Taxes and Kaesong

Last week Yonhap reported that for the first time a South Korean company operating in the Kaesong Industrial Complex (KIC) paid taxes to North Korea.  Last year a firm reportedly paid $7,000 in corporate income taxes, and this year the unnamed firm and three others paid $153,000 in taxes to the North for profits booked in fiscal year 2011. South Korean companies at the KIC are subject to a 10-14 percent corporate income tax, but are exempt for the first five years of profitability, and in the next three years are assessed at half the normal rate.

The spin from the Ministry of Unification was that the payment was made at all documented the sustainability of operations at KIC. Fair point, though recent survey-based research suggests that South Korean business in the North, including in Kaesong, is highly dependent on implicit subsidies created by South Korean public policy.  In effect, the tax payments, which are admittedly minimal, may represent a transfer from the South Korean taxpayer to the government of North Korea.