The Korean government is showing haphazard responses to the EU’s announcement which put Korea on a blacklist of areas uncooperative in the tax sector.
The Korean government believes that the EU decided to accept the results of the evaluation of harmful taxation systems of the Group of 20 Major Countries (G20) by the Organization for Economic Cooperation and Development (OECD) in February of this year but suddenly made its own independent evaluation list. In this process, the EU requested Korea to promise to abolish or improve its tax exemption system for foreign investments next year and Korea did not accept the request, saying that the OECD’s evaluation did not find any problems with Korea.
Bloomberg said on December 5 (local time) that 17 countries including Panama, Tunisia, UAE, Barbados, Macao, Palau and St. Lucia were listed on a draft of a blacklist of areas uncooperative in the tax sector to be discussed at the EU financial ministers’ meeting in Brussels of Belgium.
The EU is working on making a blacklist of uncooperative regions in the tax sector with the goal of finishing it by the end of this year after the International Consortium of Investigative Journalists (ICIJ) carried a report on large tax havens last month. The selection criteria are whether an area honors the EU's tax transparency standards and whether there are wrong tax practices in the area.
The EU’s draft included countries that caused “tax haven” controversy in the past. However, Korea has not been involved in the controversy, so a lot of attention is being paid to why Korea was included in the draft.
First, the Korean government showed its embarrassment. The Korean government said that the OECD is currently working on the BEPS project to preclude multinational companies from avoiding taxes. No problem was found in Korea in the evaluation of harmful tax systems by the OECD’s BEPS project.
The EU also said in February that it would accept the results of the OECD's evaluation of harmful tax systems with respect to multinational corporations' tax evasion problems. Korea predicted that the EU would accept relevant standards because there was no problem with Korea’s tax system in the OECD’s evaluation.
However, all of sudden, the EU did not accept the results of the OECD evaluation, but started its own evaluation. Then, the EU created the blacklist draft of regions uncooperative in the tax sector. The OECD limited subjects of its evaluation to the financial and service sectors but the EU even looked into the manufacturing industry.
The EU considers a Korean system that provides tax support to foreign investors investing in free economic zones and foreign investment areas a harmful tax system. This system gives breaks to corporate taxes levied on companies in such zones and areas. Under certain conditions, their corporate taxes will be cut 50% to 100% over five to seven years.
The EU regards three cases with low taxation or no taxation as harmful tax systems. The three are the provision of discriminatory tax benefits for domestic and international transactions, a lack of transparency in the system, and a lack of effective information exchanges about the system.
According to the government, since last year, the EU has proposed that Korea promise to abolish or improve the system next year. However, the Korea government said that the EU accepted the OECD evaluation criteria in February of this year and did not accept the proposal since the system had not raised any international issues.
"The OECD basically works on harmful tax systems and never raised a problem with Korea," said an official of the Korean Ministry of Strategy and Finance. "We judged that it was not in national interests to abolish or improve the system on the premise that the system considered not harmful internationally was harmful"
There is growing concern that the Korean government will not be able to devise proper countermeasures as the Korean government is not accurately grasping the intentions of the EU. The EU has not yet decided on sanctions levels against the countries on the list.