Nonsense in Kaesong

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Nonsense in Kaesong

A safe investment environment is essential to successful business. No businessman will invest if regulations on taxes change overnight. North Korea must keep that in mind if it wants to attract foreign capital.

Quite the opposite, however, is happening in the Kaesong Industrial Complex in the North. Pyongyang has imposed outrageously punitive taxes on South Korean companies doing business there for missed reporting of revenues - as high as 200 times the unreported amount and even retroactively applying those rates as far back as eight years. No companies would do business in such a hostile business environment.

It all began in August, with North Korea’s unilateral decision to revise detailed rules for operations of South Korean companies. It called for fines of up to a maximum of 200 times the unreported revenues, scrapping of a ban on retroactive taxation, a demand for more detailed documentation of purchases of raw materials and more accounting. Based on the new rules, North Korea allegedly levied as much as $100,000 in extra taxes on 19 companies, or 16 percent of all the 123 companies in the complex, not to mention a threat to limit the shipping in or out of resources if they violate the new guidelines.

Most likely, North Korea took its action out of suspicions that some companies evaded taxes by manipulating their accounts. That’s not only an outright violation of the laws of the complex, but also a negation of the basic spirit of the agreement on inter-Korean investments. Despite our officials’ request for consultations to discuss the matter, North Korea refused, saying taxation is their jurisdiction.

The North held four briefing sessions in China to attract foreign investments last month, probably aimed at luring capital to three special economic zones - Hwanggumpyong, the Rason Economic Zone and Wihwa Island - to improve its people’s lives. We cannot help but question what is behind its retrogressive actions in Kaesong. If Pyongyang really needs foreign investment, it must back down and respect international law.

The industrial complex where 52,880 North Koreans are working is a golden goose. It contributed $245 million to the North’s state coffers. If the North intends to earn more money by taking advantage of a power transition period in the South, it’s being penny-wise and pound-foolish. Seoul must strongly demand Pyongyang withdraw its latest actions. We hope our companies, too, demonstrate a concerted response, even a willingness to walk away from Kaesong in a worst-case scenario.
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