North Korea recently declared that if companies operating in the Kaesong Industrial Complex fail to file accurate taxes they are to be heavily penalized.
According to the Ministry of Unification, North Korea notified the Kaesong Industrial Complex Management Committee about revisions to the taxation code at the beginning of last month. Asked why the North made the move, one South Korean government official hypothesized, “The North seems to have some doubts about those companies they didn’t gain from.” In other words, North Korea suspects that there is false accounting occurring in the complex.
According to the existing tax regulations, manufacturers in the complex pay 14% corporate income tax. However, they are exempt for five years after first turning a profit, and then pay tax at a reduced 50% rate for the next three years.
Despite the fact that the complex was launched almost ten years ago, a sum total of just four companies have paid a total of just $160,000 in tax over the last two years. North Korea views such low tax receipts as suspicious given that there are now 123 companies operating in the zone.
There are suspicions, however, that North Korea’s main goal is to extract maximum benefit from the complex rather than addressing tax avoidance issues. Certainly, the North has put financial pressure on South Korean companies in the past, for example by refusing to allow workers to work if wages are overdue or imposing a $10,000 fine if roads get damaged.