WORLD TRADE  
ORGANIZATION  G/SCM/Q2/KOR/25 
19 October 2004 
 (04-4396) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
SUBSIDIES 
 
Reply of KOREA to Questions fr om the EUROPEAN COMMUNITIES 1 
and the UNITED STATES2 Regarding the New and Full  
Notification of KOREA3 
   The following communication, dated 15 October 200 4, is being circulated at the request of the 
Delegation of Korea. 
 
_______________ 
 
 
Replies to Questions from the EUROPEAN COMMUNITIES
 
 
1.  Local Tax reduction for Building and Acquisition of International Line Vessels and 
Deep-Sea Fishing Vessels 
 Question
 
 
 Is this subsidy only available for vessels built  in Korea or also for imported vessels? 
 
Reply  
 
 This subsidy is available not only for vessels built in Korea, but also for imported vessels. 
 
2.  Support for Foreign Invested Enterprises 
 Question
 
 
 What are the eligibility criteria for th is programme?  Are there any export 
requirements linked to this programme? 
 
Reply  
 
 Eligibility Criteria 
 1. Foreign-invested enterprises engaged in the service sector supporting other industries or using 
advanced technology.  
 
                                                     
 
1 G/SCM/Q2/KOR/23 
2 G/SCM/Q2/KOR/24 
3 G/SCM/N/95/KOR G/SCM/Q2/KOR/25 
Page 2  
 
  - "Advanced technology" refers  to a technology that is l ess developed or not developed 
in Korea. 
 - "Service sector supporting other industries" refers to a high value-added service 
sector that supports the development of other industries including the manufacturing industry. 
 
 - Exemptions and reductions   · Individual and corporate income taxes :  Full exemption for the first five years, 
50% reduction for the next two years 
  · Local taxes:  Full exemption for the first five years, 50% reduction for the next 
two years(local governments can extend the applicable period up to 15 years) 
  · Customs duties, special excise tax, value-added tax:  Full exemption for three 
years on imported capital goods by Foreign-invested enterprises 
 2.  Foreign-invested enterprises that ope rate in the Free Economic Zone(FEZ), Free 
Trade Zone(FTZ), Foreign Investment Zone(FIZ) 
 
Tax Free Economic 
Zone(FEZ)  Free Trade Zone 
(FTZ)  Foreign Investment 
Zone(FIZ)  
Individual 
and corporate  
income taxes  Full exemption 
for first 3 years, 50% reduction for 
next 2 years Full exemption 
for first 3 years, 50% reduction for 
next 2 years Full exemption for 
first 5 years, 50% reduction for next 2 
years 
Local 
taxes  Full exemption 
for first 3 years, 50% reduction for next 2 years (local governments can extend the 
applicable period 
up to 15 years) Full exemption 
for first 3 years, 50% reduction for next 2 years (local governments can extend the 
applicable period 
up to 15 years) Full exemption for 
first 5 years, 50% reduction for next 2 years (local governments can extend the applicable 
period up to 15 
years) 
Customs duties  Full exemption 
for 3 years on imported capital goods Full exemption 
for 3 years on imported capital goods Full exemption for 3 
years on imported capital goods Exemptions  and 
reductions  
Special excise 
tax, value -added tax     
Manufacturing 
business  $10 mil. or more $10 mil. or more $30 mil. or more 
Tourism 
business  $10 mil. or more $10 mil. or more $10 mil. or more 
Logistics 
business  $5 mil. or more $5 mil. or more $10 mil. or more 
RD  - - $5 mil. or more Conditions 
for 
application  
SOC 
business  - - $1 mil. or more 
 
 Export Requirements : None   G/SCM/Q2/KOR/25 
 Page 3 
 
 
 3. Tariff Reduction on Aircraft Parts 
 Question
 
 
 It is stated that the objective of the subsidy is to encourage the import of aircraft parts 
not locally produced and to reduce production costs.  Can Korea please explain the eligibility 
criteria and what taxes are reduced at which rate?  
Reply
 
 
 Eligibility criteria:  Aircraft parts imported for the purpose of manufacturing or repair by 
persons who manufacture or repair aircrafts.   Reduction rate:  100% reduction of customs duties and value-added tax. 
 G/SCM/Q2/KOR/25 
Page 4  
 
 Replies to Questions from the UNITED STATES
4 
 
I.  FORESTRY 
 Forest Product Utilization Assistance Programme 
 
Question
 
 
 Please provide more information regarding  the eligibility requirements for this 
programme.  In particular, which industries are eligible to receive this assistance?  Are 
producers of chemical and wood pulp eligible  to receive benefits under this programme? 
 
Reply  
  The Forest Product Utilization Assistance Progra mme is provided as a loan for companies in 
need of funds for the purchase of raw materials an d the replacement or expansion of outworn wood 
utilization and processing facilities (including boards,  such as particle boards and fibreboards).  
  Producers of chemical and wood pulp are not  included and were never aided by this 
assistance programme. 
 
II.  FISHERY 
 
A.  Support for the Development of Deep-Sea Fishery 
 
B.  Support for Fishing Activities  C.  Local Tax Reduction for Building and Acquisition of Deep-Sea Fishing Vessels  Question
 
 
 Please explain to what extent support th rough the above listed programmes contributes 
to the creation or maintenance of capacity in  the fisheries sector?  More specifically, how are 
factors such as oversupply and overcapacity take n into account when determining the amount 
of support given to the fishing industry under these programmes? 
 Reply
 
 
A.  Support for the Development of Deep-Sea Fishery 
  Support for the development of deep-sea fishery is a short-term loan programme of less than 
one year, under which holders of distant water fi shing permits can receive a loan necessary for their 
distant water fishing operation.  Special consideration is  not given to the status of fish stocks or fleet 
size when the government decides the amount of the support. 
 
 Recently, Korea has not only been pursuing a standstill policy for the number of distant water fishing vessels, but rather, it is downsizing th e overall fleet size.  During 1998~2003, Korea 
decommissioned 21 distant water fishing vessels.  Al so, the fishing capacity for distant water fishery 
is regulated either through bilateral fishery access arrangements or regional fishery management 
bodies.  
 
                                                     
 
4 G/SCM/Q2/KOR/24  G/SCM/Q2/KOR/25 
 Page 5 
 
 
  Such a decrease in the number of distant wate r fishing vessels has resulted in a drop in the 
demand for the fund.  Also, the narrowed gap between  the market interest rate and the fund rate, 
following the fall in the market inte rest rate reduced the actual benef it of the fund, which reduced the 
demand for the fund.  Thus, the loan itself does not have a direct impact on the fishing capacity and, 
such an effect, if any, would be minimal. 
 
B.  Support for Fishing Activities 
  Recently, the gap between the market interest rate and the fund rate has narrowed, shrinking 
the actual benefits of the loans.  As the actual be nefits get smaller, the impact of the catch effort 
intensity or oversupply is likewise reduced.   The loan is withdrawn if the beneficiary is f ound to be engaged in il legal fishing practices, 
thereby encouraging sustainable fisheries. 
 
C.  Local Tax Reduction for Building and Acquisition of Deep-Sea Fishing Vessels 
  In accordance with Article 284 of the Local Tax Act, a 50% credit of acquisition tax and 
property tax is given for the cons truction or acquisition of distant water fishing vessels that are 
replacing old vessels or vessels which undergo shipwrecks or fires.   It may seem that the tax credit for the distan t water fishing vessels would appear to increase 
the fishing capacity.  However, the acquisition tax rate (0.3%) and property tax rate (0.2%) are not 
that high, and the programme is on a downward trend in terms of size(24 billion KRW for 2001, 
9.8 billion KRW for 2002), reflecting the recent downsizing and standstill policy for distant water 
fishery.   Korea, as a responsible fishing country, is an active member of 18 regional fishery 
management bodies such as the Commission for th e Conservation of Antarctic Marine Living 
Resources (CCAMLR), the Northwest Atlantic Fisheries Organization (NAFO) and the International Commission for the Conservation of Atlantic Tun as(ICCAT).  The conservation measures adopted by 
these regional fishery management bodies and the access terms established by coastal states which are 
parties to bilateral fishery access arrangements provide another scheme for the regulation of distant water fishing capacity for Korea. 
 
 Thus, the contribution to the increase in fish ing capacity through th e local tax exemption 
would be minimal.  
D.  Other Fishery Programmes 
 
Question
 
 
 Does Korea maintain any subsidy programmes,  not fully described in its notification, 
administered by either the central or sub-nationa l governments, for any of the types of assistance 
listed below?  If so, please provide all the relevant  information in accordance with Article 25 of the 
Subsidies Agreement.  
• Replacement of Old Fishing Vessels and Equipment 
• Fishermen and New Fishermen Support 
• Fisheries Development Support Fund 
• Production of New Fishing Nets 
• Insurance, Risk and Disaster Assistance  G/SCM/Q2/KOR/25 
Page 6  
 
 • Loans and Other Support to Fishing Cooperatives 
• Direct Sales/Marketing Assistance 
• Distribution System Improvement Assistance  
• Development of New Fish and Marine Products 
• Export Supports 
• Fishery Fund Loans and Other Assistance 
• Other Fishing-Related Loans ( e.g., loans for: shellfish harvesting,  fish wholesalers, rural fish 
distributors, other food distributors, processors, fishing net producers, fish farming, fish-breeding equipment) 
• Fishing Fleet Reduction 
• Aquaculture Development    
• Tax Free Fuel 
• Fuel Distribution Infrastructure 
• Research and Development 
• Fishing Port Construction 
• Fishing Village Development 
• Tax Waivers on Fishing Equipment 
 
Reply
 
  This information is reported to the WTO in order to answer the questions raised by the 
United States, in the spirit of promoting transparency .  It should be made clear that the provision of 
the following information does not represent any change in Korea's position on what Korea is 
required to notify the WTO.  
Replacement of Old Fishing Vessels and Equipment 
 
- The accident toll for fishing vessels accounts for approximately 66% of total maritime 
accidents in Korea.  In order to protect th e lives and safety of fishing vessel crews from 
maritime accidents, thereby promoting social  welfare, Korea has a support programme to 
replace old vessels with new ones. 
 
- In order to minimize the possible adverse impact on fishery resources, this programme is 
implemented under strict conditions for eligibility.  The eligibility for this project is limited to 
small and old vessels - those under 10 GT and older than 16 years. Using funds from this project to increase the tonnage of the vessel is not permitted. 
 
-  Vessels used in high-intensity fisheries, which are currently subject to fleet downsizing 
policies, are not eligible for this project.  The total fishing capacity is taken into account as the 
government implements this project. 
 
Fishermen and New Fishermen Support:  None 
 
Fisheries Development Support Fund 
 
- In an attempt to protect fisheries stock an d achieve sustainable development, Korea has 
programmes related to fisheries development.  The programmes include the Total Allowable 
Catch (TAC) system, resource management fishery, artificial reef construction, ocean 
ranching and fingerling release.  
 -  These programmes are aimed at the protection and proper exploitation of natural resources. 
  G/SCM/Q2/KOR/25 
 Page 7 
 
 
 Production of New Fishing Nets:  None 
 
Insurance, Risk and Disaster Assistance 
 
-  The Korean government partly supports the insurance premiums for fishing vessel crews who 
are more frequently exposed to disasters compared with land-based workers, thereby 
protecting their lives and safety. 
 -  This project is supported in respect of the so cial welfare policy for fishing vessel crews and 
the beneficiaries of this programme are fishi ng vessel crews for coastal and off-shore fishing 
vessels. 
 -  This project provides a service similar to ot her industrial casualty compensation insurance, 
but is administered separately, taking into account the special characteristics of the fishing 
industry. 
 
Loans and Other Support to Fishing Cooperatives 
 
- Except for the government assistance to the Na tional Federation of Fisheries Cooperatives 
(NFFC) as part of the country's overall fina ncial restructuring programme affecting all 
industry in Korea, no financial assistance has been rendered to the NFFC.  
 
Direct Sales / Marketing Assistance : None 
 
Distribution System Improvement Assistance 
 - Distribution system improvement assistance is  provided in order to renovate old and 
inefficient marketing systems and reinfo rce the relevant local infrastructure. 
 - This programme is aimed at securing the m odernization of the traditional system.  
 
Development of New Fish and Marine Products:  None 
 
Export Supports:  None  Fishery Fund Loans and Other Assistance 
 
- It seems to indicate the "support for fishing activities".  - Please refer to the explanation on the "support fo r fishing activities," which has already been 
notified.(G/SCM/N/95/KOR) 
 Other Fishing Related Loans 
 
- Some of these loans seem to be incl uded in "support for fishing activities". 
 - Please refer to the explanation on the "support fo r fishing activities," which has already been 
notified.(G/SCM/N/95/KOR) 
 
Fishing Fleet Reduction 
 
- Since 1994, Korea has been downsizing its ove rall fishing fleet in pursuit of sustainable 
fisheries through catch effort reduction.  The vessel buy-back accompanies the withdrawal of G/SCM/Q2/KOR/25 
Page 8  
 
 permit, and the decommissioned vessel is scrappe d, and thereby prevented from returning and 
increasing the fishing capacity. 
 - During 1994~2003, 2,555 vessel s of the types prone to cause stock depletion were 
decommissioned and scrapped under this programme.  
 
Aquaculture Development 
 
- Please refer to the explanation on the "support for aquaculture fishery development", which 
has already been notified.(G/SCM/N/95/KOR) 
 
Tax Free Fuel 
 
- The so-called fuel tax, which is imposed  on gasoline and diesel oil in the name of 
"Transportation Tax" and "Motor Fuel Tax" in Korea, is an earmarked tax designed to create 
a specific revenue source for the construction of highways or railroads based on the benefit 
principle.  In this context, it is reasonable that fuel used for non-highway purposes such as 
agriculture or fisheries, should not be subject to  taxation.  Therefore, the exemption from fuel 
tax for fisheries is not a subsidy. 
 
Fuel Distribution Infrastructure 
 
- As a non-petroleum producing country, the govern ment supports part of the expenses for the 
construction of fuel storage infrastructure to ensure a stable supply of oil. 
 
Research and Development 
 
- Korea conducts general fishery research and de velopment for the promotion of sustainable 
fisheries. 
 
Fishing port construction 
 - The construction of fishing ports has been s upported by the government in order to provide 
safe transportation for out-isla nders and recreational opportuniti es for urban people, as well as 
safe mooring for fishing vessels.  Thus, the pa trons of the fishing ports vary from fishing 
vessels to passenger vessels, cargo vessels and also  recreational vessels.  In this context, 
fishing port construction is considered a ge neral infrastructure project for the balanced 
development of the country. 
 
Fishing Village Development 
 
- Korea has projects to support the stability of fishing communities through the enhancement of 
their living environments, including improvement in  welfare facilities.  This kind of project is 
provided not only for the fishing communities but also other regional communities. 
 
Tax Waivers on Fishing Equipment 
 
- Value-added taxes are exempted for certain ty pes of fishing equipment.  In Korea, value-
added tax is not imposed on agricultural or fish ery products.  As a result, in order to achieve 
equity in taxation, the government does not impose value-added tax for intermediate goods 
such as fishing equipment for relevant activities. 
  G/SCM/Q2/KOR/25 
 Page 9 
 
 
 - This is a corrective measure for the sake of  equitable taxation between the industries, and 
therefore is not a subsidy of any special purpose or a specific treatment for the fishery sector. 
 
III.  ENVIRONMENT, RESEARCH AND DEVELOPMENT 
 
Support for Recycling Equipment and Technology Development 
 Question
 
 
 With regard to the Support for Recyclin g Equipment and Technology Development 
programme, because paper producers are able to use recycled paper in producing their 
products, please explain whether paper producers a re eligible to participate in this programme. 
 
Reply  
 
 §Paper producers manufacturing recycled paper from wastepaper are included in the recycling 
industry as reported recycling manufacturers (inclu ding paper recycling) under Article 44-2 of the 
Wastes Control Act and as designated recycling bus iness operators (including paper manufacturers) 
under Article 23 of the Act on the Promotion of Saving and Recycling of Resources. 
  Therefore, paper producers manufacturing recycl ed paper from wastepaper are eligible to 
participate in the Support for Recycling E quipment and Technology Development programme. 
 
IV.  GENERAL 
 A.  Support to the Semiconductor industry 
 
Question
 
 
 The ROKG is reportedly providing a large am ount of R&D funds to the "Next-Generation 
Growth Engines".  As part of this programme , monies are earmarked for development of next-
generation of semiconductors.  In addition, th e Ministry of Commerce, Industry and Energy 
announced that it was going to provide seven billi on won for developing semiconductor materials and 
equipment.  Please explain whether these f unds for the development of next-generation 
semiconductors have been budgeted.  If so, please  explain why these programmes do not qualify as 
notifiable under Article 25 of the SCM Agreement. If they do qualify as notifiable, please provide the information required under Article 25. 
  
Reply
 
  It is still unclear whether the programmes coul d be put into action and how much would be 
allocated for them.  B.  Financing for Raw Materials  Question
 
 
 The Korean Government recently announced var ious low-interest loan programmes to 
assist companies purchase of raw materials.  The programmes were announced due to the 
increases in raw material prices due to Chinese de mand for these raw materi als.  However, most 
of the programmes were targeted to SMEs.  Please explain whether these programmes have 
been implemented.  If so, please explain wh y these programmes do not qualify as notifiable G/SCM/Q2/KOR/25 
Page 10  
 
 under Article 25 of the SCM Agreement.  If it does qualify as notifiable, please provide the 
information required under Article 25.   
Reply
 
 
 This programme has been implemented from March 2004, and it is not subject to this 
Notification covering the period of 2001 to 2002.  C.  Grants for Investment  Question
 
 
 The Ministry of Finance and Economy stated that foreign investors will be eligible for 
grants equal to 15 per cent of their investment in  the country.  Factors to be used to determine 
the exact amount of the grant are type of indus try, location, number of jobs created. Has this 
programme been implemented?  If so, please ex plain why this programme does not qualify as 
notifiable under Article 25 of the SCM Agreement. If it does qualify as notifiable, please provide 
the information required under Article 25.  
 Reply
 
 
 This programme has been implemented from May 2004, and it is not subject to this 
Notification covering the period of 2001 to 2002.  D.  Paper Subsidies  Question
 
 
 Does Korea maintain any subsidy programme, not fully described in the notification, 
administered by either the central or sub-national governments, for any type of assistance listed below?  If so, please provide all the relevant in formation in accordance with Article 25 of the 
Subsidies Agreement. · Assistance provided to paper companies for locating facilities inside Kunsan industrial 
area/estates 
· Low-interest loans or other assistance for paper companies for overseas 
forest/timberland development under the Ov erseas Resources Development Business 
Act 
· Loans to paper companie s under the Industrial Base Fund 
· Aid provided to paper companies under the Export Industry Facility Loans programme 
· Korea Asset Management Corporation (K AMCO) purchase of Shinho paper company 
bad debts 
· Industrial Bank of Korea loans to Kyesung paper · "Workout" programmes provided to Shinho and Kyesung paper  
 
Reply
 
 
Assistance provided to paper companies for lo cating facilities inside Kunsan industrial 
area/estate 
 
-  No assistance has been provided to paper companies for locating facilities inside Kunsan 
industrial area.  Furthermore, no paper compan y is currently located inside the Kunsan 
industrial area.  
  G/SCM/Q2/KOR/25 
 Page 11 
 
 
 Low-interest loans or other assistance for paper companies for ov erseas forest/timberland 
development under the "Overseas Re sources Development Business Act" 
 
- Korea provides low-interest loans for overseas plantations under the "Overseas Resources 
Development Business Act".  However, no pa per company has received loans under this 
system. 
 
Loans to paper companies under the Industrial Base Fund 
 
- The loans under this fund do not have specific ity because the loans are provided to all types 
of business which meets the fund requirements.  
 
Aid provided to paper companies under the Export Industry Facility Loans programme 
 
- No aid has been provided to paper compan ies under the Export Industry Facility Loans 
programme.  
 
Korea Asset Management Corporation(KAMCO) 's purchase of Shinho paper company's bad 
debts 
 
- Korea Asset Management Corporation (KAMCO) purchases bad debts at the market price, 
upon the request of purchase from financial ins titutions.  The price is determined through 
negotiations with the relevant fi nancial institutions in considera tion of the purchase criteria of 
KAMCO or evaluation of other third associations on a commercial basis. 
 - KAMCO purchased Shinho paper company's ba d debts in December 2001 and June 2002, 
upon request from relevant financial institutions .  However, there was no intervention or 
assistance from the Korean government in the process.  
 
Industrial Bank of Korea loans to Kyesung paper 
 
- No loan has been provided to Kyesung paper by the Industrial Bank of Korea.   
 
"Workout" programmes provided to Shinho and Kyesung paper 
 
- Assistance to Shinho paper from financial institu tions in the form of interest rate reduction 
and debt-equity swap was determ ined in order to maximize the collection of debts through the 
workout programme on a commercial and voluntary basis.  Therefore there were no subsidies 
provided by the government.   
 - Kyesung paper was placed under court receivership due to the temporary management crisis 
in 1994, which came to an end in February 2000. Kyesung paper company has not received 
financial assistance from government. 
 
__________