Questions are being raised about the relevance and effects of extensive tax breaks given to foreign-invested companies in the country.

Critics say a wide range of tax benefits for foreign-invested enterprises have done little to help spur the Korean economy in recent years, causing local firms to be subject to what they call reverse discrimination.


At a public hearing hosted by the Korea Institute of Public Finance in Seoul last week, participants called for changes in the current system of providing tax breaks for foreign-invested companies.

Ahn Jong-seok, a researcher from the state-funded institute, proposed reworking the scheme in accordance to the principles of “selection and concentration.”

Under the system introduced in the 1980s, foreign-invested enterprises engaged in areas that use high-level technologies and provide industrial support services are entitled to a broad scope of tax benefits if the amount of investment exceeds a certain level.

Such companies are exempted from all corporate, income, acquisition and property taxes for the first five years of operations and are given a 50 percent cut in levies for an additional two years. In 2014, foreign-invested firms received tax breaks worth 123.3 billion won ($106 million).

Experts say the system put in practice decades ago to facilitate foreign investment in high-tech sectors has become out of mode as it remains inflexible and hasn’t adjusted to changes in the country’s industrial conditions.

Tax benefits have been given to a small portion of foreign-invested companies. In 2014, less than 1 percent of them benefited from the system.

It is called into question whether the 600 or so business areas entitled to tax breaks have been chosen properly to meet the economic needs of the country, experts say.

They also note the system has discouraged local enterprises from increasing investment by discriminating them against foreign-invested companies engaged in similar fields.

“No other country has a differentiated tax support system that applies only to foreign investors,” said Ahn.

With the amount of investment serving as a major standard for receiving tax benefits, the current system is also limited in inducing more foreign investment to be channeled into fields that may help increase employment and enhance research and development.

Many experts share the view that it is necessary to provide tax benefits for more narrowly selected foreign-invested firms that can make more substantial contribution to satisfying the country’s economic needs.

An official at the Ministry of Strategy and Finance said the government would consider reflecting proposals on improving the tax break system for foreign-invested companies in working out the tax code revision to be put into practice next year.

The ministry is particularly giving a positive consideration to offering new or more tax benefits to those enterprises that create more jobs or invest more in research and development.

The government may also need to pay heed to concerns raised by foreign-invested companies and foreign investors regarding the country’s tax regime, particularly the enforcement of tax compliance through tax investigations.

Foreign businesses still cite Korea’s tax laws as part of its complex regulatory system that makes it a difficult place to do business.

Korea may feel less need to attract foreign investment as it has a growing sum of surplus capital. But experts note the country should continue to step up efforts to draw foreign investment in a way to help boost exports, advance industrial structure and increase employment.

New foreign direct investment pledged to Korea climbed by 19.3 percent from a year earlier to $4.24 billion in the first quarter of this year mainly due to a sharp rise in investment from the EU and China, according to data from the Ministry of Trade, Industry and Energy.

New FDI pledges from the EU and China surged more than fourfold and sixfold to $1.76 billion and $375 million, respectively, during the cited period.

In contrast, U.S. investment dropped by 56.2 percent to $549 million and that of Japan decreased by 44.4 percent to $161 million.

New FDI pledges in the country’s manufacturing sector soared by 226.1 percent on-year to $1.26 billion during the January-March period of the year, while those in its service sector declined by 0.6 percent to $2.95 billion.

Experts say drastic deregulation needs to be coupled with an improvement in the tax break system to ensure a continuous flow of foreign investment amid increasingly versatile global economic conditions.

By Kim Kyung-ho (khkim@heraldcorp.com)