North Korean Economy Watch

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.

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