slap punitive fines retrospectively if a South Korean company is found to have fudged their accounting books. The fines could be as heavy as 200 times the income not recorded on books.

The North has reportedly threatened to ban the movement of goods and people in and out of the complex if the companies fail to pay the taxes or submit the required documents.

Pyongyang is also pressing the companies from the South to provide severance pay to North Korean employees who quit voluntarily.

Under the current agreement, South Korean firms are required to offer severance pay to North Korean employees only when they are involuntarily laid off for reasons related to the companies themselves.

According to reports, about 500 to 1,000 North Korean employees quit every year, citing personal reasons such as health and marriage.

The North’s latest moves might have been prompted by a shortage of hard currency. Pyongyang is in desperate need of dollars as it can no longer rely on such old sources of foreign exchange as arms sales due to the tight international sanctions against its missile launches and nuclear tests.

Yet it is foolish for the North to squeeze the South Korean companies in Gaeseong. These companies as a whole are now beginning to make a turnaround. They registered operating profits last year for the first time since the complex opened in 2004.

Under these circumstances, unbearably heavy taxes would only force them to consider relocating their plants. In fact, some companies are reported to be already planning to leave the Gaeseong complex as the North has begun to tighten the screws on them.

For the North, the Gaeseong complex is the goose that lays the golden eggs. But if it slaps punitively high taxes on South Korean companies, it could kill it.

Pyongyang leaders should withdraw the ill-advised tax policy. Otherwise, they would scare away South Korean companies. This is a folly the North can hardly afford.

What Pyongyang should do is to respect the inter-Korean agreement on the operation of the complex and follow international business norms. They also need to supply 18,000 new workers to the Korean companies to resolve their labor shortage.

 

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