South Korea's successive administrations have offered companies a variety of incentives to promote balanced regional development. A representative example is cutting corporate and property taxes for firms that relocate their headquarters to provincial areas. But these measures have largely failed to produce tangible results. Even when companies moved their headquarters outside the capital region, core personnel in areas such as research and development (R&D) often remained in the Seoul metropolitan area, contributing little to regional growth.
POSCO Holdings, which relocated its headquarters to Pohang when the holding company was launched, is a prime example. While POSCO Holdings changed its registered headquarters address to Pohang, it kept several hundred core staff in strategic planning and other key functions working in Seoul. HMM, which recently decided to move its headquarters to Busan, faces a similar situation. HMM's head office is currently in Yeouido, Seoul, and of its roughly 2,000 employees, about 800 are said to work at headquarters. The shipping industry explains that most shippers — HMM's clients — are based in Seoul, and Seoul is advantageous for overseas sales. Unlike POSCO, which has production facilities in Pohang, HMM has little room to significantly expand investment and hiring in Busan.
"Ultimately, for provincial regions to thrive, what's needed are powerful incentives that drive investment and employment in those regions — not just the relocation of a headquarters address," a senior business community official said.
Behind the government's decision to offer corporate and property tax reductions in the July tax code revision to companies expanding investment, hiring and R&D in the provinces lies the view that companies must serve as "anchors" of regional economies for province-led growth to succeed. While tax incentives to draw companies concentrated in the capital region to the provinces already exist, many assessments find that support from both central and local governments still falls short compared with major foreign countries that compete to attract global firms with massive subsidies.
The additional tax cuts for provincial companies are viewed as the first step in implementing the "five-pole, three-special-zone" framework and the province-led growth strategy. The government first plans to offer sweeping tax benefits to companies that have relocated to or are based in the provinces when they contribute to regional growth through investment, employment and R&D. Specific eligibility and reduction criteria will be disclosed in the tax code revision at the end of July, but the basic framework is to grant additional incentives to companies that are actually conducting business activities in the provinces.
Differentiated corporate tax rates, which regional business circles have long called for, were not adopted owing to a lack of safeguards against potential abuse. Still, observers expect significant incentive effects if tax breaks comparable to those currently offered to relocating companies are extended to firms already based in the provinces.
Currently, companies that move their plants or headquarters from the capital region to the provinces receive corporate tax reductions for up to 15 years. Those relocating to underdeveloped areas such as growth-promotion zones and population-declining regions get a full exemption for 10 years followed by a 50% reduction for five years. Provincial metropolitan cities receive a 100% exemption for seven years and 50% for three years, while mid-sized cities get 100% for five years and 50% for three years. Acquisition taxes on plants and construction sites are fully exempted, and property tax is waived 100% for five years and 50% for an additional three years under a package of local tax incentives.
Tax incentives for companies already based in the provinces are mostly focused on population-declining areas. When a company in a population-declining area hires local residents, it receives a higher per-capita local income tax deduction, and those starting a business or building a new plant in such areas receive significant acquisition and property tax reductions for a certain period.
The government is also pursuing regionally differentiated electricity rates. The idea is to incorporate the "local production, local consumption" principle into the rate system, encouraging electricity to be consumed in the regions where it is produced. The government plans to use relatively lower electricity rates as an incentive to move companies concentrated in the capital region to provinces such as the Yeongnam and Honam regions, where power plants are clustered, thereby promoting balanced regional development.
Experts say differentiated regional corporate tax rates for provincial firms can serve as a policy tool to attract companies to the provinces, but argue that more comprehensive measures are needed to revitalize regional economies.
"It's not appropriate to grant benefits simply because a company moved from Seoul to Busan and is now considered provincial," said Kang Sung-jin, president of the Korean Economic Association. "Benefits should be granted with finer distinctions based on whether an area is urban or non-urban, and whether it is a low-income region."
