[Tax Story] The Future Direction of the Next-Generation Jeju Special Act and Tax Policy

The year 2021 marks the 30th anniversary of the enactment of the 「Jeju Special Act on Development」 (‘Jeju Special Act’). Known as the ‘Constitution of Jeju Island,’ the Jeju Special Act is the first special law concerning regional development plans, centered on ‘resident-led development’ and ‘return of development benefits,’ and has undergone multiple revisions to reach its current form. Thanks to long-term legislative support, Jeju Island announced the dawn of the era of 10 million tourists in 2013, reaching a peak in 2019 with 15.2 million visitors. Due to benefits such as tax exemptions, companies like Daum Kakao and Nexon Holdings have their headquarters in Jeju City, and over 70 IT companies have settled in the Jeju Advanced Science and Technology Complex, creating local employment and leading exports. However, even after a generation, the core authorities originally scheduled to be transferred from the central government have not been delegated, and with the comprehensive revision of the Local Autonomy Act at the end of last year, which broadly strengthened the autonomy and resident participation rights of other local governments, the ‘special status’ of the Jeju Special Act has become meaningless. Recently, the Jeju Provincial Council has embarked on a full revision of the Jeju Special Act to strengthen legislative and fiscal autonomy, and if the next-generation amendment passes, it will enable not only functional decentralization but also the acquisition of advanced autonomy and comprehensive delegation of authority.

The Jeju Special Act, promoted by the Roh Tae-woo administration, was enacted in December 1991 with the aim of significantly expanding tourism infrastructure and fostering Jeju Island as an international tourist resort akin to ‘Hawaii of East Asia’ to revitalize the regional economy. The governor of Jeju was guaranteed the authority to establish mid- to long-term comprehensive development plans as part of decentralization, a special account for Jeju development projects was established, and regional development bonds could be issued to promote development projects, marking the first step toward autonomous finance. After the IMF crisis, in 2002, inspired by Hong Kong and Singapore, the law’s name was changed to the ‘Jeju International Free City Special Act’ to foster and develop Jeju as an ‘International Investment Free Zone,’ providing grounds for leasing and selling state-owned property and various tax exemptions for companies located in the Jeju Advanced Science and Technology Complex and Jeju Investment Promotion District. The Jeju International Free City Development Center (‘JDC’) was also established based on this legislation. In 2006, under the Roh Moo-hyun administration, Jeju Special Self-Governing Province was established, broadly guaranteeing autonomous organization, personnel authority, and fiscal autonomy, and significantly transferring central administrative agency powers, changing the name again to the 「Special Act on the Establishment of Jeju Special Self-Governing Province and the Creation of an International Free City」. The autonomous police system was first implemented, and the provincial council was even granted the right to submit opinions on bills. The Jeju Special Act is evaluated as having expanded its scope from an international tourist resort model in the 1990s to an international free city model in the 2000s, where people, goods, and capital move freely.

Among the various benefits for Jeju Special Self-Governing Province, the perceived impact of tax incentives is high. The Jeju Special Act, Restriction of Special Taxation Act (‘Tax Incentives Act’), Local Tax Special Cases Act (‘Local Tax Act’), and Jeju Special Self-Governing Province Tax Reduction Ordinance provide various tax benefits to companies located in Jeju. Companies located in the Jeju Advanced Science and Technology Complex, Jeju Investment Promotion District, or Jeju Free Trade Zone are exempt from corporate tax and income tax for five years from the start of business, and customs duties are waived on imported goods directly used for research and development or tax-exempt projects. Acquisition tax is exempt for five years from the date of settlement, and property tax is 100% exempt for ten years. Additionally, to boost travel demand, indirect taxes such as value-added tax, individual consumption tax, liquor tax, customs duties, and tobacco consumption tax are exempted when domestic tourists purchase goods at designated duty-free shops in Jeju. Thanks to these extensive tax incentives, despite the concentration in the metropolitan area, Jeju’s population increased by 19.3% over the past decade to about 670,000 as of 2019, employment rose by about 100,000 compared to 2009 to 380,000, and Jeju’s GRDP grew impressively by 89.2%, far exceeding the national average of 57.5% during the same period.

Along with tax exemptions, the broad fiscal authority guaranteed by the Jeju Special Act plays a dual role in enabling practical autonomous finance in Jeju. Provincial and city/county taxes were integrated, and the Jeju Special Self-Governing Province Tax was created to include national taxes, with special provisions allowing tax reduction items stipulated by presidential decree to be replaced by provincial ordinances. For local taxes such as acquisition tax, registration license tax, property tax, and local resource facility tax, authority was delegated to adjust the amount of exemption within 50% of the reduction amount under the Local Tax Act according to provincial ordinances, and special cases allow adjustment of tax rates for acquisition and property taxes through provincial ordinances. Despite the Local Allocation Tax Act, 3% of the total ordinary allocation tax is automatically allocated to Jeju, and despite the Local Finance Act, issuance exceeding the local bond limit is possible with the approval of the provincial council. However, core fiscal authority is still lacking. Although the Jeju Special Act specifies the transfer of national tax items or national taxes collected in Jeju, it remains ineffective without support from the Tax Incentives Act. As a result, the role of the Jeju Special Self-Governing Province Tax in autonomous finance is insufficient. The fact that Jeju’s fiscal independence ratio was 38.7% in 2020, below the national average of 48.7%, attests to this.

Marking its 30th anniversary this year, the Jeju Special Act has made a significant contribution to placing Jeju on its current solid foundation, much like the meaning of ‘Wi-jeong (?政)’ in the Analects, which means ‘laying the foundation.’ However, the current status of tax policy for Jeju is disconnected from norms and reality, making its future uncertain. To foster Jeju as an international tourist resort, value-added tax refunds and expansion of duty-free zones are requested, and for building the foundation of an international free city, corporate tax reductions for foreign capital are crucial. For this, local taxes alone are insufficient, and the transfer of national taxes stipulated in the Jeju Special Act is essential, but the introduction under the Tax Incentives Act is blocked due to concerns about tax confusion, leaving tax policy constrained. While it may be difficult to establish tax exemptions at the level of Hong Kong or Macau, where there are no customs duties or value-added tax on import/export goods and no taxation on interest income, dividend income, or capital gains, in line with the Jeju Special Act’s intent, it is worth attempting short-term transfers of indirect national taxes such as value-added tax, which have fewer side effects, and in the long term, after careful review of adverse effects, considering measures on direct taxes such as corporate tax. Considering Jeju’s geopolitical position in preparation for the unification era, maintaining and developing various tax support systems to attract foreign companies and tourists will greatly benefit not only Jeju residents but also the national interest of Korea. The experience of local autonomy in Jeju is evaluated as a model for the launch of Sejong Special Self-Governing City, and its achievements and shortcomings in tax policy will serve as a touchstone for various local autonomy operations in the unification era. On the 30th anniversary of the Jeju Special Act, it is time to design a blueprint for the next 30 years and consider the coordinates of next-generation Jeju Special Act and tax policy that can firmly secure future growth engines.

Baek Je-heum, Lawyer at Kim & Chang