[Lee Jae-min] Oops, Korea labeled as tax haven

It was in 2013 that the EU designated Korea as an illegal, unreported and unregulated fishing country along with 11 other states, indicating a possible EU-wide sanction on Korean ships and fisheries products. The alerted government mobilized a yearlong campaign to persuade Brussels to delist Korea, and it was eventually taken off the list. Korea had its own problems of IUU fishing at that time, but so did many other countries. So, it was odd to see Korea on the list, the only industrialized state in the group. It is one thing to warn Korea to do better, but another to include the country in the worst group of the global fishing universe.

Now the EU has surprised Korea with another “list.” Brussels designated Korea on Dec. 5 as a tax haven -- a non-cooperative jurisdiction, to be precise -- together with 17 other states such as Barbados, Grenada and Panama. This latest categorization means Korea is allowing itself to be used by global businessmen and corporations as a tax avoidance conduit -- bad enough behavior to be condemned by other countries. Interestingly, this time again, Seoul is an odd member of the group. Korea is the only country of meaningful economic size on the list: in fact, it is the only one that is a member of the Organization for Economic Cooperation and Development states, and has concluded tax treaties with EU member states. It is all the more embarrassing that the EU itself has concluded a free trade agreement with a country it now regards as a bad actor in the global finance system.

It all started with South Korea’s administration of tax exemption and reduction law for foreign investors in the free economic zones. As the EU explains, preferential tax treatment in the zone is a magnet for possible tax evaders, so much so that the country should be included in the category of global tax havens. I have no desire to defend the government -- much less its tax law -- but this is a perplexing rationale, because this type of exemption is adopted by and available in many other states including some of the EU member states as well. If a tax exemption measure is branded as a tax avoidance facilitator, it should be so regardless of whether both foreigners and nationals receive it or only foreigners do -- the same incentive for foreign corporations. So, hard to fathom the logic.

The government, though belatedly, is now putting full-court press on Brussels to reverse the decision. Well, Korea may be taken off the list one way or another. But the damage has been done. As the tax system and larger economic policies are implicated here, the damage is far worse than the IUU wrangling several years ago.

From a wider perspective, it is a repetition of the IUU fishing listing and delisting. In both incidents, the government is to blame for clumsy handling of important matters. More active engagement with decision makers in Brussels should have taken place in advance. That said, speculation is that Korea has been inserted as an easy target to send a signal that new regulations do not necessarily target certain easily identifiable, developing states. South Korea is the “right size” of economy for such purposes, so goes the speculation. I believe the speculation is wrong. But proving it to be so would require some more plausible explanations from the listing authorities.

The EU’s general objective here is legitimate by any standard. Illegal tax avoidance in the global community is now calculated as $32 trillion per year. Combating it is one of the top priorities of any responsible government. Korea should be warned if it does not abide by its international obligations. Absolutely. Failure to live up to a global standard should render any listing all the more deserving. Elements of mistrust or opaqueness in the tax laws and regulations should be addressed quickly. Certainly. If, on the other hand, Korea has been made an example of to dilute an image that only vulnerable, small states are captured on the list, it is a different story.


By Lee Jae-min

Lee Jae-min is a professor of law at Seoul National University. He can be reached at jaemin@snu.ac.kr. -- Ed.