The respected Comrade
"We should establish a well-regulated system of guidance over the tax authorities and steadily perfect the tax supervision methods in conformity with the various conditions and circumstances."
The revenue services of a state must strictly observe the legal requirements in the course of taxation foreign investors.
The Democratic People's Republic of Korea has abolished the tax system since April 1, 1974 following the popular policies of the Party and the state. However, the foreign businesses and individuals are exceptions. To this end, the DPRK adopted "the Tax Law on Foreign-Invested Businesses and Investors" and, after that, made several amendments and supplements reflecting the external economic relations of the country. "The Tax Law of the DPRK on Foreign-Invested Businesses and Investors", amended and supplemented on January 19, 2023, is now under application.
"The Tax Law on Foreign-Invested Businesses and Investors of the DPRK" (Chapter4 Articles 25~Articles 30) stipulates the VAT on foreign-invested business.
Here, foreign-invested business means foreign-invested enterprise and foreign owned enterprise. Foreign-invested enterprises include the cooperative enterprises, joint enterprises and foreign-owned enterprises which are established in DPRK.
A cooperative enterprise is jointly invested by the DPRK investor and foreign investor and it is operated by the DPRK side repaying the investment of the other side or distributing profits under the contract.
A joint enterprise is the one in which the DPRK investor and foreign investor jointly invest and operate jointly and then distribute profits according to their share of investment.
A foreign owned enterprise is a business invested and operated by a foreign investor alone.
A foreign enterprise is a foreign business which is registered with the investment management organization of the DPRK to conduct economic activities. It makes investments in accordance with contracts with institutions, enterprises and organizations of the DPRK.
In such foreign-invested enterprises, the ones in the field of production and construction (except for the sales tax and the tax on resources) shall pay value-added-tax in a prescribed currency or in Korean Won.
The value-added tax is imposed on the income earned by production of commodity products and the income of a construction project without the cost of raw and other materials, fuel, power, and depreciation. The rate of VAT is 5-17% over taxation. And the subject of taxation shall be decided by the time the financial income and expenditure are determined in the law of the finance of foreign-invested enterprises.
"The DPRK's Law on financial management of foreign-invested business" stipulates that the financial income is ascertained when the goods are shipped for sale or on the first day of the offered service. Moreover, the financial income may be determined when the products and services are paid for the cashier section or the bank account and when the goods of monetary value are shipped to the warehouse. It is also stated that the payment time of the foreign-invested enterprise's expenditure is the day when the monetary property or substituted goods are delivered, and that the foreign-invested enterprise shall decide the amount of the expenditure according to the authorized documents such as receipts or vouchers issued at the payment time of expenditure.
Foreign-invested enterprises that pay for the sales tax and the tax on resources are excluded from the VAT.
Sales tax is levied on a foreign-invested enterprise that produces specific products like luxury goods. Its subject includes incomes from tobacco, alcohol, wine, beer, cosmetics, valuable commodities, jewelry, mobile phones, vehicles, and entertainment equipment.
Resource tax is levied on a foreign-invested enterprise that collect, sell and consume natural resources such as mineral resources, forest resources, animal and plant resources, marine resources and water resources. Its subject includes the followings:
-the income from sales in case of a foreign-invested enterprise that collects resources for sale
-the charge for the amount of consumed resources in case of a foreign-invested enterprise that collects resources for its self-consumption
-the amount of resource collected in case of a foreign-invested enterprise that collects resources with ships
The calculation of VAT is performed according to the prescribed tax rate;
-in case of a foreign-invested enterprise in the production sector (once a month within first days of the following month)
-in case of a foreign-invested enterprise in the construction sector (within the first 3 days from the day when the income of construction project is delivered)
When the VAT is calculated as a deficit (if the expenditure exceeds the income), the tax should be calculated by subtracting the deficit from the next surplus.
A foreign-invested enterprise in the field of production and construction shall pay the VAT in accordance with the declaration of the tax within two days of the VAT calculation.
"The Tax Law on Foreign-Invested Businesses and Investors of the DPRK" also stipulates the preferential benefits in the application of VAT.
When a foreign-invested enterprise earns an income by exporting its products to a foreign country(except for the limited goods), no VAT is levied, as well as in case the income is earned by selling the produced crops to the territory of DPRK. Furthermore, the VAT on the income earned by selling their products at low prices according to the state's demand is reduced by 50%.
The law on the VAT imposed on foreign-invested enterprises in the DPRK will contribute to ensuring a favourable environment for foreign investment with its validity and preferential measures.
