The year 2016 holds a special place in the narrative of North Korea’s political history. In May that year, Kim Jong Un was elevated from First Secretary of the Workers’ Party of Korea (WPK) and elected as its new chair during the party’s 7th Congress. The next month, he was promoted from First Vice Chairman of the National Defence Commission (NDC), which formerly served as the top policy making body of the North Korean government, to Chairman of the newly established State Affairs Commission, which overtook the NDC as the supreme policy body. This official appointment of Kim Jong Un to the top positions of the party and state might have appeared purely symbolic at the time, but information that has been made available over the past year indicates these promotions led to unprecedented changes in North Korea’s economy, law and human rights policy.
In late 2018, three insurance companies appeared with their own pages on the North Korean website Naenara: Polestar, Samhae and Future Re. Just like North Korea’s national insurer, Korea National Insurance Corporation (KNIC), which releases financial reports on its own website, those presumed non-state-owned insurers also included the yearly amount of “payments to the state” in their reports—equivalent to corporate taxes in the North Korean system. KNIC has consistently reported a tax rate of 32.5 percent on billions of North Korean Won (KPW) in profits for the last decade, but two different tax rates were applied to those smaller insurers. Samhae only paid 7.5 percent on the 13 million KPW it earned in 2016. But any other profit reported by the three companies, the lowest of which was 31 million KPW, were taxed at 30 percent. A few months later a page for a fourth insurer, Rainbow Intermediaries, went online on Naenara as well, showing tax rates of: 18.9 percent (3,264,971 KPW)* for 17.2 million KPW (2016) and 25 percent (7,211,833 KPW) for 28.8 million KPW (2017).
*Note on Rainbow Intermediaries’ Income Reporting
Polestar reached a profit of 828 million in 2017 and still was not taxed the 32.5 percent that KNIC pays, which could mean two things: this tax rate is applied somewhere beyond the one billion mark or it is reserved for state-owned enterprises (SOE) like the KNIC. Rainbow Intermediaries’ reporting revealed that before 2016, a different tax system existed that was presumably reserved for non-SOEs. Despite a profit of only 3.1 million KPW in 2015, the company had to pay 40.7 percent in taxes in contrast to the KNIC’s 32.5 percent. The other three companies were founded in 2016 and 2017, leaving us with only one data point so far. Thus, whether North Korea previously used a single rate independent of the amount of profits cannot be answered. But it appears the government used to levy a higher burden on non-SOEs prior to 2016, which could have been even higher than the known 40.7 percent. This higher maximum rate also was applied to strikingly low profits of only a tenth or lower of what is taxed at 30 percent from 2016. It remains unknown if the separate tax system for non-SOEs was completely abolished in 2016 or just reformed.
What we learn from this is that prior to 2016, it seems the government sought to extract a premium from non-SOEs in return for their greater economic freedom. However, the rates we see now tell a different story and appear to signal a major policy shift. When exactly this new tax system was announced remains unknown, but given its importance, it likely followed the creation of the State Affairs Commission in late June 2016.
The lower taxes for non-SOEs likely provided a tremendous boost to grassroots marketization, as suddenly a large amount of capital could be reinvested in the company that otherwise would have gone to the state, potentially leading to a mushrooming of companies either through investment by individuals or subsidiaries of larger companies. Polestar appears to exemplify this. It was created in August 2016 and is jointly owned by three North Korean companies that presumably shared the reported initial investment of 7 billion KPW. The three available registration numbers for the insurance companies, in fact, suggest that a larger number of them were registered after August 2016 presumably with the State Insurance Commission. But as will be shown below, a change in economic legislation around August 10 likely also played an important role.
Reducing taxes for non-state-owned companies in such a drastic way should have reduced revenue available to the government in 2017 to a degree visible in its yearly budget report. North Korea does not release absolute numbers, only percentages of plan fulfillment or increases in comparison to the previous year, so it is difficult to discern. However, predictions for increases in 2017 revenues were, in fact, one whole percentage point lower compared to the previous year. But the budget still increased by three percent, and the one percentage point could have been solely due to sanctions on coal that were adopted in November 2016. Profits from state-run enterprises were also predicted to increase one percent less in 2017 than in the year before. This could reflect stronger competition with non-state companies as was visible in the insurance sector, yet those profits still increased.
Furthermore, there was no evidence for sharp decreases or increases in revenue. Instead, two other fields suggest another important change in the fiscal relations between the provinces and the national government, hiding any effect the tax reform might have had on the national budget: fulfillment of local revenue plans and the share of local revenue in the overall budget. The plan for local revenue was usually overfulfilled by more than ten percent, but the three budget reports since 2017 revealed that revenue predictions were met rather accurately by 100.5 percent. That every year the same 0.5 percent increase could be achieved points to a fixed amount transferred to the central government instead of a less predictable income from economic activity. This suggests a major change in the distribution of local revenues, with local governments allowed to keep everything beyond a certain amount decided in yearly budgets. This amount was fixed at 26.1 percent of the overall revenue plan in 2018 and 2019, which was only slightly less than the 26.9 percent in the 2017 plan. Accordingly, any increased tax revenue, thanks to the economic reforms, would have remained with local governments, while they also appeared to shoulder any losses due to the lower tax rates.
While North Korea is required to regularly compile legal collections, none of the larger collections were available to outside researchers after 2016. Only a few dozen laws have become known since then and only about ten of those are available in full text, either through North Korea’s legal publisher, its websites, or a small collection published last year by South Korea’s National Intelligence Service. But no legislation linked to the economic changes described above appears available. A Law on the Financial Management of Foreign-Invested Businesses was adopted in April 2016, and laws on external arbitration and economic development zones were revised in August of that year.
But a closer look at the adoption dates and the numbering of available legislation shows that on August 10, 2016, a large reform package must have been adopted. On that day, six major laws were revised: the criminal and civil procedure law, the notary public law, the law on adopting legislation, and the two laws mentioned above. It is also the only known cluster of legislation for that year that was adopted under the same decree number. Those clusters of decrees with the same number include half of the known laws for the period of 1998 until 2015, but usually only two to four laws were adopted this way. A cluster of six, despite the limited access we currently have to legal changes at that time, is highly unusual and might be similar to the cluster in November 2011 that adopted a long list of economic legislation shortly before the death of Kim Jong Il. But as the greater diversity in 2016 makes clear, several areas were affected and certainly other new legislation will come to light in the future as well.
North Korea revealed in its report to the 3rd Universal Periodic Review that on the same day in August a “Regulation on the Election of Judges and People’s Assessors of Courts at All Levels” was also adopted, highlighting reforms in its justice system. Legislation related to human rights protection was likely also revised during that period, as it was a central agenda item of the government at that time as outlined below. But those texts are not currently available and probably will remain secret for some time, partially because they are considered too sensitive for public release.
More Human Rights Protection
Kim Jong Un appears to have focused on improving North Korea’s human rights policy shortly after he was formally made the leader of the party and the state. The first evidence for this came from a December 2016 DailyNK report that North Korea had banned public trials, executions and house searches without warrants. Those changes were apparently introduced in early December, just after the creation of a separate institute for human rights under the Academy of Social Sciences. By early February 2017, the Ministry of Unification in South Korea additionally announced that Kim Won Hong, head of North Korea’s secret police, had been removed around mid-January amid allegations of human rights violations and torture. DailyNK reports further substantiated this focus on human rights with orders handed down shortly after to eliminate beatings and torture and hand out lighter punishments.
Although North Korea made no effort to propagate its new domestic human rights policy, changes were also quickly visible in its foreign relations. In early December 2016, North Korea ratified the Convention on the Rights of Persons with Disabilities, followed by the respective UN rapporteur announcing in April 2017 that she had been invited to visit the country. North Korea also tried to restart a human rights dialogue with Europe. In early 2017, Ri Su Yong, then-head of the International Department of the WPK, renewed an invitation to the EU Special Representative for Human Rights that had initially been offered in 2014, and included the possibility of a first ever visit by the UN’s Special Rapporteur on the situation of human rights in the DPRK, Marzuki Darusman. Around the same time and possibly directly linked to the removal of Kim Won Hong, North Korean diplomats in New York were also willing to talk about the release of Otto Warmbier, a US student who had been detained in North Korea the previous year, and a North Korean diplomatic delegation was set to visit the US in February 2017 for informal meetings.
North Korea today is not the North Korea it was before the 7th Party Congress in 2016. The changes that have been seen so far, while still early in implementation, should increase optimism that change is possible. Recognizing these trends may provide new opportunities for the international community to approach North Korea. Rather than constantly working to restrict the North’s financial opportunities in hopes that it will change its WMD ambitions, creating opportunities for Kim Jong Un’s policies to succeed could encourage him to keep moving down a path toward reform. This might be the easiest and quickest, if not the only, way to achieve goals of greater opening, marketization and human rights improvements in the country.
A recent release of 2018 financial data by Rainbow Intermediaries showed that the tax system was changed again for that year. The company now had to pay the presumed maximum rate of 30 percent on profits of 20 million KPW.
A first analysis of these new lower tax rates by the author appeared in July 2019 on NK Pro. As 2016 taxes were due only by early 2017, when exactly this new tax system was introduced still remains unclear. It could have been adopted as one of the first measures of the SAC or only later in 2016.
DailyNK recently also mentioned the maximum tax of 30 percent, but misreported it as a fine. Unregistered individual businesses transporting luggage from railway stations, a source was quoted, were fined 30 percent on their profits. DailyNK’s translator added an “at least” to those 30 percent that was not there in the original Korean report, either as punishment or to capture unreported income the maximum tax rate was applied. This measure might have been implemented at the December 2019 plenum. But even before those unregistered businesses were likely levied with a higher tax rate on the income they reported. DailyNK provided an example of a people’s committee estimating a modest yearly profit of 240 USD which would have been taxed with 7.5 percent or less for a normal, registered company.
That these businesses outside the law were only forced to pay taxes instead of additional fines was explicitly stated in a 2009 publication by North Korea’s Ministry of People’s Security. This reference book even used the very same example of an individual delivery business, absent the exact tax rate. This part of the reference book was not yet reported on in English and only Tongil News appears to have reported the example in detail in Korean. The publication has yet to be released to the public by Caleb Mission in South Korea who acquired it in 2011.
Available are BH 10508221 of Polestar (August 2016), BH 10510061 of Samhae (October 2016) and BH 10610121 of Future Re (October 2017). After the Juche year, the number likely stands for the number of entities registered at this time. This translates into a sudden registration of more than 1800 between August and October 2016 and only 60 over the following year. Although less likely, those numbers also might include a sector code after the Juche year which makes Polestar registration not comparable with the others, but still points to 60 new registrations after October 2016.
It is required by the Act on Adopting Legislation.
The civil code, however, which still is a major obstacle to expanding individual property and private companies in North Korea, was not changed. A 2018 reprint by North Korea’s legal publisher available in Seoul still included the 2007 text.
In an article for the European Journal of Korean Studies, the author has analyzed the quantity of North Korean legal change based on numbering of the legal documents up to 2015. In contrast to the lower amounts of legislation included in North Korean legal collections, the number of decrees adopted by the SPA Presidium sharply increased in 2010. Those decrees are used to adopt most laws as well as to award state honors. But it seems very likely that the increase was at least partially driven by changes in legislation touching on human rights, which was too sensitive to be publicly released.
Will Ripley from CNN was even allowed to meet the institute’s director Sok Chon Won on April 26, 2017. The UN special rapporteur announced the invitation the very next day suggesting approval North Korean government approval for both events might have been given at the same time.
Glyn Ford, Talking to North Korea (London, UK: Pluto Press, 2018), p. 416.
Doug Bock Clark, “The Untold Story of Otto Warmbier, American Hostage,” GQ, Condé Nast, July 23, 2018, https://www.gq.com/story/otto-warmbier-north-korea-american-hostage-true-story.