Pyongyang targets Kaesong Zone for more revenues

UPDATE 2 (2012-10-18): Yonhap and the Korean Times pass along details of the tax increases in the Kaesong Zone:

North Korea has unilaterally imposed hefty taxes on South Korean firms operating in the joint Gaeseong inter-Korean industrial complex in the North while employees there are demanding the firms provide more severance pay, a Seoul government official said Thursday.

“The North imposed the taxes including corporate income and business taxes on some of the companies operating in the Gaeseong complex in accordance with a new tax enforcement regulation (enacted) and delivered by the North last August,” the official said.

The imposed taxes were unilaterally drawn based on the North’s estimation of business activities by the South Korean firms, according to the official. About 10-20 firms out of the total 123 South Korean firms operating in the complex located in the North Korean border city of Gaeseong were reportedly slapped with the heavy taxes.

The amount of taxes imposed and whether the firms paid them are not clearly known, but some of the companies are said to have paid the taxes amid increasing pressure from the North.

The North unilaterally issued the new tax regulations in August, which also allow the country to levy heavy fines if a South Korean firm is found to have accounting irregularities. The regulations allow fines as heavy as 200 times the amount involved in potential accounting fraud by South Korean firms.

As part of efforts to extract taxes, the North is reportedly threatening a ban on the movement of goods and people in and out of the complex if the taxes are not paid, other sources said.

South Korean firms there are protesting the levies, saying “they may thwart normal corporate activities,” but the North may not budge on the decision, they said.

In addition, North Korean employees at the Gaeseong complex are demanding that South Korean firms provide severance pay even if employees voluntarily quit.

Under the current labor terms in Kaesong, South Korean firms are required to offer severance pay only when North Korean employees are involuntarily laid off after at least one full year of employment.

As of end-August, a total of 52,881 North Korean workers were employed by South Korean firms operating in the Gaeseong complex. About 500 to 1,000 employees leave South Korean employers every year, citing health reasons or marriage.

Meanwhile, the South Korean firms continued to register an annual net loss from their operations in the Kaesong complex, the Unification Ministry handling inter-Korean issues said. The combined net loss of 119 firms out of the total 123 stood at 14 million won ($12,681) in 2011, decreasing from net losses of 134 million won and 272 million recorded in 2010 and 2009, respectively, according to the ministry.

Nearly 37 percent of the 119 firms surveyed by the ministry said they feel the North’s interference with their corporate activities is severe, the ministry said. Inability in hiring or firing North Korean workers is the most frequently cited complaint among the 119 firms polled, followed by difficulties in Internet connection and a shortage of North Korean labor.

Read previous posts on this topic below.

UPDATE 1 (2012-9-21): North Korea to Impose Tax Penalties in Kaesong Industrial Complex. According to the Institute for Far Eastern Studies (IFES)

It is confirmed that North Korea will begin to impose tax penalties on companies in the Kaesong Industrial Complex (KIC) that report false accounting information.

In early August, North Korea notified the Kaesong Industrial District Management Committee (KIDMAC) about amendments to the taxation codes, and plans to heavily fine companies for tax fraud.

According to the current tax regulations for the Kaesong Industrial Complex, manufacturing companies must pay 14 percent in corporate income tax. However, companies are provided income tax exemption for five years after accumulating profit, which is reduced to half for the following three years. For the past years, only four companies have paid about 160,000 USD in taxes.

Out of the 123 companies in KIC, only four companies have paid taxes and North Korea began to suspect others of false accounting and manipulation.

North Korea’s suspicion began to grow as South Korea-based companies brought raw and subsidiary materials into the complex, reporting them at a higher price and setting the prices of final products lower when shipping products back to the South.

No fines have been imposed yet since the announcement of the revisions. Nevertheless, there will certainly be more pressure placed on the companies for taxes.

However, there are also problems with the details of the revisions submitted by the North. North Korea’s tax authorities reserved the right to estimate the unit prices of raw and subsidiary materials for taxation and tax adjustments. This will become problematic as irregular taxation can occur based on insufficient evidence. The companies will be required to submit more documents to fulfill the new tax requirements.

The KIC has grown considerably in appearance since it first opened its doors in 2004. Annual production volume in 2005 at 14.91 million USD burgeoned to 400 million USD last year. According to unidentified personnel at the KIC, “North Korea has misunderstood few things about the KIC and its accomplishments. Given that North Korean workers’ wages increased and the production efficiency, there are many companies that still have not reached the break-even point, with investment not exceeding the losses.” He added, “North’s recent move to impose tax fines will decrease the investment value of the complex and could impede the future development.”

Although there is a need for companies in the KIC to increase transparency in their accounting, South Korean authorities have expressed the concerns of South Korean companies to the North via KIDMAC, as opinions of the resident companies should be considered in the process of revising the tax regulations.

ORIGINAL POST (2012-9-20): According to Yonhap:

Representatives of South Korean companies running businesses in North Korea’s Kaesong industrial park have submitted a letter of protest to Pyongyang over its recent move to jack up fines for accounting fraud, a park official said Thursday.

Last month, North Korea announced its revised rules about taxation on firms in the joint park, which stipulate that those caught for accounting fraud face a fine of up to 200 times the money involved.

“Several representatives visited Kaesong yesterday and conveyed a letter to the North Korean authorities to lay claims that such rules are excessive,” the Kaesong park official said. “Most of the companies’ chiefs there put signatures on the document,” he added.

It marks the first time that the companies in the industrial park have appealed to Pyongyang over the unfairness of the new rules.

In the document, the companies called on the North to introduce a grace period before pushing for such tax regulations, expressing concerns that they could stifle the industrial park, according to the official.

“We also pointed out that the rules run counter to the international taxation criteria as well as its own relevant pieces of legislation,” the official said.

According to the law, the firms are also obliged to submit internal documents about transactions and other business on a daily basis, and they will be levied additional taxes in case they submit tax-related documents “deemed unclear.”

“The rule means we have to expose our business secrets, which is hard to accept,” the official added.

As of the end of June, 51,310 North Koreans work at about 123 labor-intensive South Korean plants there, according to government data.

Read the full story here:
Kaesong park firms protest against N. Korea’s fine raise
Yonhap
2012-9-20

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  • Mike

    Ahh, complaining about internet access in North Korea. What did they expect? :)

    Though I must say I’m surprised by that complaint as I actually figured South Korean businesses operating in Kaesong were using internet just as they would at home as a matter of course – obviously not the local workers but the businesspeople commuting from South Korea. I guess that was a bit naive.