South Korean FDI Declines Sharply Amid Tax Probes

by Mary Swire, Tax-News.com, Hong Kong

07 July 2005

A sharp drop in foreign direct investment in South Korea has been blamed on a marked deterioration in the country's business climate caused by the reduction of a tax break and ongoing investigations into the tax affairs of numerous foreign firms.

According to the Ministry of Commerce, FDI in South Korea fell by 25% in the second quarter, the largest drop in two years as the number of large-scale acquisitions declined. This has led to a fall in investments worth more than $100 million by 62%, as more mergers and acquisitions were led by local companies.

Several factors seemed to have weighed heavily on levels of foreign investment, including the a new rule requiring foreign investors owning more than 5% of a South Korean business to disclose the purpose of their investment and reveal the identities of their principal backers. The government also recently cut the tax reduction period for technology firms to seven years from ten.

The recent tax probes into foreign investment funds appear to have further deterred foreign investors. Korea's National Tax Service has also denied reports this week that 137 foreign companies are under investigation for suspected evasion of corporate and other income taxes. However, the government has conceded that these factors have damaged the business environment in Korea.

“Increasing [public] wariness over foreign capital, seen in the examples of the 5 per cent rule and tax audit on foreign funds, had an [adverse] impact on reduced foreign direct investment,” Choi Pyeong-rak, the ministry's director general of International Trade and Investment remarked at a briefing.

Recommended