Jeju Special Self-Governing Province(“Jeju”) has continued its effort to launch the International Financial Centre as part of the development plan of Free International City since 2006. In 2009, Jeju actively participated in a bid for the selection of a financial hub by the Financial Services Commission under the Act on the Creation and Development of Financial Hubs. According to the Act, if a province is chosen as a “financial hub”, then the province’s financial hub implementation and development plan shall gain a full financial support from the Government. Jeju’s bid to become a financial hub, however, was dropped due to the Government’s concerns that Jeju’s proposal of “Offshore Financial Center(OFC)” model could lead to an infringement of OECD’s Harmful Tax Competition.
A “Financial hub” means a hub of domestic and international financial transactions in which many financial institutions can raise, make transactions and manage funds, as well as making other financial transactions. An OFC is a country or jurisdiction that provides financial services to nonresident on a scale that is incommensurate with the size and the financing of its domestic economy, which could be included in the definition of “financial hub.” The problem with OFC is that, many OFC jurisdictions are considered to be “tax haven” in terms of financial secrecy and tax avoidance. However, “tax haven” is not always an appropriate term for OFCs, many of which have no statutory banking secrecy, and most of which have adopted tax information exchange protocols to allow foreign countries to investigate tax evasions, following OECD standards on tax transparency and effective exchange of information, which was declared in 2001.
Hong Kong and Shanghai is often cited as potential rivals of some Korean cities, competing over the position of a top financial hub in East Asia. Although Jeju might have a long way to go catch up with both cities, there are a number of things to learn from China’s well organized long-term strategy to make Hong Kong and Shanghai the global international financial centers. Hong Kong is already the top global financial center in Asia, closely following New York and London, while Shanghai is emerging as one of the major international financial centers. When it comes to tax system, Hong Kong tax rates are low by OECD standards, and there are no capital gains taxes. Taxes are also only levied on income made in Hong Kong. Compared with Hong Kong, Shanghai’s tax system can be quite complex and onerous as it complies with that of China. Instead, Shanghai municipal government makes use of various business tax incentives to further attract foreign investment and trade.
Jeju could have the potential of becoming an international offshore financial center. As an island province of South Korea, Jeju is unique within the country as its only self-governing jurisdiction with a governor and significant local government infrastructure with a new legislation enabling greater economy. Jeju is similar to other overseas offshore financial center like Jersey, Cayman Islands, Labuan and Madeira as it has mainly a services-oriented economy with little crime and a clean environment.
Jeju International Financial Center(JIFC) should be an important part of Jeju’s overall development strategy into the 21th century and it could reinforce the main Korean financial center of Seoul. JIFC can benefit greatly by benchmarking the older and well-established OFCs like Dublin, Labuan, and Madeira for many of its pioneering measures. For its rapid and steady development, JIFC will need to implement tax-benefit policies by new legislation in order to draw foreign investments. Concerns over OECD Harmful Tax Competition measures would be resolved by complying with OECD standards on tax transparency and effective exchange of information.