Foreign Investors Welcomed In South Korea's Financial Industry Vision

by Mary Swire, Tax-News.com, Hong Kong

18 April 2006

Against the backdrop of apparent hostility towards the activities of foreign funds by the South Korean authorities, Vice Minister of Finance and Economy Kwon Tae-shin has insisted that the government welcomes foreign investment as it sets about implementing a strategy to elevate the country's status as a major regional financial services hub.

Delivering a keynote speech at the Financial Times 'Financial Centres Summit' in Seoul last week, Mr Kwon stated that the government wants the financial sector to serve as a driving force behind growth, and he revealed that South Korea has aspirations to develop a "niche financial hub" with a focus on the asset management industry.

"We have been working closely with the financial industry to improve our regulation system, bring greater liquidity and depth to our financial market and sharpen the competitiveness of financial institutions," he said.

Mr Kwon explained that the government's primary focus is making the regulatory system more market-friendly. A cornerstone of this effort is the introduction of a 'Consolidated Capital Market Act' that will combine existing asset management, securities and futures regulations.

The act seeks to to eliminate more than one third of around 300 capital market related regulations, excluding those for investor protection. It will also enable the establishment of so-called 'Financial Investment Companies,' which can engage in all capital market related businesses including securities, futures, asset management and trust.

Mr Kwon added that the government is also advancing its efforts to liberalise foreign exchange controls and will encourage more listings by foreign firms.

However, against a background of growing public resentment at foreign companies buying up Korean assets on the cheap and selling them on at often vast profits, recent events have sown seeds of doubt in some quarters of the international investment community regarding thed Korean authorities' attitude to foreign investors.

Last month, prosecutors raided the Seoul office of Lone Star, the US buyout fund, amid allegations of tax irregularities concerning its acquisition of Korea Exchange Bank (KEB). Local reports claimed that Lone Star evaded some 14.7 billion won ($15 million) in tax and illegally transferred some $8.6 million in funds out of the country.

The controversy deepened when it emerged that Lone Star had signed an initial deal with South Korea's largest lender, Kookmin Bank, to sell its entire controlling stake in KEB for about 6.4 trillion won, earning the firm a capital gain of more than 4 trillion won.

Lone Star was among a handful of foreign funds which were fined significant sums last year for allegedly evading domestic taxes by channeling income through offshore subsidiaries, and South Korea is seeking to tighten the tax net by renegotiating certain bilateral tax treaties.

However, Mr Kwon brushed off concerns that the country is in the midst of a witch hunt against foreign investors.

"Recently, some investors have mistakenly suggested that we are pursuing anti-foreign investment policies. Quite to the contrary, I can say with full confidence the government is committed to providing a level playing field for all companies regardless of nationality." he said.

"We also protect lawful profits of foreign companies, since these gains are well-deserved fruits of risk-taking activities," he added.

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