NTS to foster foreign investor-friendly environment

The following was contributed by National Tax Service Deputy Commissioner Kim Moon-soo. ― Ed.


The size of foreign direct investment in 2010 was $13.1 billion, the largest amount since 2000. Although difficult to quantify, foreign investment certainly helped Korea overcome the 1997 economic crisis and achieve economic growth of 6.1 percent last year.

However, amid growing uncertainties in the global markets, the Korean economy expects difficulties in achieving this year’s FDI target of $15 billion. Affected by global financial instability, foreign investment in the third quarter is dropping sharply after a relatively strong year-on-year growth.

In times like these, when global companies begin to cut spending and investment regardless of how attractive a country is, Korea needs to be active in promoting itself by creating a business environment that is favorable to foreign investors.

The main role of the National Tax Service of Korea is to collect government revenue. However, it can play a major role in creating a foreign-business-friendly environment and consequently attracting foreign investment, by administering taxes in a fair and consistent manner.

There are many factors to consider when determining an investment destination, such as consumer purchasing power, geographical location, logistics, labor market flexibility and financial and commercial regulations, and tax is certainly a significant factor. According to the “Survey of difficulties faced by foreign-invested companies” conducted by the Korea International Trade Association, foreign companies cited tax as the most decisive factor after labor relations and the financial market.

Recently, however, the aspects of tax considered most critical in attracting foreign investment seems to have changed. Traditionally, most of the focus was on corporate income tax rate, corporate tax reductions for foreign invested companies, and other such tax benefits. Now, with the increased global emphasis on the transparent management of multinational enterprises, investors now place as much weight on how transparently and consistently taxes are administered.

In line with this change, the NTS has implemented various programs to help enhance the consistency and predictability of taxation.

First, the NTS provides advance rulings to taxpayers.

When a taxpayer makes an inquiry by providing accurate facts and circumstances of a transaction, the NTS provides a binding response. This is a useful tool available to foreign investors to obtain early certainty in tax matters.

Second, the NTS offers the Horizontal Compliance Program that enables taxpayers to settle tax issues with the NTS at an earlier stage on a comprehensive range of tax matters.

Under the Horizontal Compliance Program, the participating company discloses its tax issues and the NTS provides interpretation of the tax law and responses to other questions in a timely matter. It is a gentleman’s agreement whereby compliant companies have the benefit of being exempt from regular tax audits. The Program not only helps the taxpayer in removing tax uncertainties, but in sparing the burden of a tax audit.

Third, the NTS provides the Advance Pricing Agreement for foreign companies to help settle transfer pricing issues. The NTS has reduced the time it takes to conclude an APA so that early certainty is obtained by taxpayers.

Investing in a foreign country inherently carries greater uncertainties than investing in domestic markets, but the NTS continues to move toward creating credibility and reliability in its administrative area.

The NTS will continue to administer taxes pursuant to internationally-accepted standards so that foreign investors can carry on their business in a more transparent and consistent tax administrative environment.

By Kim Moon-soo, Deputy commissioner of the National Tax Service